Investment Property: 6 Reasons Why New Launch Is Better Than Resale
Today, property investment is the aspiration of many Singaporeans.
In an increasingly affluent and progressive nation, we look beyond having just a roof over our heads. Property investment is a popular strategy to plan for our retirement.
The question is, when you are looking for an investment property should you be looking at a new launch or resale condo? Which one has more potential to help you make some gains in the future?
When you start comparing the new launch versus resale condo, the most noticeable differences are the differences in sizes and per square foot prices. New launches are generally smaller and higher $psf.
But does that mean resale condos are better buys?
If new launches are smaller and more expensive in terms of $psf, why are more people buying them?
Reason #1: New Launches Are More Profitable Than Resale
One usual response I get is, “New launches are so much more expensive, how to make money?”
What is most baffling is that though new launches are more expensive than the resale in terms of per square foot prices, they are actually more profitable. Isn’t profitability what you are after when buying an investment property?
Let’s look at some examples of new launch versus resale.
Commonwealth Towers versus The Queens
Commonwealth Towers and Queens are next to the Queenstown MRT but on different side.
They were both T.O.P. in 2017 and 2002 respectively.
Commonwealth Towers was launched in May 2014 at an average price of $1,622psf as compared to Queens at only $1,218psf.
To date, Commonwealth Towers have gained 26.33%, whereas Queens 19.99%.
Alex Residences versus Ascentia Sky
Both are near to the Redhill MRT. Their respective TOP years are Ascentia Sky (2008) and Alex Residences (2017).
Alex Residences was launched in Nov 2013 at an average price of $1,719psf. At that point, Ascentia Sky was transacted at a lower $1,375psf.
Fast forward, Alex Residences has since gained 26.75% while Ascentia Sky 14.74%.
While it seems like resale condos are better buys when the nearby new projects are launched at a higher $psf, empirical research shows that the new launches are more profitable investment properties.
Reason #2: New Launch Buyers Enjoy First Mover Advantage
Based on research by OrangeTee & Tie, about 9 out of 10 who bought new homes from the developers in the last 10 years made profits.
Developers sold 115,610 new homes in the last ten years. About 15% (16,017 units) were resold with an average gross profit of $220,000. These profitable resales were across different market segments.
Take a look at some projects that were TOP in the last 2-3 years where most units were resold at profit.
Project | Segment | T.O.P. | Gains (No.) | Average/High Gains | Losses (No.) | Average/High Loss |
|---|---|---|---|---|---|---|
Coco Palms | OCR | 2018 | 73 | $117,180 / $431,500 | 0 | 0 |
The Glades | OCR | 2017 | 9 | $49,138 / $115,500 | 4 | $25,178 / $70,100 |
Sim Urban Oasis | RCR | 2017 | 26 | $125,047 / $264,751 | 0 | 0 |
Commonwealth Towers | RCR | 2017 | 26 | $199,123 / $345,300 | 0 | 0 |
City Gate | CCR | 2018 | 8 | $143,906 / 213,000 | 0 | 0 |
Duo Residences | CCR | 2018 | 26 | $192,679 / $409,900 | 4 | $337,890/ $937,000 |
Why did most of the buyers of these new launches make money for their investment property? The reason was they enjoyed the first-mover advantage.
As the saying goes, “early birds catch the worms.”
The best time to buy is during launch. Developers typically offer their lowest prices to entice buyers and to spur sales. This approach helps to create hype.
Over time, as the project sales move, it is not unusual for developers to start increasing their prices at various stages.
There is a TOP effect where buyers are willing to pay a premium to see the finished products and enjoy immediate occupation. So those who buy at launch generally will make a profit.
Price Preservation
Owners who bought first hand will rarely sell at a loss because of price preservation.
What if you buy a unit from the first owner who paid the developer’s launch price?
Let’s suppose the launched price of the unit you bought was $1,400psf, but you paid $1,700psf. Five years later you want to sell at a 10% profit. So you need to sell at $1,870psf. But you would be competing against many first owners who bought at an average of $1,400psf. These owners will limit your upside potential.
If you buy a new condominium, you are on an equal playing field as all others when putting their property on the market. Since every owner wants to make a profit, you will likely make a profit too on your investment property.
If you buy a new condominium, you are on an equal playing field as all others when putting their property on the market. Since every owner wants to make a profit, you will likely make a profit too on your investment property.
Reason #3: New Launches Are More Affordable
You may be asking, how can new launches be more affordable when their prices are so high in $psf?
Do you notice new launches are so much smaller than the older condos?
Those apartments that built in the ’80s and ‘90s come with 3-bedder anything from 1,600sf to over 2,000sf.
In the following decade, 3-bedders are typically between 1,300 to 1,700sf.
Then, up to 2009, we see an era of apartments with huge balconies, disproportional air-con ledges, double-volume space and bay windows.
Today, the 3-bedders have shrunk to a mere 900sf to 1,200sf.
With land prices so astronomically high these days, developers are building the apartments smaller to make the quantum more affordable for buyers.
The Impact of TDSR
There is a reason why apartments are now built much smaller.
At one time, the gap between new launches and resale condos is very close, and at times even converges.
But everything changed on ‘D Day’ 29 June 2013.
After several rounds of cooling measures that could not tame the market, the government introduced the mother-of-all cooling measure: Total Debt Servicing Ratio (TDSR). TDSR limits the maximum loan of the borrower to 60% of one’s gross monthly income.
Monthly debt includes all outstanding debt obligations:
- Property-related loans, including the loan being applied for.
- Car loans.
