Why are new projects selling well while the resale market remains quiet?

/Why are new projects selling well while the resale market remains quiet?

Why are new projects selling well while the resale market remains quiet?

In recent times, new projects seem to be selling like hotcakes. It just seems like the market has an insatiable appetite for new project launches. Le Quest, a new mixed development in Bukit Batok, sold all 280 units launched on its first day of sales. Just a few weeks earlier, all 531 units at Hundred Palms Residences were snapped up over one weekend. The market has hardly seen such strong demand for new home sales. Suffice to say, developers and property agents who were involved in these sell out projects are extremely happy.

Yet despite the fervor in the primary market, the resale market does sing a distinctively different tune. Due to the excessive supply, resale properties can be placed on the market for many months with no takers. At times these resale properties may even have a lower per square foot pricing as compared to new projects. So then why are buyers not turning their attention to the resale market instead?

 

1) Lower capital outlay

For a first time buyer, the cash component is 5% of the purchase price. If a brand new 2 bedroom condominium costs $1,000,000, that works out to be $50,000. Compare this to a 4 room flat in say Ang Mo Kio with an asking price of $500,000. The value of the flat may only be $450,000. Thus the buyer of the flat will need to come up with 5% of $450,000 as well as the cash above valuation. The amounts are $22,500 and $50,000 respectively. This works out to be a cash outlay of $72,500 for a 4-room HDB flat versus $50,000 for a brand new condominium. This is even before any renovation costs are factored in. An older property would normally require more renovation as compared to a brand new one.

 

2) Progressive payment

Even if the total purchase price is much higher in my previous example, if the property is uncompleted, the payments are to be made progressively. This would mean that the buyer would not be paying installments on the full purchase price yet. Progressive payments are extremely beneficial for buyers who wish to sell off their properties once the properties obtain their Temporary Occupation Permits (T.O.P.). Leveraging on financing and the progressive payment scheme would result in a higher return on equity for the buyer.

 

3) Show flats are extremely appealing

Developers are getting extremely good at making show flats look extremely beautiful. They spend lots of money to renovate show flats to entice buyers when they come and visit. Often buyers are sold on the possibility of how their home could look like. This versus a cluttered home on the resale market and it is easy to see why buyers naturally gravitate to new projects.

 

4) Little renovation required

New projects usually come with built in cabinets and appliances. Moreover, these days the appliances and fittings that are provided are usually of a certain standard. You often see brands like Hansgrohe and Miele being used for toilet fittings and kitchen appliances. The common thinking would be that it would cost a lot to build and retrofit the toilets and kitchen of an older property with such fittings and appliances. It would also cost a lot to replace dated tiles and worn out cabinets. Also, the hassle of looking for a reliable contractor may come to mind. Thus to most buyers, it makes more sense to purchase a new project.

 

5) Herd mentality

There is evidently a very strong herd mentality prevalent in show flats. It is the job of the salespeople to invoke urgency among buyers and when there are throngs of buyers packed like sardines in a show flat, it is easy to convince buyers to make a decision on the spot. Compare this to the resale market whereby most viewings involve one or two groups of buyers and you can clearly see that a show flat on launch day would have so much more urgency among buyers. Also, when buyers see their family or friends purchasing properties, some may feel that they are missing the investment “boat” and inadvertently want to get into the market. Coupled with a trip down to a new project launch, it is easy to see how they get convinced to buy a new project.

 

6) Strong advertising

Developers have a lot more budget to market their projects as compared to property agents. TV ads, billboards on buses, full page newspaper adverts, Google and Facebook ads are just some of the advertising mediums which developers utilise to drum up interest in their new projects. They engage professional photographers, videographers and designers to ensure that their projects are portrayed in the best possible light. How can a solitary advertisement about one particular property compete with developer ads?

 

7) Almost full 99-year lease

For leasehold properties, buying a new project means starting with an almost fresh 99-year leasehold on the property. A property with less than 60 years left on its lease will always find itself more difficult to be sold due to limitations on the use of CPF and financing. There is also a realisation that not all HDB flats may go through the Selective En bloc Redevelopment Scheme (SERS).

 

Buyers have to be discerning in their property purchase. Never get too overly emotional in your property purchase. I am personally worried when I hear that buyers are buying just with the hope that they can sell the property off at a higher price at a later date. When that is the primary reason to buy an investment property is that and not due to the potential yield, a bubble may be forming.

Yours Sincerely,
Daryl Lum

2017-10-11T03:29:35+00:00August 28th, 2017|Property|
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