Thanks to the hot response toward launches like The M condo at Middle Road, and Midtown Bay at Beach Road, this has become a more common question of late.

A lot of people are shaking their heads and asking why people would buy, at prices as high as $2,450 PSF, or even $3,000 PSF (as indeed, are the going rates for many units at The M and Midtown Bay).

Another assertion – which is not always correct – is that these people are getting a “bad deal” by buying at such a cost. Let’s take a deeper look at the issue. We need to:

  • Consider how returns and rental yields are calculated
  • Remember that quantum matters more for affordability
  • The difference in the layouts between new launches and resale condos
  • Price PSF doesn’t take into account many more important factors

A lower quantum helps improve your rental yield; a low price per square foot doesn’t factor into this.

Reason #1: Consider How Returns and Rental Yields Are Calculated

Sometimes, a buyer does not buy an apartment unit for own stay, but to rent it out. Alternatively, some buyers may see a small condo unit – such as a two-bedder – as a stepping stone to something bigger (e.g. they may not intend to stay on beyond four or five years, and just want to make some gains in resale).

In both these situations, remember that the Price PSF does not directly impact their yield or return.

Rental Yield

For example, say you buy a large, older unit that costs $1,200 PSF, but with a quantum (total cost) of $1.6 million.

At a rental income of $42,000 per year, your gross rental yield (annual rental income divided by cost) = 2.6 per cent.

Now, say you buy a small, newer unit at $2,450 PSF. The quantum is $1.2 million. The rental income is a little less as it’s smaller: $38,400. The gross rental yield would be ($38,400 / $1.2 million) = 3.2 per cent.

Notice that the price PSF has no bearing on the rental yield. It’s possible for a small unit bought at a high price PSF to have a much better return than one with a lower price PSF,  simply because you have to invest less to earn that rental income.

This is why some landlords – who buy small units to rent out to single or couple expatriates – may shrug off a high price PSF. They are more interested in a low quantum, coupled with a highly desirable location.

(But if they’re choosing between different units in the same development, which are roughly the same size, then they may look at the individual price PSF to decide which is better value).

It’s possible for a small unit bought at a high price PSF to have a much better return than one with a lower price PSF, simply because you have to invest less to earn that rental income.

Capital Gains

The same concept applies to your eventual returns when you sell. If you buy a unit at $1 million, and sell at $1.1 million five years down the road, then your capital gain is 10 per cent – your price PSF is not relevant.

So again, an investor is often more concerned with a low quantum, and an excellent location with a lot of room for appreciation. If they can tick those boxes, then they may look past the high price PSF.

Can a home with a higher Price PSF be a more prudent purchase? Yes, if the overall quantum means it’s easily affordable to you.

Reason #2: Quantum Matters More For Affordability

When the bank is calculating your Total Debt Servicing Ratio (TDSR)*, and you are working out your down payment (minimum of five per cent in cash), the price PSF is not a factor.

For example, to buy a $1.5 million home, you need a minimum of $75,000 in cash. It doesn’t matter if the house is $3,000 PSF or $1,500 PSF; you still need the $75,000 if the quantum is the same.

Likewise, the monthly home loan repayment is based on the amount you borrow. If you borrow $1 million, and your home loan repayment is $4,700 a month, then that’s what you’ll pay; the bank doesn’t care whether your unit is bigger or smaller for that amount.

*Under the TDSR, your home loan repayment, plus any other outstanding debt repayments, cannot exceed 60 per cent of your monthly income.

The amount of loan bank can give you decides what you can afford to buy, which is more important than the price PSF

As such, many homebuyers of new launches know that the price PSF is high. They may not mind, however, so long as it means having affordable home in a place they really want to stay or an investment property they can rent out for good yield.

Buyers at Midtown Bay are aware they’re paying a high price PSF – but it may be the only affordable way they can have a home across from Bugis Junction.

Even if they were to find units with a lower price PSF (and there are many in the Bugis area) the typical home price for a District 7 property was around $3.4 million in 2019.

A Midtown Bay unit at $1.4 million may be the unit within their reach, whatever the price PSF.

