It’s all about the where

  July 9, 2011

Many buyers are prepared to pay a premium for developments in good locations, so shouldn’t the HDB take that into account when pricing flats, asks Colin Tan

 

If there was to be just one lesson one could take away from the recent fiasco over the Design, Build and Sell Scheme (DBSS) project in Tampines launched last month, it has to be that property is essentially all about location – not tenure, not designs and definitely not fittings.

 

The project which demonstrated this fact most vividly is Centrale 8, a proposed development located in an attractive – some say prime – location at the edge of Tampines town centre, a mature estate.

 

At its project launch in the middle of June, the developer announced indicative prices for its apartments which included an S$880,000 price tag for its priciest five-room flats – a record for what are essentially public housing flats, governed by HDB rules and regulations except that they come with supposedly superior designs and better fixtures and fittings.

 

The unbelievably high prices created a huge public outcry since these apartments are meant to be public housing flats leading some to question whether these flats are indeed subsidised and if so, where and how much is the subsidy.

 

The torrent of negative publicity which followed forced the developer to later slash the top price of those flats to S$778,000. Subsequently, the Ministry of National Development announced that the scheme would be reviewed.

 

Although the project was eventually oversubscribed by two times when applications closed, there were many calls for the scheme to be scrapped.

 

What this unhappy episode and the success of other past DBSS projects have shown that no textbook can illustrate more clearly is that property is all about location, location, location – the first thing all real estate students learn.

 

It appears that many applicants or buyers are prepared to pay or have paid significantly higher premiums for DBSS projects, many of which have been located in central locations or in mature estates.

 

Indirectly, it quantifies in dramatic terms, the kind of returns that may be awaiting successful applicants of all new BTO flats in mature estates or in central locations and explains why they are always many times oversubscribed.

 

In media interviews in the days following the outcry, applicants as well apartment owners of other DBSS projects admitted as such that it is was the projects’ attractive location which clinched it for them. It was not the superior designs or quality as some complained of the shoddy workmanship and defects they discovered when they received their keys.

 

A question of perception

 

Many buyers believe and continue to believe that they will enjoy higher capital gains than normal BTO flats when they re-sell a DBSS flat after the minimum five-year occupation period.

 

Alas, what many do not realise is that because developers were allowed flexibility in their pricing, most of these potential capital appreciation gains have already been creamed off upfront by the developer. If they experience any capital gains, much of it will be due mainly to the timing of their sale at that particular stage of the property cycle. If the property cycle has not advanced by much since their purchase or may even be correcting, their potential gains may be small or may even turn into a loss.

 

These gains remain intact for normal BTO launches in similar locations. This is because the developer – in this case, HDB – does not actively seek the highest price that the market is able to bear.

 

In view of the ability of private developers to cream future potential capital gains from buyers upfront, should the scheme be allowed to continue?

 

After all, it is widely recognised by most economists that the provision of a public good – in this case, public housing – is never ever best handled by the private sector. If participation is allowed, there should be some form of control. The greater the room for exploitation under the scheme, the more the controls in place, there should be.

 

The main objective of the scheme should be reviewed. If it was meant to give buyers wider housing choices, than the site selection is crucial. It should be in a less prime location but not too unattractive as to deter private sector participation. This will automatically rule out DBSS projects in all mature estates or in locations close to the city centre.

 

This means all BTO flats in mature estates would be best handled by the HDB which brings me to my next point.

 

A possible mispricing?

 

If all BTO flats are priced using the same yardstick, should not they all be faced with more or less the same subscription rate? So why do projects in mature estates draw double or even triple the subscription rates of those in new estates? Does it not suggest that prices of flats in mature estates are under-priced while those in new estates are over-priced?

 

The HDB could do more in narrowing this differential because it gives successful applicants for flats in mature estates an unfair advantage in terms of future potential capital gains.

 

Efforts to narrow the differences need not be in terms of prices. It can come in the form of shorter minimum occupation periods in new towns and/or longer periods for mature estates, better fixtures and fittings, larger private enclosed spaces such as bigger balconies and yard space for flats in new towns – all of which do not have to cost much more.

 

By Colin Tan – head of research and consultancy at Chesterton Suntec International.