- Student loans.
- Renovation loans.
- Credit card loans.
- Any other secured or unsecured loans, including revolving loans.
It instantly changed the whole landscape of property investment.
Affordability becomes a major issue.
The only way developers can get around this issue is to make the new condos smaller.
The Key Is Affordability
When you are buying an investment property, it will likely be your second property.
If you have an outstanding loan, you are only eligible for 45% Loan-To-Valuation (LTV) for your second loan. That means if you are looking at a $1m investment property, you would need 55% of capital outlay.
Let’s suppose you already have one property in your spouse’ name, and you want to buy an investment property in your name as your first property (adopting the Sell-One-Buy-Two strategy).
Since it’s your second property, which is an investment property, you want to be prudent and not over-stretching your resources.
Comparing Commonwealth Towers and Queens
Let’s go back to the example of Commonwealth Towers and Queens.
Queens’ smallest unit is a 915sf 2-bedder. In August 2014, a #17 unit was sold for $1.25m ($1,366psf)
The smallest 2-bedroom unit at Commonwealth Towers is 689sf. The transacted price for #17 unit was $1.018m ($1,479psf).
To buy the said Commonwealth Towers at $1.018m, the buyer’s minimum gross income is $5,800 a month. Your 25% downpayment is $254,500.
On the other hand, a buyer needs to earn $7,100 a month to buy the 2-bedder at Queens with a downpayment of $312,500.
A 689sf 2-bedroom unit at Commonwealth Towers was recently rented out at $5,200 and a 915sf 2-bedroom at Queens at $4,000 . That works out to 6.1% versus 3.8%.
Of the two, which is more ‘affordable’ and enjoy better rental yield as an investment property? The obvious answer is Commonwealth Towers though in $psf term it is higher than Queens.
When comparing new launch versus resale condo, new launch while higher in $psf, is more affordable and gives better rental yield
Reason #4: New Launches Have Better Designs and Facilities
New projects usually come with better and more updated amenities such as infinity pools, aqua gym, onsen spa, sky gardens, themed pavilions, private kitchens, game rooms, karaoke rooms, gyms with state-of-the-art equipment, badminton hall, branded appliances and high-end finishing.
The list can go on and on. Every developer is trying to out-do one another.
It is quite common for developers to engage world-renowned architects to differentiate themselves.
Newer condos with better design and facilities will usually attract tenants who are willing to pay a higher rent while sacrificing on the size.
The biggest advantage of new launch over older resale is the feel-good factor because everything is newer and nicer
Reason #5: New Launches are Easier To Rent Out
If you are buying an investment property and deciding between a new launch versus a resale condo, new launch will definitely has an edge when looking for tenants simply because it is new and better, even if it is smaller.
Today, tenants are spoiled with choices.
Potential tenants will almost always go for condos that are newer and nicer. New condos not only are easier to rent out than the older ones but also they enjoy better rental yields.
The older developments lose out to the brand new condos on the facilities. For the interior of the units, owners will need to renovate the apartment, sometimes extensively, to make it more tenantable.
It is not uncommon for tenants to be concerned about the state of the air-conditioners if they are old. They are worried about things breaking down, such as washing machine or refrigerator.
If the apartment is brand new, everything that comes with it is brand new and under warranty. The developer covers even the first year servicing of the air conditioners. So it’s hassle-free both for the landlord and tenant.
Newer condos are not only easier to rent out than the older ones but also they enjoy higher rental yields
Reason #6: New Launches Have Lower Cost of Maintenance
One of the major considerations when choosing between a new launch and resale for your investment property is the cost of renovations for the latter. This cost involves your cash reserves. For an investment property, it is not ideal to eat too much into your cash reserves.
You might burn a big hole in your pocket if you need to overhaul the whole apartment with new air-conditioners, wardrobes, flooring, bathrooms and kitchen cabinets. Furthermore, you may need to buy a new washing machine, dryer, refrigerator and oven. It is not uncommon to end up spending more than $100,000.
New condos come with everything new, including branded appliances. And if there is any defect, they are covered under the one-year defect liability period by the developer. The saving can be quite substantial.
As the apartments aged, especially those that are 15 years old and above, they are prone to structural issues like leaking and choked pipes. You need to fork out higher sinking funds as the costs of maintenance and repair for the common areas and facilities go up.
New condos are spared from such problems with all things new.
Concluding Thoughts
While we are saying new launches are better investments, not all new launches will make money. It is important for you to consult an experienced agent to identify the right choice of new launch.
After all that been said, it also does not mean it’s wrong to buy a resale condo. There are many investors who believe in resale condo for various reasons. Here we are expressing our opinions, supported by research, why we think new launches are better investment property.
If you are planning to buy an investment property but not sure as to what is the best option, do feel free to contact me for a non-obligatory discussion.
Do go to my Facebook page and click like because there is another upcoming related topic.
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Danny Han has always been in the people’s business, having spent 23 years as a church pastor, five years as an insurance agent, and the last 16 years as a property consultant.
Danny has a genuine interest in people and firmly believes in personal integrity. While helping homeowners with their property needs, their interest always takes precedence over his personal gains. Hence, Danny has consistently earned his clients’ complete trust and loyalty. Many of them have become his personal friends.
Danny received his Diploma in Mechanical Engineering from Singapore Polytechnics and Bachelor of Science from Oklahoma Christian University of Science and Arts in Bible & Psychology.
Besides keeping abreast of the property market trend and constantly equipping himself to better serve his clients, Danny is a passionate foodie, a weekend cyclist, and an avid hiker.
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