Reason #3: The Difference In The Layouts Between New Launches and Resale Condos

Penthouses

A penthouse unit and a ground unit are usually the lowest in price PSF in the same development.

If you buy a penthouse, it usually has a big open roof terrace. Not forgetting the staircase to the upper level also eats into the floor area.

This penthouse at Freesia Woods has a full open roof terrace on the second floor

Ground Floor Units

As for a ground floor unit, it usually comes with a big private enclosed space (PES).

All these floor areas are tabulated in the floor size, and they make the price PSF look very cheap.

Big private enclosed space (PES) of a Holland Collection ground floor unit.

Double Volume Ceiling or Void Area

If you consider projects like Trizon and Trilinq, which seems very spacious on paper. But you may not realise that the sizes quoted include ‘air space’ or void area because of double volume ceiling in part of the apartment.

If you are not discerning, you may think you got a good deal at a very attractive price PSF.

But what can you do with the ‘air space’ which you paid for it?

This Trizon 3-bedroom 1894 SF unit includes a 118 SF of void area because of the double volume ceiling in the master bedroom

URA New Regulations

Since 17 January 2019, URA has imposed some new regulations:

  • The total balcony area(s) for each unit will be capped at 15% of the nett internal area to ensure that the balconies are not disproportionately large relative to the main unit.
  • Each balcony is to have a minimum width of 1.5 metres as measured from the external building wall to enable it to function as a meaningful outdoor space.
  • Developers are given a maximum of 10% bonus Gross Floor Area (GFA) over and above the Master Plan Gross Floor Area (MP GPR). That means developers no longer have any incentive to build oversized air-con ledges, PES, open roof terraces and bay windows.

Because of the new URA regulations, the new developments have a much more efficient layout than the older ones. So with the new developments, the quantum is not only lower but also you paid for more useable space.

The new launches, while higher in price PSF, give you more efficient layout with lesser wasted space. You may end up paying a lower quantum for more useable space

Reason #4: Price PSF Doesn’t Take Into Account Many More Important Factors

Consider this: there are two same-sized units in the same project. One is going for $1,500 PSF, the other is going for $1,450 PSF.

Does it mean that the unit priced at $1,450 PSF is a better bargain?

Facing, Level and View

It’s possible, and you should definitely take a closer look. However, it’s also possible that it’s priced lower because it has a view of the next block, rather than pool view or an unblocked view.

It may have a layout that’s awkward or less desirable (e.g. an L-shaped layout that doesn’t permit good flow of natural light). Or it may be directly facing the MRT track (this can cause the windows to vibrate slightly whenever the train roars past). If you are buying to lease out, you may have a problem getting a tenant who can tolerate the noise.

A high floor unit with an unblocked view naturally will fetch a higher price PSF than a lower floor unit without such a view

High Floor Units Are Not Always Worth Paying For

There is also no good reason to pay a higher price PSF for a high floor unit if there is no view that justifies the higher price tag. If you are looking into another block or building, a low floor or high floor unit does not really make a difference, except in price.

If you are paying a premium price for a pool-facing unit, ask yourself if it’s worth paying higher price PSF for a very high floor unit where you can only see the pool when standing at the edge of the balcony? And the higher you go, you smaller the pool appears. Why not pay a lower price PSF instead, for a unit on level 3 to 5 where you can enjoy a pool view while sitting down in your living room?

So, while it’s reasonable to look for a price PSF below the median (within the same development), you need to be cautious in scrutinising why that’s the case. This can be especially hard for new developments, where you have nothing to go by besides show flats and the floor plan. This is where you need an experienced agent to help you spot the best stack with the best value.

Conclusion

Please don’t ignore the price PSF, as it can still be a useful indicator of value. But at the same time, don’t be so focused on finding a low price PSF that you neglect other key factors.

In general, I find that genuine home buyers should focus more on quantum. It’s more important to ensure you can comfortably afford your home than to buy a big, overly-expensive house that will leave you financially stretched.

Recommend0 recommendationsPublished in Singapore, Property

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