Today, I am going to share with you six methods to help you assess if the property is a good buy.
All the six methods are primary a comparison method by selecting comparable projects for comparison analysis based:
- Normalisation of Average PSF (or also known as Land Cost PSF method)
- The Velocity of Resale Transactions
- Price (Average PSF) Trend Analysis
- Average Rental Yield Analysis
- Rentability Analysis
- Rental Yield Trend Analysis
This article will focus on project-level assessment. For assessment on a specific unit within a project, I will touch on it in a separate article. You may want to follow me to receive updates when that article is ready.
Here’s how it goes for a question I received recently:
The 1st step is to establish the value of Bartley Ridge is to compare it against its surrounding comparable projects. For my client’s case at Bartley Ridge, we have selected Botanique at Bartley, Bartley Residences, Oasis Garden and The Gazania for comparison.
The information which I usually use for my analysis includes the following:
- Total Number of Residential Units in the Project
- Type of Tenure & its remaining lease (preferably based on lease start year of land over the TOP year)
- Average resale transacted PSF for the past two years
- Average rental yield of the past two years
- Number of resale transactions in the past two years
- Number of rental transactions in the past two years
Note: We are using two years of data points because the data would be recent and relevant with good enough numbers of data points for analysis purposes. On your own, you can extract the data from URA and Realis.
General Project Information
For this case studies, we are working on a 2-bedroom from Bartley Ridge, so if possible, we try to zoom into data related to 2-bedroom.
The project information is as followed:
|Project||The Gazania||Botanique at Bartley||Bartley Ridge||Bartley Residences||Oasis Garden|
|Total No. of Residential Units||250||797||868||702||134|
|Total No. of 2 Bedrooms||80||382||272||228||36|
|Tenure||Freehold||99 Years Leasehold from 2014||99 Years Leasehold from 2012||99 Years Leasehold from 2011||Freehold|
Likewise, for the Average PSF of the resales transactions & volume of transactions performed between 2018Q1 and 2020Q1, we pulled out the transaction data of 2-bedroom only for our analysis.
With the resale information obtained, we can begin analysing the performance of 2-bedroom of Bartley Ridge against its peers.
Normalisation of Average PSF (or also known as Land Cost PSF method)
One of the ways that I use to compare the value of the properties is by normalising it to 99 years (or some called it Land Cost PSF method). This method kind of “reset” projects of different ages to the “same” age for ease of comparison.
Normalising is done by taking the average PSF divided by the years of the remaining lease and multiply by 99, i.e.,
For properties sitting on freehold land, we will use the age of the building instead.
Here’s the table for the five projects after normalising their average PSF to 99 years.
|Project||Remaining Lease||Average PSF||Normalised to 99 Years|
|Botanique at Bartley||93||1,483.60||1,579.32|
After normalising back to 99 years, if we are looking at the Bartley series (Botanique at Bartley, Bartley Ridge, Bartley Residences) projects, Bartley Residences appears to be the best buy among the three projects. The PSF price gap of Bartley Residences after normalising to 99 years against Botanique at Bartley and Bartley Ridge is 7.73% and 6.85% respectively.
But among the five condos, Oasis Garden appears to be the best value – the price gap against Bartley Residences (the lowest average PSF in the Bartley Series) is a significant 11.09%, and it is a freehold project. In my earlier studies “Freehold vs Leasehold”, it has shown that Freehold properties have better capital appreciation than Leasehold properties when the age of property passes ten years old.
Although the data points to Oasis Garden as a better value buy, it is essential to note that the newness, types of facilities, location, proximity to train station, amenities etc. should be taken into consideration when deciding which project is more suitable for yourself.
The Velocity of Resale Transactions
The velocity of resale transactions help me to assess the attractiveness of the projects, that is, how fast can we sell off a unit in a project. In my opinion, the higher the volume of resale transactions in the projects, the easier it is to sell the unit in the future.
Now, let’s take a look at the velocity of resale transactions of the five condominiums:
|Project||Total Number of 2 Bedrooms||Resale Volume between 1Q2018 and 1Q2020||Velocity of Resale Transactions|
|Botanique at Bartley||382||23||0.06|
Among the five projects, the demand for 2-bedroom at Oasis Garden is the highest, for the 36 units of 2 bedrooms within Oasis, 17 units of 2-bedroom have changed hands. For the Bartley series of condominiums, Barley Residences stands out among the pack. For every 100 units of 2-bedroom at Bartley Residences, 22 units have changes hands, compared to 13 and 6 of Bartley Ridge and Botanique at Bartley.
