Launch prices of new condos often raise resale values of nearby developments
When the show flat of a new residential project is ready, the new kid on the block often creates a buzz among the residents living nearby. People are generally curious about what the project looks like, its launch and completion date, and most importantly, the launch price.
Homes in these new projects are often priced higher than the average transacted value of resale units in the neighbourhood because of several factors, such as newer designs and longer tenures.
Many homeowners have asked how these new launches affect the value of their homes. Does the pricing of these new properties affect the prices of nearby resale units and, if so, to what extent?
Knight Frank has carried out a study to examine the pricing effects of new projects on resale properties in their vicinity. Our study is adjusted against the benchmark Urban Redevelopment Authority (URA) price index in the respective regions to take into account the effects of broad general market movements.
The price effect is based on the change in transacted prices per square foot over time of selected new and resale properties over the period from 2004 to last year in the Core Central Region (CCR), the Rest of Central Region (RCR) and the Outside Central Region (OCR), according to the URA’s geographical classification.
The average transacted prices of similar-sized units in developments adjacent to the new project were studied and compared over a three-month period before and after the new launch. Sizes were controlled to reduce price distortion where smaller units command higher prices on a psf basis and vice-versa.
Anecdotal comparisons showed that new projects were generally priced 20 to 40 per cent higher than the average transacted prices of nearby developments of similar sizes. This was especially so in the CCR and the RCR region and during property market upturns.
The new developments were found to have a positive effect on the transacted values of resale units after adjusting for broad market movements.
Resale prices moved up in tandem following the launch of higher-priced developments. The average resale unit price appreciation was 12.98 per cent in the CCR, 19.14 per cent in the RCR and 4.23 per cent in the OCR over and above the benchmark price index.
Prima facie, new launches do seem to have a positive effect on resale prices.
For example, when Marina Bay Residences was launched in December 2006 at a premium of 38 per cent to the average price of similar-sized units in the neighbouring development, transacted prices of the already-launched The Sail went up by some 21 per cent after adjusting for broad market movement. Likewise, the transacted prices of The Metropolitan went up by 12.2 per cent after The Ascentia Sky was launched at a premium of 36.3 per cent in July last year.
Arguably, the positive effect arises because resale units take reference from the transacted prices in the vicinity, including the higher priced new projects.
Higher priced launches raise the selling price expectations of the owners of resale units, particularly if they are located near the new project.
From the buyers’ perspective, resale units may also appear to offer value for money if they cost lower than their new neighbours. Inadvertently, this results in price appreciation for these resale units.
The real estate adage of “location, location, location” also applies in this instance, where the price effects of new launches have greater impact in the CCR and the RCR rather than the OCR.
Apparently, older properties in better locations benefited more where buyers have deeper pockets vis-a-vis buyers in the suburban regions.
But before you decide to jump on the property bandwagon, we would like to add a caveat. We noticed in our study instances where new launches did not result in a positive effect on the prices of nearby resale units.
Broadly, these instances occur during periods where home buyers’ sentiment was weak, such as when the broad market was awash with negative news or in the doldrums. There were also periods when buyers’ sentiment turned cautious after the announcement of public policies aimed at cooling the property market.
For example, in September last year, the Government announced the withdrawal of the interest absorption scheme and interest-only loan as an attempt to pre-empt a speculative bubble from forming.
The property market turned quiet for a while as buyers adopted a cautious stance. Resale units near new launches during this period did not exhibit much price movement compared to the market before the announcement.
To sum up, while new projects are still popular with potential home buyers, resale properties may be worth a second look, whether it is for owner-occupation or for investment.
Gems can be uncovered, especially for properties near sites with potential for new developments.
Perhaps it may help to look at yet-to-be launched sites that had been tendered between last year and this year.
If your sums, market conditions and timing are right, a pot of gold may be waiting at the end of the rainbow.
By Png Poh Soon, senior manager at Knight Frank’s consultancy and research department.