Goh Eng Yeow | The Straits Times | Wednesday, Aug 07, 2013


Buyers of the J Gateway condo in Jurong East can hardly be said to be getting a big bargain.

Almost all of the 738 units of the 99-year leasehold development were snapped up on the first day of the sale launch at the end of June. This is despite their being priced at an average of $1,480 per sq ft (psf), far higher than the asking prices of older developments in the same district.

These include 99-year condos such as Parc Oasis and Parc Vista, whose owners are asking for about $1,000 psf for their units. Even then, they may find difficulties attracting potential buyers, given the subdued state of the resale market.

But the hefty 48 per cent premium commanded by J Gateway over its older peers is hardly the exception, more the rule. It applies to many other new condo developments as well.

Why should the arcane pricing of new condos concern the rest of us? The answer is that it may give a deceptively healthy picture of the private housing market with such headline-grabbing prices.

And it begs another question: Why is there such a big discrepancy in the valuations between new condos and older developments, and is the premium they command worth paying for?

Certainly, J Gateway has many merits that are worth highlighting. For one, it is the first condo to be launched near the Jurong East MRT station in 10 years.

That is a big draw since the area around the MRT station is getting a makeover as well, encompassing existing and upcoming malls like Jem, J Cube, Westgate and Big Box.

Still, that does not fully explain the top dollar that buyers were willing to fork out for J Gateway.

There is also the element of “future” pricing to consider, according to Chesterton Suntec International research head Colin Tan. “Investors put a down payment and hope to resell before the condo’s completion. The initial investment is low for a new condo, whereas you have to stump up the full sum for existing projects,” he said.

Units in new projects are also smaller, compared with existing ones. That makes them more affordable, much like penny stocks in the stock market, he added.

By paying a fraction of the monthly instalment while the condo is being built, the buyer is essentially getting a long-dated option on his purchase. As such, the new condo may simply be priced at a premium to reflect the value of the option.

Now in the stock market, traders use the Black-Scholes model – a complicated mathematical formula developed by economists to value complicated derivatives – to work out the value of the options.

In some cases, the options can be worth as much as 30 per cent of the value of comparable investments, depending on market conditions.

But there is one snag: Unless market conditions improve, the value of such options whittles to zero, as the project reaches its temporary occupation permit deadline. As such, there may be a risk that the price of the new condo may fall as it nears completion, unless the price of existing condos catches up.

Also, because of the relatively smaller outlays involved, it helps to explain the buoyancy of the sub-sales market – which involves the sale of condos while they are being built – until two years ago.

That was when the Government stamped out the speculation by slapping a seller’s stamp duty – that is scaled – on residential properties that are sold within four years of their purchase.

For owners of condo developments with collective sale potential, it is the disparity between the price of new and resale ones that poses a dilemma.

Take, for example, the en bloc sale of Lucky Tower in Grange Road in 2006. It was sold for a hefty $383 million, which worked out to $1,134 psf, after including an estimated development charge of $20 million.

But one year later, units for the new upmarket development Cliveden At Grange down the road were changing hands at about $3,600 psf.

Now, owners of units in the adjoining 17-year-old Spring Grove are being asked to consider an en bloc sale of their condo development. The carrot dangled before them is extremely attractive. Each of them stands to get around $2,100 psf on their units if the sale is successful.

But the snag is that any developer who buys the site might have to sell the new units for at least $3,127 psf just to earn a 15 per cent profit. That again works out to a 48 per cent difference in prices.

So unless the owners are willing to downgrade, the payout will simply not be good enough to buy similar-sized units in the same area.

As such, there is more than just a headline-grabbing price in the property market that meets the eye.