The velocity of resale transactions in this study aligned well with the results of Land Cost PSF method. Given that Oasis Garden and Bartley Residences are well-priced as evidenced in the Land Cost PSF method, this has translated to a higher demand evidenced in the result of the velocity of resale transactions analysis.
Price (Average PSF) Trend
The Price (Average PSF) Trend analysis allows us to understand the behaviour of the projects during the various significant events in the past which we can use that information to infer how the project will perform in the future.
Back to the five projects, based on the price trend analysis, Oasis Garden is the project that is experiencing steady capital appreciation over time and Botanique at Bartley is experiencing growth at the moment. For Bartley Ridge and Bartley Residences, we need more data points (e.g. like looking into months, the units transacted within the concerned period, etc.) to deduce their trend. We will skip over this as the purpose of this article is to show the methods you can use to evaluate the worthiness of the property among its peers.
As a side note, from the price trend, using Bartley Ridge as an example, you will notice that there is a jump in the PSF after it obtains TOP. There is a steady decline of PSF before it TOP, and my guesses are bigger-sized 2-bedroom are towards the end of TOP, translating to lower PSF. Likewise, the reason for the downward trend can be verified by looking into the details of the transactions that took place during that period.
Below are the gross rental yield and volume of rental transactions between 1Q2019 and 1Q2020. We have excluded The Gazania in this study because it is still under construction. Also, rental yield refers to gross rental yield in this article.
Average Rental Yield
A higher rental yield increases the return on investment on a property, making it attractive for investors seeking good rental income.
In terms of rental yield, Botanique at Bartley stands out from the rest at 3.23% with Bartley Residences and Bartley Ridge at 3.05% and 2.81%. Oasis Garden falls short at 2.39%. But having a high rental yield may comes with an opportunity cost where we shall discuss in the following section “Rentability”.
Rentability refers to the ease of securing a tenant within a period.
For rentability, we simply take the total number of rental transactions divided by the total number of 2 bedroom units in each development.
Here’s the table:
|Project Name||Total No of 2 Bedrooms||Rental Volume||Rentability|
|Botanique at Bartley||382||58||15.2|
Despite Botanique at Bartley, which has higher rental yield among the pack, its rentability of 15.2% is much lower than the rest of the projects. So even if Botanique at Bartley has the highest rental yield, the property may be left vacant for a long time before finding a tenant, where time is the opportunity cost.
Nonetheless, one of the limitations of this approach is that we do not have the number of owner-occupied property against a pure investment property meant for rental.
However, in the case of this study, with a significant difference between the rentability value, we can safely infer that Botanique at Bartley may take a longer time than its peer to look for a tenant.
As there’s opportunity cost tied to time spent looking for a tenant, you have to weigh between the higher rental yield and rentability of the project to decide which works best for you.
Rental Yield Trend
From the rental yield trend, coincidentally, in Quarter 1 of 2018, the rental yields of Bartley Residences, Bartley Ridge & Oasis Garden are somewhat closer to each other when compared to their rental yields in Quarter 1 of 2020.
Between Q1 2018 and Q1 2020, we can infer that Bartley Residences is the more attractive 2-bedroom for tenants as it has achieved a higher rental yield of 3.22% in Q1 2020 compared to 2.87% and 2.35% of Bartley Ridge and Oasis Garden.
With that, Bartley Ridge makes more sense compared to the other two developments when one is looking for rental income.
Each of the methods has its strength and weaknesses. Depending on your investment strategy, one method may take precedence over the others. For example, if you are buying for own stay, analysis of the sales value would overweigh the rental value. Importantly, you may not want to over compromise your living comfort over the value of the property.
And yes, if you have any comments or other ways to analyse the worthiness of the property, I would love to hear from you too.
In my seven years of real estate career, I have seen many property owners losing their money or have their money stuck in their property investment. Mostly because of bad decisions made based on lack of information, bad advice and unchecked emotions. I would love to meet up with every one of you and help you in your real estate journey, but this may not be possible. So, I have started this blog to share my insights and hopes they will help you make a better decision.
If you are ready to begin your rewarding real estate investment journey with me, Whatsapp me today at +65 9004 5827, till we meet, good luck in your real estate investment journey.