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Pros and Cons of Buying Completed Properties vs Under Development Properties

07.07.2011 · Posted in Real Estate

A constantly debated topic in Real Estate has always been should one buy completed properties or under development properties from a developer? The answer is, it depends on your need and situation. I for one have done both and I would like to share my experience. Frankly, I dislike buying under construction properties nowadays as I hate waiting for a long time before I start seeing any Real Returns. However, I will still go through the Pros and Cons of each.

Buying Underdevelopment Properties Pros

Developer Freebies

Developers often give freebies like Free Stamp Duty, Free Legal Fees, Rebates and others. There are also developments where the Developer absorbs the interest during the construction period, known as Interest Absorption Scheme/Deferred Payment Scheme. In some lesser known developments, Developers may also give out Rental Guarantees for a number of years to attract investors. However, the Developers normally have already priced in these incentives into the pricing, so it’s not usually that great a deal after all.

Ease of Financing

Developers usually work with Panel Banks to secure financing for their buyers. As such, valuation is usually not required for these properties as the banks have already accepted the valuation of the developers’ pricing. Banks may also come up with innovative schemes like No Payment Down or minimal down payment required for certain developments.

Low Payment Upfront

As described earlier, a combination of Free Stamp Duty and Legal Fees basically reduce transaction costs. Coupled with low down payment schemes, the down payment can be pretty low. It’s one of the cheapest options to purchase a property.

Brand New

Buying an underdevelopment project means getting a brand new property when you receive the keys. For some people, it’s a psychological comfort that the house is brand new and much cleaner than one which has been lived in before. There will also be minimal hassles with repairs and maintenance since it would be covered by the developer during the Defects Free period.

Buying Underdevelopment Properties Cons

Risk of Abandoned Projects and Delays

The most basic risk is that the development gets delayed or worse still never gets completed. It’s a real risk in countries such as Malaysia where any Tom, Dick and Harry can become a developer. For larger, well known developers the risk of the project getting abandoned is less likely. In this case, the risk may be delays in delivering the completed property.

Unable to See the Final Product

Developers are known to furnish showrooms with the most expensive materials, furniture and fixtures which may not be in the actual unit. Showrooms also employ many visual tricks like walls of mirrors, breaking down doors and divisions to make the space appear larger than it actually is. The site plan may also be somewhat different, so the layout of certain rooms may not be as ideal as you expected. Also, standing at the ground floor of the showroom, it’s difficult to imagine what your view would look like; the last thing you want is to see cemetery right from your living room. (It happened to a friend of mine before)

Waiting Time Period

The standard length of time is anywhere from 2 years to 4 years, so it’s a long wait. If your development does not offer Deferred Payment Scheme, you will have to make interest payments for the Progressive Payments of the project. In addition to the opportunity costs of the downpayment locked in during those years, the holding costs could be quite sizeable. Remember, the money can always be invested in low risk stocks/bonds for 3-4% return per year.

Market Uncertainty

For investors, the market can be very unpredictable, 2 to 4 years are a long time and anything can happen when you get the keys. Should there be a downturn during that time, you could be in for a tough time. Those who are hit particularly hard by this are speculators who just buy with the aim of flipping for a gain upon completion. A hot market inevitably draws in a lot of speculators who do not have the ability to hold the units and they may be forced to sell at low prices, lowering market values for the property.

Higher Prices Than Subsale Properties

In recent years, new properties are almost always priced above currently available subsale properties in the same area. I am sure you have heard all the factors, inflation, rise in construction costs, rise in material costs, higher land cost, new design blah blah blah. There may be some truth in them, but it’s up to you to decide if the developers are overpricing their projects.

Rental Yields Uncertain

Sales people will always quote unreasonably high rental yields and always boast the rentability of the project to expats or students. Investors for some reason have a constant fascination with either expats or the student rental market so the sales people will always try to touch on these factors. It is important to note that half of the things sales people say are bullshit so I would never take them too seriously. Do your own research on how certain these units are likely to rent and the rental rate.

 

Buying Completed Properties Pros

What You See Is What You Get

You will be able to see the actual unit before you commit to purchasing it. This is quite important actually; you will see the exact layout, the quality of furnishing, the view, who the neighbours are, occupants of the development, surrounding amenities and more. All these factors are critical factors to rentability of your unit, so it’s great to be able to see them, reducing your risk considerably.

Cheaper Prices than New Properties

Subsales properties are not always old and dilapidated, in fact, some are newly completed! In my opinion, those new completed properties usually represent a good buy especially if the price is still below the launching prices of new projects.

Instant Rental

Once the transaction is completed, you will be able to rent out the unit for income instantly. Better yet,if the purchase comes with a rental agreement, saving you the agent costs and searching costs. This is another very important factor, getting Instant Returns once you actually own the unit instead of having to wait.

