Does executive condo provide an arbitrage opportunity?

/ The Edge Property |

October 7, 2015 12:00 PM SGT

Will it pay to buy an executive condo at a discount today in the hope of selling it in the secondary market 10 years after completion as a private condo? Some see it as an arbitrage opportunity, albeit a long-term one.

The battle of the executive condominiums (ECs) has begun. JBE Holdings will open its 525-unit EC project, Signature at Yishun, for e-application from Sept 11, with bookings to start from Sept 26. JBE is believed to be pricing Signature at Yishun, located on Yishun Street 51/Yishun Avenue 1, at an average of $750 psf, making it “the most affordable EC in 2015”.

Meanwhile, City Developments Ltd will conduct private previews of its 505-unit EC project, The Criterion, next door on Sept 13, according to sources. CDL declined to comment on the pricing except to say that it would be announced “in due course” and that it would be competitive and affordable.

Nicholas Mak, executive director of research and consultancy at SLP International, says the median transacted price of ECs launched over the past three months ranged from $767 to $820 psf. As the land price of The Criterion is slightly lower than that of Signature at Yishun, the project has “a slight pricing advantage”, reckons Mak.

On July 27, CDL announced that it sold 185 units at the launch weekend of The Brownstone, its EC located near Canberra MRT station in Sembawang. Prices at the 638-unit EC ranged from $596,000 for a 732 sq ft, two-bedroom unit to $1.316 million for a five-bedroom penthouse. The average price translated into $810 psf.

Showflat of a three-bedroom unit at Signature at Yishun designed by renowned interior designer Peter Tay

Best-sellers The Brownstone was billed as the best-selling EC in 2015 until it was overtaken by the launch of Sol Acres over the weekend of Aug 22 and 23, when 248 units were sold at an average price of $780 psf. As at Sept 8, 267 units of a total of 707 released had been sold. With 1,327 units, Sol Acres is also the largest EC project launched so far.

Sol Acres is the result of the amalgamation of two EC sites that MCL Land won in February 2014 in a government land tender. MCL Land won the first site of 177,122 sq ft with a bid of $232.5 million ($375 psf per plot ratio), and the adjacent plot of 177,107 sq ft with a bid of $210.1 million ($339 psf ppr). By winning both sites, the developer has been able to reduce its overall land cost while creating a better project with more amenities, says MCL Land’s CEO Koh Teck Chuan.

A departure from other ECs, Sol Acres is offering one-bedroom and one-bedroom-plusstudy units measuring 500 to 580 sq ft. Such units make up about 10% of the total number of units. The majority are still three- and four-bedroom apartments, as ECs are still aimed mainly at young families or couples who intend to start a family. However, the one-bedroom and one-bedroom-plus-study provide an alternative for young couples who do not intend to have children or empty nesters who may prefer to downsize to a one-bedroom EC rather than a three-room HDB flat, says Koh.

The larger units appeal to those with bigger families and are usually the first to sell out. For example, at Sol Acres, more than 80% of the four-bedroom units have been sold, and all 21 five-bedroom units of 1,350 sq ft priced at an average of $1.06 million have been snapped up. Even at The Brownstone, all five-bedroom penthouses priced up to $1.36 million were sold out at the launch weekend.

‘Buying a Toyota, selling a Lexus’ There are restrictions to buying ECs, though. For example, buyers have to be Singapore citizens and form a family nucleus. First-timers are entitled to Central Provident Fund housing grants like buyers of build-to-order (BTO) flats purchased directly from HDB. Like HDB flats, there is a minimum occupation period of five years for ECs, after which the owner is allowed to sell the unit only to a Singapore citizen or permanent resident. It is only from the 10th year after the Temporary Occupation Permit (TOP) is obtained that there are no restrictions, and ECs can start to trade in the resale market like other 99-year leasehold condos and are open for purchase by foreign buyers.

The average price at Sol Acres of $780 psf is at least $400 psf, or 35%, less than the average price of $1,198 psf for a 570 sq ft, one-bedroom SOHO unit at Hillsta on Choa Chu Kang and Phoenix Roads. Hillsta is a mixed-residential project with SOHO units, condos and townhouses, and is the nearest new residential project to Sol Acres. Launched in 2012, the 99- year leasehold condos and SOHO units have been fully sold, with only a few townhouses still available.

“As an investment proposition, an EC is a better bet because, ultimately, it will be a private condo,” says Koh. “It’s like buying a Toyota Corolla today, and selling it 10 years later for the price of a Lexus.”

It is no surprise why some buyers view ECs as an arbitrage opportunity, although a long-term one. “That’s provided you buy directly from HDB when the project is launched, and hold it for 10 years after completion when it’s considered a private condo,” says Desmond Sim, CBRE’s head of research for Southeast Asia.

No profit guarantee Those who bought ECs in the 1990s know that there is no profit guarantee when selling the property, says SLP’s Mak. The first 13 EC projects launched from 1996 to 1999 were completed in 1999 and 2000. When the first batch of EC projects reached the fifth year after completion, it was 2004 to 2005, and the residential market was still in the doldrums, he adds. Based on the average transacted prices, those who sold then registered a loss. Those who sold from the 10th year onwards saw price appreciation.

Historically, ECs can appreciate more strongly in value than private condos because of the freeing of resale restrictions in the fifth and 10th years of completion, says Ong Teck Hui, JLL’s national director of research and consultancy. For example, 10 years after TOP, average prices at Nuovo in Ang Mo Kio had risen to $895 psf, up 127% from its average launch price in 2001. In the same period, average prices of nearby Castle Green, a 99-year leasehold private condo, rose 58%, he points out.

