Developers ponder tricky math before new launches

Posted on July 7, 2008 by lushhomeonline

Apart from pricing, a host of factors are critical in their launch decision
THE recent spurt of purchases at projects like Nassim Park Residences, Dakota Residences and Clover By The Park, has got many industry players preparing for possible launches to ride the current buying wave.

The decision on whether to launch a project now is a tricky one. A host of factors have to be weighed - not just pricing, location and the product, but assessing the depth of demand in the particular neighbourhood or micro-market where a condo is located, how many projects have been launched in the area over the past few years, and even the buyer profile in earlier projects.

The ability to price projects attractively - from 7 to 25 per cent lower than market expectations 12 months ago - has been a critical factor in drawing buyers at recent launches.
An increasingly important factor is the prices at which earlier projects in the area had been sold in the past couple of years. Given the run-up in prices, some buyers in earlier projects may unload their units at prices below what the developer of the latest project in the area may be gunning for.
In fact, in at least one project in the Newton area, the developer is said to have started facing competition from earlier buyers in the same condo seeking to unload their units.
Keppel Land is still marketing the remaining units at Park Infinia at Wee Nam and its asking price is understood to be $1,400 to $1,800 psf. Earlier buyers in the same project are offering their units just a tad lower. KepLand first released the project in 2005 at prices well below $1,000 psf on average. So when the project received Temporary Occupation Permit a few months ago, earlier buyers were in a position to undercut the current price and still reap a nice profit.

So studying the extent of competition from secondary market deals is a vital part of the homework developers and agents have to do before deciding on any launch. ‘Supposing you’re a developer and your upcoming condo launch will be the fourth project to have been released in a particular location in the past two years and buyers in the earlier projects bought their units for, say, $800 psf average and your breakeven cost is around $900 psf, you could be in a difficult position if you need to launch today,’ a seasoned industry player says.
‘If a substantial number of buyers in the earlier projects bought for investment rather than owner occupation, they may consider leasing the units when the project is completed - and rental yields could be pretty attractive today based on the investors’ purchase price - or they may decide to cash in their units for a profit. That could spell competition for the developer launching a new project in the area,’ he added.

Frasers Centrepoint Homes chief operating officer Cheang Kok Kheong says: ‘The supply-demand pattern in the particular micro-market must be suitable for the project a developer is targeting to launch.’
‘There may be pent-up demand in a location that has not seen any new projects launched in the past few years,’ he adds.

A case in point would be Sim Lian’s Clover By The Park condo in the popular Bishan area, near Catholic High School, which has sold over 200 units since it was released on June 25 at an average price of $750 psf. By some agents’ reckoning, a project like that could have been priced at $800-850 psf on average about 12 months ago.

While many in the industry have lauded Clover’s ’success’, Credit Suisse’s property analyst Tricia Song finds the response wanting. ‘Given that the pricing is relatively attractive for a popular suburb that has not seen any new projects in years, we think the take-up is disappointing and is reflective of the cautious sentiment even among upgraders,’ she said in a June 30 research note. ‘If we exclude the 100 units that were sold during a private preview (on June 25) take-up has visibly slowed…’
Perhaps this reflects a smaller demand pool these days, in the absence of speculators and fewer foreign buyers.
As Knight Frank managing director Tan Tiong Cheng says: ‘I think everybody’s very cautious about whether they should or should not launch - and at what price levels. You don’t want to start something that will run out of steam because it’s priced too high or the demand pool just isn’t big enough.’
DTZ executive director Ong Choon Fah notes that the recent home-buying spurt was created by developers releasing new projects in attractive locations at lower prices than initially expected. ‘However, once a developer has started selling a project at a certain price, it becomes trickier to reduce the price as this then creates a problem of dealing with earlier buyers who paid the higher price.’ The stakes are indeed high for developers to get the timing and price right for their launch.
Source : Business Times - 7 July 2008