Is Buying A Low Price Per Square Foot Property Always A Good Idea?
Price per square foot ($/PSF) is a common indicator used by property buyers to gauge if the property is a “good buy”. Many buyers look at the PSF of property and compare it to the average PSF around the area to determine if they should make the purchase. However, does a high PSF always indicate that the property should not be bought? Are properties with low PSF a “good buy”?
What is Price Per Square Foot?
As the name indicates, the price per square foot is the cost of one square foot of the property. It includes both the livable and unlivable areas, such as the air conditioning ledges, planter boxes, and bay windows. Many buyers assume that a low PSF makes the property a good buy while a high PSF indicates that the property is “not worth”. However, this is not entirely true due to quantum.
What is a Quantum?
In simple terms, quantum is the absolute price of a property. A high quantum indicates that the property is priced lower than its surrounding developments.
A small unit tends to have a higher price per square foot for most properties while a larger unit tends to have a lower price per square foot. Though a smaller unit has a higher $/PSF, its quantum will always be lower than that of a larger unit. As a result, smaller units will definitely be more popular and affordable among property buyers.
An example would be Parc Esta. Located opposite Eunos MRT, the smallest unit in the development (1 bedroom + 1 study) has an average price PSF of $1.7k to $1.8k. Though its price PSF for the smallest unit is higher than the average of $1.6k for the entire development, the overall quantum is much lower than those bigger units.
Another example would be M Condo @ Middle Road. The development is located in District 7, which is part of the Core Central Region (CCR). For the smallest unit in M Condo, it commands a price of less than $1 million at an average of $2,200 to $2,400 PSF. Not forgetting the convenient location (walking distance from Bugis MRT) and the potential for future growth, there is no question as to why it is one of the more popular developments currently.
These two examples show that a high $/PSF does not necessarily mean that the property is “not worth” its price as the overall quantum will likely be more affordable compared to those with a lower $/PSF.
Are Properties with High PSF not profitable?
A low initial PSF does not indicate a higher possibility of a profit in the long run; other factors contribute to the growth of property prices as well.
Let’s take a look at The Minton and Forest Woods, whereby both developments are 99-years leasehold. Comparing their price per square foot, it can be seen that The Minton has a lower price PSF compared to Forest Woods. From Q4 2016 to Q1 2021, prices of units in The Minton have increased by 9.47% while prices of units in Forest Woods have surged by 16.12%.
Another example would be Bishan 8 and Sky Vue. Completed in 2000 and 2016 respectively, owners of Sky Vue properties have a higher profit compared to owners of Bishan 8. When Sky Vue was launched in 2013, it was launched with a higher price per square foot of $150 as compared to the price PSF of Bishan 8 at the point of time. From Q3 2013 to Q1 2021, Sky Vue has appreciated by 33% while the price of Bishan 8 grew by a meager 4.90%.
Looking at these two examples, we can see that a lower price per square foot does not necessarily mean that the property will be much more profitable than those with a higher price per square foot.
Total Debt Servicing Ratio & Resale Prices
A 3-bedroom unit in Gem Residences starts from $1.2 million and a unit with the same number of rooms starts from $1.5 million in Trevista. This would mean that the property buyer has to meet the TDSR by earning $7.5k for a unit in Gem Residences and $9k for a unit in Trevista.
As a result, Gem Residences became an option that is more popular among resale property buyers. This in turn led to the growth in resale price.
In 2016, Trevista had a PSF of $1,350 while Gem Residences has a PSF of close to $1,400. As Trevista was launched in 2008, it would mean that it only has 91 years out of its 99 years lease. When we prorate it back to 99 years, Trevista would have a PSF of $1,469. When we compare Trevista’s $1,469 PSF to Gem Residences’ $1440 PSF, we can clearly see that Gem Residences is much more attractive in terms of its price.
Conclusion
Aside from the price per square foot of properties, it is important to be aware that older properties have a less efficient layout as compared to newer ones. Back in the olden days, unusable areas take up around 20% of the total property area. This 20% was lost to air conditioning ledges, planter boxes, and bay windows. As a result, buyers are less inclined to purchase older properties due to their inefficient layout.
Another factor to consider is the cost of renovation works for older units. This amount can vary from a few thousand to a hundred thousand, depending on the extent of the renovation.
While a lower price per square foot might seem like a good deal at the start, you should also know that not all properties with a lower PSF have a higher resale price, nor does it mean that the overall quantum will be lower.
William Lee / Eileen Au
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Ideal Home is well-liked by both local and international clients for their friendly yet professional approach in the way it goes about helping them with their real estate goals in Singapore. They welcome the opportunity to have a no-obligation chat with you to see how they can help you to achieve your real estate goals in Singapore.
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