Ability to Calculate Rental Yield

Even if the actual unit is not rented out, it is quite easy to derive approximate rental based on other units rented in the same project. Ability to calculate rental yield is an important determinant of whether the price you are paying for the property is reasonable. The higher the rental yield, the better the price is.

Buying Completed Properties Cons

Higher Transaction Costs and Cash Outlay

In a subsale, the buyer often has to pay for all the transaction costs upfront such as Stamp Duty, Legal Fees, Financing Fees, Valuation etc. and more. Furthermore, the Down payment will have to be paid in full in a relatively short timeframe of 3-6 months. The cash outlay is normally much higher when you buy a completed property.

Difficulty In Getting Valuations

In some cases of hot properties, it may be difficult to get banks to match current asking prices since valuation prices are normally based on older prices 3 months or older. If you believe in the potential of the property, you have to either shop around, push banks to increase valuation or even top up the difference in cash. Again, having the cash on hand is critical in such situations. You can always refinance the property to get the cash out after the valuers have caught up with the new valuation.

Repair and Renovation Costs

Buying a subsale property normally means having to do some repairs and renovations. Depending on the state of the property and age of the furnishings, the costs can be either minor cosmetic touch ups or astronomical for those with structural defects. It is therefore important to get an expert to check on potential defects especially if you are buying an old house. Then again, there are many who have made good money by buying old houses, renovating them and flipping for a good profit.

 

After going through all the Pros and Cons, you should have a good idea of the differences between both options. I personally prefer buying Completed Properties, but for some people Under Development Properties may be a better choice. I will probably touch on the situations which may make one option more suitable than the other in a latter post.

 

 

18 Responses to “Pros and Cons of Buying Completed Properties vs Under Development Properties”

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  4. it is a nice article that can make many people benefited from it ^^thanks, mr Yeo

  5. Calvin

    Wonder if you could share your experience in your purchase of properties especially residential in Malaysia? There has been so much spotlight on Iskander and seminars ongoing and news about people picking up units within hours of soft launch.

    Thanks

    • Hi mr chua, if you are interested, it is best to go there and see for yourself. The prices are going up too fast in my opinion and there is just too much construction going on there all at once. The important part is whether there will be enough people staying there to occupy all these luxury houses. How long it takes for the offices and houses to be fully occupied is a question mark when all is completed.

      I definitely see a lot of synergies for Singapore and Iskandar, but mainly in the industrial and logistics sector. So my bet would be on industrial properties rather than residential.

  6. Hi Calvin,

    Which type and areas of industrial properties in Iskandar you are looking at now?

    Any tip?

    • Hi Han Leong, JB is very big and there are plenty of opportunities to find undervalued industrial properties there. Proximity to highways, Pasir Gudang port, causeway, Senai airport all play a big role. Accessibility is very important. It may also make sense to buy industrial land if you have the cash or older industrial buildings with catalysts nearby.

      • Hi Calvin,

        I found this listed company Tiong Nam Logistics Holdings Berhad under KLSE.

        It hold a lot of industrial properties and development esp in Johor and is also in logistics.

        I was researching this company and find it could a beneficiary of the industrial property in johor.

        Any opinion on this company?

        • Hi Han Leong, Tiong Nam is indeed an interesting company. It does have a huge amount of logistics properties and it is likely to list them into a REIT which could result in a major payout for shareholders. Dividend yield is decent at about 3.5%, but that may go down if it does decide to list them into a REIT.

          Looking at NAV of RM 3.30, the stock looks undervalued based on the asset values. However, earnings are volatile and not fantastic due to the high transportation costs. Net margin is extremely low, but cash flow is still enough to cover dividends. It is worth a look, but it will require more detailed study.

  7. Hi calvin,

    Is there a easier to way to invest in industrial properties in JB? Reit?

    • Han Leong, as far as I know there is no pure JB REIT. However, there are REITs who are looking to take up significant industrial and warehousing properties in JB, one such REIT is Axis REIT.

  8. Hi Calvin,

    Not sure about Axis Reit? Is it worth investing in your opinion?

    • At current prices probably not attractive, yield is a bit low in my opinion for a diversified REIT. However, good REIT with good management and execution, can keep on watchlist.

  9. hello calvin
    now that reit prices have gone up significantly. I am thinking of putting some money in this company – global investment ltd. What is your opinion? currently trading at 0.15 which is a bit high but current yield 10.07%.price to book ratio 0.662 assets per unit 0.245 debt per unit 0.02 (including current liabilities) and gearing 6.67%

    thanks for your advice.

    • Hi patricia,

      Personally I don’t like their business. They don’t even have a real business in the first place. They invest in some planes, railways, high risk debt and CDOs, US MBS and some equities. None of the assets other than equities are growth securities, they are mostly high risk fixed income securities.

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