A lot of my friends and close business associates have commented that I have a knack to find value-for-money deals. They are often quite amused and amazed that I am able to find such deals even though I am not a property agent.
I often explain that my ability to do so does not lie in the access to information. With many online property portals, buyers can simply find deals with the click of a mouse, while sellers can bypass the middleman to list and sell their own properties. I believe my edge lies in research and the system I rely on to find good deals.
I firmly believe that,regardless the market condition, there are always good deals available in the property market. A case in point was a Tanjong Rhu unit that I purchased just a few months ago. While units in that location were being sold for an average of between $1,200 psf to $1,400 psf, I was able to find one that was asking for $980 psf. After my purchase, all of the subsequently transactions in that development were sold for at least $1,000 psf with some even reaching close to $1,200 psf. As my unit size is 1,300 sq-ft, I can easily reap a$100,000 to $200,000 capital appreciation if I had to sell it right now.
My purpose of illustrating this is simply to highlight one point – if you are going to spend a hefty sum on a property, why not buy an undervalued unit like the one I mentioned above and be profitable from the onset? While I cover the details of how to find such deals during my property courses, I will share one tool I often use in this article.
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The statistics of the Singapore real estate market
To identify whether a deal is worthwhile, one of the key things I look at is the property’s unit price (i.e. $psf or $psm) and my focus is to find deals with as low a $psf as possible. Unit price is the amount you have to pay for a square foot (or square metre) of space and it allows us to compare how pricey or affordable the units are.
Why look for low $psf? My team at Ascendant Assets collated all the residential transaction data from 2009 to Aug 2012 and plotted Figure 1. From the chart, we can clearly see that most transactions fall within the price range of $700psf to $800psf(15,663) and the $800psf to $900psf (15,704). It can also been seen that transaction volume tapers off as $psf increases. Naturally, buyers who have a larger budget, say $4,000psf, would have a wide selection of properties to choose from and sellers asking for high prices would in turn have to wait longer for a potential buyer to come along as they are priced at a level that most people would not be willing to pay.
Figure 1: Transaction price distribution from caveats lodged from 2009 to Aug 2012 (Source: URA and Ascendant Assets Pte Ltd)
Working out the probability of finding a seller
Occasionally my seminar participants will ask me to help them assess certain deals. To give them as sense of how risky or value-for-money the investment is, I would always try to tell them the likelihood of finding a seller, at their expected price, under prevailing market conditions. To illustrate, if the seminar participant was thinking of selling his unit at $1,010psf, under prevailing market conditions, he would have a 45% chance of finding a buyer. However, if he reduces his asking price by $30psf to $980psf, his odds of finding a buyer would increase to about 56%.
How do we work out the percentage? Figure 2 is the cumulative distribution of all the transacted prices from 2009 to Aug 2012. From this chart, we can work out how many people (in terms of percentage) have paid more or less than a certain price. To put it in another way, when we say the seller has a 45% chance of finding a buyer at $1,010 psf, this means that 45% of buyers had paid more than $1010 psf for a similar unit. Assuming all factors remain constant (i.e. economic environment, supply and demand, government policies, etc.), it would be reasonable to conclude that the distribution would not change significantly and infer that there is a 45% chance of finding a buyer as it is priced at a $psf that 45 out of 100 can afford.
Figure 2: Cumulative Distribution of transacted prices from 2009 to Aug 2012 (Source: URA and Ascendant Assets Pte Ltd)
Using Figure 2, we are also able to determine what the extreme prices are. Hence, if a unit is priced beyond $2,700 psf, the odds of finding an investor is less than 1% (0.98%). So if an investor is thinking of spending $2,700 psf to buy a unit and hoping to sell it for $3,700 psf (0.09%), the property that he buys must be extremely unique, otherwise he would have problems attractive the attention of a handful of prospective buyers.
I must qualify that this is only one of the many tools we use. Apart from looking at the general market conditions (which the 2 charts above show), pricing is also heavily dependent on characteristics of the specific development. For example, the fact that the transaction volume, demand and supply, etc. of The Sail, Marina Bay Financial Centre (MBFC), One Shenton are quite different even though they are located within a short distance apart clearly shows that each development appeals to a different investor/buyer base. Hence a similar approach can be used to analyse each development to differentiate between a good deal and a dud.
While such analysis and tools are far from an exact science, theyhelp investors have an idea on what the market is prepared to pay by telling us wherethe “psychological price barriers” are. More importantly, this is a fundamental shift in how properties are viewed. By putting some semblances of statistics in looking at transactions, we move away from simply relying on conventional wisdom or gut feel to distinguish between a good or bad deal.
Getty Goh has a MSc(Real Estate) and a BSc(Building) from National University of Singapore. He is also a Director of Ascendant Assets, a real estate research and investment consultancy firm. He holds property talks regularly, sign up for it here. Also, you can visit BuyByeProperty for more information.”