Bishan Loft was also an EC project launched in 2001 and, 10 years after completion, prices surged 169% to $1,132 psf. Bishan 8, a 99-year leasehold private condo in the vicinity, saw prices rise a more moderate 81% in the same timeframe, adds JLL’s Ong. Another example is that of The Dew, an EC at Bukit Batok launched in 2001. It recorded a 136% price appreciation from launch to 10 years after TOP. Meanwhile, nearby condo Guilin View saw a lower price appreciation of 73% over the same time horizon, says JLL’s Ong.

“ECs are an attractive proposition for first-timers, given the price advantage over private condos and the availability of housing grants,” adds Ong. “But the resale rulings could make it more restrictive for a buyer who has an upgrading opportunity before the rulings are lifted.”

Attractive location the key Location is also an important consideration for ECs, notes JLL’s Ong. For instance, Bishan Loft is located in the vicinity of other HDB flats, and yet the highest price achieved there is $1,265 psf, well above average resale EC prices of $750 psf.

“So, an attractive location is a more powerful consideration than whether the EC is located among private condos or HDB flats,” he points out.

CBRE’s Sim agrees. “[EC projects] that were not as well located did not see the same level of capital appreciation in the resale market,” he says.

Does it make sense to buy an EC today? Sim says it does, as long as there is a price gap of at least 20% between an EC and a 99- year leasehold condo in the same area. “The fear is that supply may increase faster than demand.” Based on EC projects launched as at end-July, the unsold number of units stood at 2,898.

As at Aug 24, the monthly household income ceiling for EC buyers had been raised to $14,000, from $12,000 in 2011, and to $12,000, from $10,000, for HDB flats. “The increase in income ceiling will definitely help the EC market but, to what extent, it remains to be seen,” says MCL Land’s Koh.

MSR an obstacle to EC sales The main constraint in the EC market is the 30% mortgage servicing ratio, introduced in December 2013. “Sales are therefore not expected to be spectacular even with the raised income ceiling of $14,000,” says SLP’s Mak. “The additional $2,000 in household income will translate into an additional $600 a month available for mortgage payments.” He foresees sales picking up dramatically only when the government removes some of the property cooling measures.

Meanwhile, it is a buyer’s market, as EC buyers are spoilt for choice in terms of unsold units in both launched projects and new launches.

The popularity of a project also depends on the catchment area as well. “The Choa Chu Kang area has a huge catchment,” says Koh. At Sol Acres, there are two LRT stations within walking distance, with each connected to an MRT station on different MRT lines. The shopping malls at Jurong Gateway are also a five-minute drive from the project, he says.

The next EC to be launched soon in Choa Chu Kang is Sim Lian Group’s 534-unit Wandervale at Choa Chu Kang Avenue 3. Another EC that could be launched next year is located at Choa Chu Kang Avenue 5, which a Qingjian Realty-led consortium purchased in August for $156.16 million ($295 psf ppr).

Priced to sell At Sol Acres, MCL Land is offering units with fully equipped kitchens. Koh says the project is reasonably priced at an average of $780 psf. “There’s some resistance from buyers today when EC projects are priced above $800 psf,” he observes.

For Patrick Lam, CEO of JBE Holdings, Signature at Yishun marks his third and latest EC project. His first EC project — the 506-unit SkyPark Residences — was launched in December 2013 at an average price of $792 psf, and is 86% sold. The 378-unit The Amore, launched in January this year, is another EC project in which JBE has a stake, along with Keong Hong and Master Contract.

Lam believes buying an EC today provides potential capital upside. He points to the neighbouring 420-unit Skies Miltonia, located across the road. The 99-year leasehold condo was launched in 2013, and units were recently sold at almost $1,100 psf. That is 32% higher than the average of $750 psf that Signature at Yishun is likely to be priced at. “Ten years after completion, when the EC project is open to foreigners, the price difference between an EC and private condo will generally disappear,” he says.

At Signature at Yishun, JBE is offering quality finishes such as real timber — instead of synthetic or laminate — flooring for the bedrooms. The interior finishes are designed by Peter Tay, who was named Designer of the Year in the President’s Design Award 2014, and has put his touch on the homes of celebrities such as Zhang Ziyi, Stephanie Sun and David Gan.

Signature at Yishun’s unit sizes are also comparable to or slightly larger than the average private condo today. Two-bedroom units measure 764 and 775 sq ft; three-bedroom units, 947 sq ft; three-bedroom premium, from 1,076 to 1,098 sq ft; four-bedroom units, 1,184 sq ft; and premium four-bedroom units, 1,302 sq ft. Most of the units are said to be priced below $1 million.

Excluding Signature at Yishun, seven EC projects — with 3,650 units — could be launched in the next 15 months, says Mak. They include CDL’s The Criterion, Sim Lian’s Wandervale, and Frasers Centrepoint and Keong Hong’s joint venture EC Parc Life in Sembawang. He says, “Therefore, a sensible strategy for many EC developers would be to sell as many of their EC units as quickly as possible, and maintain the sales momentum.”

The number of EC launches are also set to overtake those of private condos over the next 15 months, notes Mak. Upcoming private condo project launches include UOL Group’s 663- unit Principal Garden at Prince Charles Crescent in the Alexandra area; Nanshan Group’s 288-unit Thompson Impressions on Lorong Puntong, off Upper Thomson Road; and MCL Land’s upcoming 710-unit condo at Jurong West Parcel B, located across the road from its 696-unit Lakeville condo. “There are more EC projects than private condo projects for launch between now and early 2016,” he says.

JBE’s Lam hopes to have first-mover advantage by being the first new EC project to be launched after the household income ceiling for EC buyers was raised.

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This article appeared in the City & Country of Issue 694 (Sep 14) of The Edge Singapore.

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