Assessing Property Potential Upside and Risks

In one of the previous post, we have talked about the reverse mortgage.  Let us talk more about assessing the potential upside and the risk associated when it comes to investing in property. We will also recommend a good property investment opportunity for our reader – Hundred Palms Residences at Yio Chu Kang Road.

Assessing Potential Upside and Risks

From historical data, we know that the value of properties in Singapore has multiplied many times over. 30 years ago, the value of a small private apartment in Singapore was around $50,000. Today, the value of a small private apartment in Singapore is at least $500,000 on average. Due to the scarcity of land in Singapore, as well as her growing population and attractiveness to foreigners as a place in which to live and work, we can say that the value of properties in Singapore will continue to rise.

Based on these observable trends, it is safe to say that properties in Singapore generally offer good long-term potential upside. But the meaning of “potential upside” as applied to buying specific properties is not the same.

When you want to buy, you want properties that you have assessed to have high potential upside. When I use the term, “potential – upside” within the context of a particular property, I am referring to the potential returns from the property that I can measure at this point in time. It is very time-and-property specific. Note that I used the word “measure” and not “see”. It is not just an observation. I do calculations in order to measure the potential upside of a property.

Another point I want to highlight is that I am not measuring the “future” potential upside when I assess the potential property. I am measuring the current potential upside of the property.

Many people misunderstand potential upside as future potential. This is a common mistake – they are lured based on the idea that the potential upside will come true in the future. The future is something nobody knows for sure.

“Timing” is not a good enough reason to buy. Value is. Even if there are new launches and the price seems low, or you happen to have spare cash, a property is still not a good buy if the potential upside is not clear to you.

I also measure “potential upside” in a very specific manner before I make the decision to buy a property, I must be able to determine the potential upside of the property based on prices under current market conditions. For example, current transacted prices of similar types of properties within the same area.

Rental yield assessments should also be based on current market rates and not future market rates. Getting a sense of what the rental yield is likely to be, is not difficult. One simple way you can check on rental yields is to scan through the property classifieds on websites or in newspapers to see what similar properties (or the same property) are asking for in terms of rent.

Measuring Potential Upside

For the purposes of assessing potential upsides, my team and I have created a customised software programme that allows us to among many other things, compare current transacted prices within a given project or across different projects within a specific area.

This invaluable tool is used all the time to make sound assessments of potential upside for our clients. Here is a sampling of what the software can do:

Example: The Sail

The sail is a private residential property project launched in 2009. The following chart shows the transacted prices of units within The Sail from March 2009 to June 2011. In that period, a total of 18 transactions were recorded. The average psf transacted price was $2,670. When it was first launched, the transacted price was less than $2,000 psf. The highest transacted price in that project was $3,000 for a unit on the 25th level. For comparison, a unit on the 21st level sold for $2,620.

Expressway of Singapore

Express in numeric values, we can say that the potential upside for buying the unit on the 21st level is good as there is a difference of —$380 psf ($3,000-$2,620) between the buying price and the highest transacted price. Based on transacted prices, we can tell that the price can go at —$3,000 psf when we choose to sell it. When we buy, we buy with the aim to sell, as that is when we can take profit. We will further discuss the different ways of comparing potential upside using different price factors in a future post.

Hundred Palms Residences

Below is a quick glance for the project information for Hundred Palms Residences.

Project Name: Hundred Palms Residences
Developer: Hoi Hup Realty
Tenure: Leasehold 99 years w.e.f. 29 Feb 2016
Address: Yio Chu Kang Road, Singapore
District 19
Units Mix: 3 Bedroom, 4 Bedroom, 5 Bedroom
Total Units: 531  Exclusive Units
No. of Blocks/Levels:  9 Blocks, 15 Storey
Car Park Lots: TBA (1 Basement Carepark)
Expected TOP Date: 28 February 2020 (Launching Q3, 2017)
Site Area: 18,422.9 sqm
Architect: Consortium 168 Architects (C168)

The new Hundred Palms Residences EC land parcel attracted 10 hopeful bids with Hoi Hup Realty emerging winner with a top bid of $183.8 million. The land cost translates to a land cost per square foot per plot ratio(psf ppr) at $331.02 and an estimated Hundred Palms Residences EC price to be in the range of $750 psf to $800psf.

Hundred Palms Residences Project Information

A new site on the Yio Chu Kang Road (YCK) / Hougang has managed to attract significant interest from various developers. It has managed to receive ten bids by the close of the tender on the 18th of February, 2016. This site is intended to be developed into an executive condo property. The winning bid is worth S$183.8 million and it was placed by Hoi Hup Realty.
Yio Chu Kang Road

According to the director of the property development company, the breakeven cost will be just above S$700 psf. Therefore, it is likely that the sale price being the target will be S$800 psf approximately. Of course, the actual pricing will be dependent on the market conditions at the time of the sale. The company expects to launch the project in 2017.

Why Buy Hundred Palms Residences EC?

  1. Hoi Hup Realty is a popular developer behind this project
  2. More than 500 units to choose from starting with 2 bedrooms to cater to different needs.
  3. Easy connectivity to multiple expressways including Central Expressway (CTE)
  4. Close proximity to prestigious school
  5. Attractive pricing from just $700K
  6. Magnificent interior designs and modern layouts
  7. District 19 and close proximity to Kovan Town Centre & Kovan MRT

Hougang (Yio Chu Kang) Master Plan

Yio Chu Kang Road EC site area is around 198,529 square feet. Thanks to a plot ratio of 2.8, a gross floor area of 555,246 square feet will be the maximum allowed on the site. Around 520 units should be available to the residents.

When the site was launched for sale in 2015, experts had predicted that the winning bid will be in the range of S$260 to S$340 per square foot per plot ratio. They also believed that the site would attract somewhere from 5 to 14 bids in total.

The bids for this EC site illustrate the interest in this sector by the property developers. This is despite the fact that there are still a large number of EC units that have remained unsold. Moreover, there are additional EC units that are currently being developed and yet to be launched.

Experts noted that the interest in this site is specific to its location. As such, it should not be taken as an indicator of the wider market conditions. The competition seems to have been intensified due to the ease with which residents will be able to access the development. Moreover, various facilities and amenities are within easy reach. The site should be particularly of interest to parents thanks to the convenient location of reputed schools in the vicinity.

Another reason for the increased interest is that the site is located in an area surrounded by HDB estates. As a result, the developer will get access to a ready catchment pool to get residents from.

Assessing Risk for property

In addition to the potential upside for a property, I also assess the risks associated with it. Risks can be measured in terms of comparing rental income with other properties within the same location, or with other units within the same development. Risk can also be measured by comparing capital gains based on other units within the same development.

For instance, going back to The Sail’s example, we can see that the current transacted prices exceed that of the current asking prices in the same development. This means that risk of buying this property is lower, as I can sell the property at a lower price than the current transacted prices and still take a profit at this point in time.

Actual Site Hundred Palms Residences

TIP! When assessing whether to buy or sell a property, ask to see the current or latest transacted prices of similar properties within the same development, or within walking distance from the property.

At the same time, check whether units with the highest transacted prices have the same features (e.g. same facing, level). Potential upside and risks are two concepts that form the basis of research and analysis in a systematic approach. It helps me make decisions on whether to buy or sell.

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