TODAY Online : Seeking underpriced apartments

Seeking underpriced apartments

There really are such units available out there, especially at new condominium launches

05:55 AM Feb 27, 2010

by Colin Tan

A colleague recently handed me a market report that forecasted it will not be long before fools and their money are parted in 2010. This brought a smile to my face for it seemed a pretty far-fetched notion - that is, until I continued to come across persistent situations of liquidity-laden property investors. Having come out of equities and from earlier property deals, they are now having great difficulty staying in cash.

While admitting that they would have preferred the economic fundamentals to be better, these investors do not think they can get higher returns from other investments. They are eager - nay, some seemed desperate - to get back into the property market.

But if they are already over-paying for an inflated asset, what kind of returns can they get back at the end of their investment period? If one had bought at the height of the last property peak in 1996, it took about ten years or more for the asset to recover its value, and that's leaving out borrowing costs.

With every new sales launch, I am frequently asked my opinion by these investors. Many want a strategy to invest in these "inflated" assets. Someone remarked that if he had to overpay, he would prefer to overpay for quality assets.

The simplest strategy would be to seek quality properties in prime locations. And look for underpriced assets. But most of such properties would have been highly priced already.

Are there still underpriced units in the market?

Actually there are. Typically, at a new sales launch, we see the better units being taken up first. If all the units were priced according to their true market worth, would not the units be taken up randomly, that is, the least popular unit would have the same chance of being sold as the most popular unit?

Does this not suggest that the better units are under-priced? And how often do developers have to give bigger discounts to get rid of unpopular remnant units, suggesting again these unattractive units were overpriced in the first place?

So why do developers under-price popular units? It has to do with marketing strategy. Often, the better units kick-start the sales and build up the buying momentum. So, these underpriced units are only available at the launch. Once they are completed and re-sold, they are no longer under-priced.

That is why you tend to see a wide range in selling prices within a completed project, compared to when the units were sold at launch.

From experience, I would suggest that about a fifth of all units in a project belong to this under-priced category. These units have the best of all the attributes of the project.

Another three-fifths will have a mix of both good and bad attributes, while the remaining fifth has the worst of each attribute. Never touch these units unless you are given a deep discount.

But buying property is an emotional decision for most people. How do I discipline myself to stick to only the best 20 per cent of each project? Here, I am assuming the selection of the project was the right one in the first place. What happens when a developer launches an unpopular block first?

You will need to sort these out yourself, but is the effort worth it? Because the top 20 per cent of the units in a quality project have all the good attributes, I would suggest that its value will be the first to recover among all units. And what price are we willing to pay for a beautiful view? ¢

The writer is the director, head research and consultancy at Chesterton Suntec International.

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