Originally published in Today, this article is posted here with the kind permission of the author Ku Swee Yong (guest contributor), founder of real estate agency International Property Advisor, which provides services to high net worth individuals.
With the interest rate on savings near zero and not able to beat even Singapore’s benign inflation, forecast at 2.5 to 3.5 per cent by the Monetary Authority of Singapore, many are looking to work their savings harder by buying an investment property.
Having decided that, the next question is whether to invest in a new property bought from the developer or a unit from the resale market. There are arguments for both.
Advantages of buying from developers
1. Brand new property
Being the first owner, the investor does not have to worry about the history of the unit, its previous owners or occupants.
2. Progressive payments
The investor may be better able to manage his finances. The loan drawdown is staged and the instalments start low, allowing one to build up the nest-egg during construction. If one’s investment time horizon is short, say two years, one can sell into a rising market and make a profit even before the substantial drawdown on bank loan when the Temporary Occupation Permit is issued. Developers may also tie up with banks to offer attractive financing packages for home buyers.
3. Defects liability period
The developer guarantees against defects for the first 12 months from TOP.
4. Early bird discounts
These can often be enjoyed at developers’ previews. Some developers may offer special prices for investors who are willing to commit even before the showflats are ready. Developers always step up prices, or reduce discount levels, when the pace of sales is strong, so early buyers stand to make paper gains quickly.
5. Choice units
If you get ahead of the queue, all the units that are released are available for your selection.
6. Configurable
In a limited way, many developers allow room for making minor adjustments. The most common features are selection of materials, tiles, finishes, etc. But it could be more substantial, such as an open versus closed kitchen, or say, the removal of a plunge pool at the rooftop terrace. At the extreme, Far East Organization’s bespoke condominium called Boulevard Vue offers a white plan for individual customisation and “the luxury of creating interior spaces that mirror your personal preferences and taste” (quoted from developer’s website). Such customisation was previously only available if we built our own landed home.
Advantages of investing in tenanted apartments
1. Low upfront commitment
As simplified by the catchphrase “1+4, not 5+15”, buying a new unit from a developer requires a 5 per cent option fee and 15 per cent more eight weeks after exercising the option to purchase. This is in line with practices allowed by the Controller of Housing at the Urban Redevelopment Authority. In the case of a resale transaction, the buyer normally pays a 1 per cent option fee and 4 per cent more to exercise.
2. Immediate income stream
Despite the relatively low yields of Singapore residential properties, most tenanted homes yield positive cash flow for the landlords, thanks to cheap mortgages.
3. Significant discounts
Older resale properties often trade at significant discounts to new launches on the same street. There are many examples to support this point, say, around Raffles Place and Shenton Way, along Grange Road, Nassim Road, in Serangoon, East Coast, West Coast, Pasir Panjang, and River Valley, etc.
The price gaps between new launches and properties more than five years old in the same street, or even sharing the same perimeter wall, can range from 5 per cent to 50 per cent, or from $100 to $1,500 psf. For 99-year leasehold properties, one might further discount based on the age of the lease, but examples abound for freehold properties too. Given that construction costs range from $300 to $500 psf for luxury properties, if the cost of an older property is lower than its recently launched neighbours by a gap of $500 psf, then one could take a view that the older property was purchased at land cost, and the buildup area was given free.
4. Developers’ sales prices are peakish
Anecdotal evidence from URA data indicates that a majority of investors who have bought from developers’ launches this year have yet to make paper gains despite the more than 10 per cent rise in the URA Private Property Index over the same period. The PPI increase was most likely due to the price gains from resales and landed properties.
5. En bloc potential
With the rebound in sentiment and collective sales coming back into favour, the en bloc potential must not be ignored. But the investor must do his homework and ask for evidence that the project is indeed a likely, economically feasible, candidate.
6. As is, where is
What you see is what you get. The investor is buying a completed apartment, flaws and gems all included. There is no guesswork as to the quality of the workmanship and the finishes that will be delivered, unlike with new apartments.
The overall trend in the Singapore home market may be up but confidence is still lacking in some quarters. Global economic uncertainties loom and Singapore is not immune.
For now though, I would recommend properties that are under-valued relative to their neighbours, minimising downside risks and collecting steady rental income.
Hi,
Correct me if I’m wrong… I’m assuming you are referring to buying buildings under construction and not buying TOP projects from developers.
In the case of a resale transaction, the buyer normally pays a 1 per cent option fee and 4 per cent more to exercise. However, the buyer still have to pay the remaining 15% within 6-8 weeks normally as required by most sellers. Which is almost the same as the “5+15” u mentioned. But that’s in the case of an 80/20 loan.
However, for a 60/40 loan it is drastically different! If the buyer has an existing housing loan, then he can only loan up to 60% from banks. Which means the buyer has to fork out 40% within 6-8 weeks under normal circumstances.
Whereas for buyers who buy from developers under normal progressive payment schemes, they need to pay a 5 per cent option fee and 15 per cent more eight weeks later. Subsequently, the next 10% is only required to be paid 6-12 months after exercising the option. And the last 10% is only required to be paid after 12 months from the exercising of the option.
That means buyers buying from developers need only to pay 40% in approx 12-18 months.
In short,
Buying resale properties:
Buyers have to pay 40% in 6-8 weeks.
Buying new properties from developers:
Buyers have to pay 20% in 8 weeks.
The next 10% in 6-12 months.
The last 10% after after 12 months.
So, I don’t really agree that investing in tenanted apartments has a lower upfront commitment than buyer from developers. In fact, it’s on the contrary.
Good Comment.
Kudo kelvn on the upfront payments for resale. Writer miss out on the rental collected for tenanted purchases which will help towards the loan payment by the investor. Maintenance of the resale property may be hefty too if it is tenanted for long period of time.