Risks of Buying Smaller Condominium Units in Singapore

Risk of Buying Smaller Condominium units in Singapore

December 25, 2010 by property 

RISK OF BUYING SMALLER CONDOMINIUM UNITS IN SINGAPORE

The risks can be broken down into mainly returns risks, capital value risks. Due in part to potential capital value risks, it also comes with financing risks.

In recent years, developers in Singapore have rolled out smaller size units in order to justify higher per square feet prices. All the developer has to do is to meet the affordability quantum to extract the maximum value and loan servicing ability out of Singapore borrowers and property buyers.

From year in early 2000, sub 1000 square feet units such as those 2 rooms condominium units become popular. Then somewhere in between 2003 to 2006, those units with ranges from 700 to 900 square feet becomes popular. This trend started in prime districts where the location is generally expensive. People who wanted a prime location but could not afford the larger units could still end up with a prestigious address by buying smaller units with a lower price quantum, but higher per square feet price.

From 700 to 900 square feet 1 bedroom units, developers who are bidding for expensive land released by the government or through en-bloc sales can only make money if they sell at higher per square feet prices. This leads developers to develop even smaller units such as 1 bedroom units as well as studio units. The popularity of studio units eventually lead to sizes of sub 500 square feet condominium units.

Here is a taking a look at the price differential between the various property size ranges. We use Valley Park Condo as an illustration: -

Condominium	Size(ft)	Size category	Price per feet (S$)	Price quantum(S$)
Valley Park	797	Small	1422	$1,133,334
Valley Park	1550	Big	1398	$2,166,900
Valley Park	764	Small	1374	$1,049,736
Valley Park	764	Small	1413	$1,079,532
Valley Park	1550	Big	1290	$1,999,500
Valley Park	1216	Mid	1398	$1,699,968
Valley Park	1216	Mid	1398	$1,699,968
Valley Park	1109	Mid	1209	$1,340,781
Valley Park	861	Small	1394	$1,200,234
Valley Park	1216	Mid	1315	$1,599,040
Valley Park	1216	Mid	1340	$1,629,440
Valley Park	797	Small	1356	$1,080,732
Valley Park	764	Small	1452	$1,109,328
Transactions between July 2010 to Dec 2010 (Excluding 1 out-lying data point) –
Average (All types)	$1,366
Average Small	$1,402
Average mid	$1,332
Average big	$1,344

Valley park Condo different sizes of Condo development

There are some price differences, though not necessarily significant difference as Valley Park Condo is an older development. Some newer developments where small size condominiums are dominant are marketed at a much bigger premium relative to similar developments around the same location.
Of course, please do not read too much into this information as it is taken off a very small sample.
However, historically very big units are priced cheaper on a per square feet basis, therefore some niche luxury property developers may start to launch big size super luxury condominiums with sizes from 2000 to 3000 sq feet at very high prices to capitalize on this price difference.

So you can clearly see the sandwiches of value range of each size class.

Some banks have declined to take on property sizes below 500 sq feet. Why is this the case?
According to the insiders, this is because of the excessive premium of such size of property over the other sizes of properties. With such additional premium for small size units, if the corresponding cost to customize to such configuration is small, then it would be almost certain that more developers will start to “arbitrage” this premium. When arbitrage happens, more such smaller size units will be available and hence put a pressure on the price and premium if demand do not also grow at a similarly fast pace.

What is the Consequence?

• So in other words, the supply side is growing.
• Demand side is unknown as there is no way to tell how the public will take to such properties despite being “affordable”.
• The potential supply coming on stream may depress prices if demand is not found.
• Rental yield may also become a serious issue as tenants will have more of such units choose from. This tends to lower the rental yields. Only the best units may be able to continue to command good rental rates.

The risk to individuals and property buyers is loss of rental income, reduced yields as well as loss of capital value of the property.

With these risks, banks are also cautious as the value of their collateral is impacted. And some banks will refuse to lend for smaller size units below 500 sq feet. Some banks will refuse to lend for smaller size units if the development consists of a large proportion of smaller units. They consider this concentration of risks.

Of course, things may change over time and banks will review their positions.
One of the key things is, what is the main reason why you are buying a smaller size unit.

RANKING OF RISKS FOR SMALLER CONDOMINIUM UNITS IN SINGAPORE

We categorize the risk in the following order with the top being the least risky in the group and the bottom being the most risky: -

• 700 to 1000 square feet units in prime locations such as district 9, district 10 and district 11 and central CBD. The development is a condominium and has large number of units where only a small number of units are smaller units such as these.
• 700 to 1000 square feet units in prime locations such as district 9, district 10 and district 11 and central CBD. The development is a condominium and has high number of units which are smaller units.
• 500 to 700 square feet units in prime locations such as district 9, district 10 and district 11 and central CBD. The development is a condominium and has large number of units where only a small number of units are smaller units such as these.
• 500 to 700 square feet units in prime locations such as district 9, district 10 and district 11 and central CBD. The development is a condominium and has high number of units which are smaller units.
• Smaller than 500 square feet units in prime locations such as district 9, district 10 and district 11 and central CBD. The development is a condominium and has large number of units where only a small number of units are smaller units such as these.
• Smaller than 500 square feet units in prime locations such as district 9, district 10 and district 11 and central CBD. The development is a condominium and has high number of units which are smaller units.
• All other units in out-lying areas outside of prime districts such as District 9, 10 and 11 with the highest risk attributable to the smallest size units.

Of course the right entry price for such property type will mitigate the risks somewhat. Property buyers should not be too anxious to chase after the status symbols of prime districts if it stretches their pockets. Cheap quantum may not necessarily be a good deal. But of course the reverse is true, taking excessive risks and buying an over-valued property may not necessarily lose you money and can in fact make you rich if you risk it and win. One of our guiding principles, “Don’t make any losses, the gains will take care of itself” If the downside is limited, that speaks volumes about the supporting value of the asset you have invested into.

Similar to a musical chair game, there are 100 people dancing and there are only 50 chairs, when the music stops, 50 people may not find chairs to sit on, but for those lucky ones who are still able to find a chair after the music stops, congratulations.

THE REASON WHY WE EMPHASIZE PRIME DISTRICTS 9, 10 and 11
The reason why we emphasize traditional prime districts mainly because of it’s appeal to the psyche of the ordinary Singapore citizen, this leads to it being benchmarked as the top grade property locations. And due to this, it will always find support level in terms of buyer’s interest in case the prices falls. Singapore has about 40% foreigners out of it’s entire population of about 5.1m, that means that some new “benchmark” locations may be established. Before these new “Benchmarks” are formed, for safety, we will stick to discussing the traditional prime districts.