Do ECs make good property investments?

The good response to the recent launch of Esparina Residences has triggered interest and aroused curiosity over executive condominiums (EC). A large turnout was seen on the first day of the launch, when 344 out of 573 available units were sold. More EC launches are expected in the coming months.

What are ECs and how do they compare with private condominiums? More importantly, do ECs make good property investments?

ECs were introduced in 1995 to meet the housing needs of the “sandwiched class” whose gross monthly household income exceeds $8,000 but is below $10,000. These home buyers do not qualify for new Housing and Development Board flats but may not be able to afford private properties. To date, there are 23 completed ECs accounting for 10,430 units.

Where design and facilities are concerned, ECs are comparable to private condominiums. However, unlike private properties, ECs owners are required to occupy their units for five years before they can sell them in the open market – and only to Singapore citizens or permanent residents. It is only after the 10th year that all restrictions are removed and the ECs can be sold to anyone, including foreigners and corporate entities. Effectively, ECs are equivalent to private properties from this point onwards.

Because of these restrictions, ECs are often priced at a discount from nearby private condominiums. The first batches of ECs in 1996 were sold at steep discounts compared to nearby condominiums. In some instances, the discount was as big as 60 per cent. Developers then were unsure of the market response as the EC launches coincided with soft market conditions after the introduction of anti-speculative measures. On average, the discount was between 35 and 40 per cent.

The gap narrowed to about 25 per cent for ECs that were launched in the early 2000s. This included Nuovo at Yio Chu Kang and Lilydale at Yishun Avenue 11, among others. Recent launches such as the Esparina Residences and The Canopy are priced at a narrower 10 per cent discount from nearby private properties. Invariably, the smaller price difference implies stronger developers’ confidence and increased buyers’ receptiveness towards ECs.

That said, how do ECs fare as a property investment? Knight Frank studied the price appreciation and price differences between ECs and private properties from 2004 to this year. Average sale transactions of ECs after the 5th year and the 10th year were included in the analyses. Sizes were controlled to reduce price distortions where smaller units commanded higher prices on a per-square-foot basis and vice versa. Prices of mass market non-landed properties were referenced to the Urban Redevelopment Authority’s price index of non-landed properties outside the central region.

ECs appreciated by an average of 66 per cent over the six years while prices of mass market properties increased by 53 per cent. A majority of these ECs had crossed their 10th year mark and were no longer subject to any resale restrictions. Interestingly, the better performers were the older ECs that had deeper discounts and were catching up with their private counterparts from a lower base – resulting in higher price appreciation.

The price difference between ECs and private condominiums were also notably smaller after the 5th year and 10th year marks, with the average discount shrinking by some 20 per cent and 15 per cent, respectively. In some instances, the difference was less than 10 per cent at the 5th year.

Not surprisingly, location is an important factor affecting prices, with those nearer MRT stations and shopping centres performing better. In the case of Bishan Loft, the average transacted prices went above that of the nearby private properties, even though it had not reached the 10th year mark.

Looking ahead, as the Government releases more EC sites, what is important when purchasing ECs is to note the quantum of discount from surrounding private properties as well as the location. While ECs are subject to a minimum occupation period as well as a myriad of other restrictions, there is value waiting to be unlocked.

By Png Poh Soon, senior manager, consultancy and research, at Knight Frank.