Taking the mickey out of home buyers

August 1, 2010 

Prices of small projects and tiny apartments unlikely to hold up well, say experts

Property prices may be strong and on the uptrend.

But not all private homes will appreciate equally in value or be able to maintain their value in bad times.

For example, small projects and tiny ‘mickey mouse’ units of less than 500 sq ft may be the first to be hit should the market suffer a reversal, experts said.

A lot of risk also hinges on entry price levels, which can be high in boom times, they added.

A property expert, who declined to be named, said smallish developments – some having just 15 to 30 units – have limited appeal.

‘These developments do not have full facilities and the road outside is usually very narrow,’ he said.

‘In the Telok Kurau area, you can sell a unit in a small development for maybe $900 per sq ft (psf) if you are lucky. But nearby, big condominiums such as One Amber or The Seaview can go for $1,200 psf.’

The lorongs in Telok Kurau are often narrow two-lane roads, whereas One Amber and The Seaview are on main traffic ways.

Investors should also do their homework before rushing to invest in ‘mickey mouse’ apartments of less than 500 sq ft.

These apartments, sometimes called ‘bikini units’, can work out well if they are located in the city or near an MRT station as single expatriates may be drawn to them, the expert said.

‘It becomes a question mark when people start building them in the suburban areas,’ he said. ‘If investors want to sell or rent them out,there may be some resistance.’

Mr Colin Tan, research and consultancy director of Chesterton Suntec International, said the small apartments are like penny stocks. They have much speculative potential but have little worth otherwise, he said.

Ms Tay Huey Ying, director of research and advisory at Colliers International, said that generally, properties that have comprehensive recreational facilities and sufficient green areas will fare better in terms of rentals and values than apartments that do not.

Investors should also be wary of ageing 99-year leasehold developments, said the expert.

The price gap between a freehold and a leasehold property – which can be marginal in boom times – may widen as the leasehold property ages and its lease shortens.

Ms Tay said it all depends on what investors are looking for.

If they are looking for pure rental income, they can go for 99-year leasehold properties as these can generate more attractive yields than freehold properties, she said.

A freehold property may generate a rental yield of 3 per cent to 3.5per cent while a leasehold property may offer a slightly higher yield of 4 per cent to 5 per cent.

But if they are looking for capital appreciation, ageing lease hold properties of 40 years and above may see weaker price appreciation compared with their freehold counterparts.

A second expert, who also declined to be named, said: ‘There is the danger of facing limited capital appreciation or even losses if you chase new leasehold projects at sky-high prices.’

These high-risk investments are 99-year leasehold projects priced above $1,000 psf, he said.

‘In five years’ time, you may not be hit if the market is good. But in 20 years’ time, the risks rise as the lease would have run down and the condo design will likely become outdated.’

Property experts also point to walk-up apartments, and cluster homes with basements located in flood-prone areas, as potential high-risk investments.

‘The design of a walk-up is quite outdated. Many people, especially families with elderly members, do not want to climb three or four flights of stairs to their apartments. But investors buy these for their collective sale potential,’ said one.

‘Lower-priced properties – but not necessarily cheap properties – in red-light districts or in very inaccessible places’ are also high-risk investments, said Mr Tan.

‘Don’t buy something just because it is cheap or cheaper. Get your priorities right. Buy for the right reasons,’ he advised.

Source : Sunday Times – 1 Aug 2010