Pushing price boundaries in private residential market

August 20, 2010 

 In business strategy classes, we often learn that the most successful businesses are the ones that are early leaders in identifying a need or are able to create a market by convincing consumers to pay for something which they never knew they wanted.

In the last property boom, the race was to build the biggest and priciest apartment.

To achieve this, projects were co-branded by contracting renowned architects to produce distinctive products and stuffing the apartment with the best appliances.

CapitaLand and Sun Hung Kai engaged the services of renowned Benoy when developing The Orchard Residences. “Branded” apartments were introduced.

City Developments brought the St Regis brand to Singapore. Specialist luxury home developer SC Global took this to a new level by introducing 6,000-square-feet apartments at The Marq, which comes with your own 15m lap pool. These distinctive projects helped to inject life and interest into the luxury housing market and pushed the price boundaries in their respective segments.

Coming out of the economic recession last year, a turning point of sorts for the private residential market was the successful launch of The Alexis at Alexandra Road, jointly developed by Fission Group and Yi Kai Development.

Before its launch and rumoured sell out, my initial thoughts were that the site attributes were not fantastic. I could not imagine staying in a 400-sq-ft apartment and thought that occupants might get dizzy from facing the giant rotating Mercedes billboard across the road.

But as it turned out, the developer had astutely identified the need for affordable houses at the expense of size. The project was sold out at launch and at a price more than 20 per cent above that of “proper” apartments in the vicinity. The developer created a market for small apartments, which have since become a “must-have” in projects in order to maximise returns.

Then, early this year, Cheung Kong created another market via introducing “luxury housing in the suburbs”.

Before its launch, sceptics lamented about the noise and congestion caused by the long container trucks plying the West Coast Highway, the bad air in West Coast and even the sea view.

But the aptly named The Vision, a 99-year leasehold project, managed to shatter the price ceiling, selling at more than 20 to 30 per cent above existing condominium prices. More significantly, its successful launch helped lift prices of existing homes in the area, which had lagged the market.

Adding $100 to $200 per square feet to a price may not be so much of a stretch during periods of economic boom and positive sentiment.

Still, taking a unit of 1,000 sq ft, each $100 psf rise in price implies that the buyer needs to fork out $20,000 more in downpayment and an additional $316 per month in mortgage payments (at 2.5 per cent interest per annum and 30-year loan term).

With overall private property prices at an all-time peak now and a wider variety of choices, it becomes even more important to differentiate the product offering.

Which projects can inject that new element that could compel home buyers to part with their cheques and pay premium “future” prices for their dream homes? Could we see 99-year leasehold projects command $2,000 psf in the Holland area or $1,500 psf in Thomson or $1,300 psf in Jurong Lakeside? Could new launches at Yishun, Woodlands or Tampines burst the $1,000 psf mark?

Existing home owners should keep watch as they could benefit from gains in value, even on paper, if and when developers manage to push pricing boundaries.

For those thinking of buying but are not too inclined to pay “future prices”, they could consider taking up positions in localities where they feel developers have the gumption to push pricing boundaries.

By Tan Kok Keong, head of the Research and Consultancy Department at Orange Tee.