Buying Low Price Per Square Foot Property: A Good Deal or A Myth?
“Should I only buy low per square foot (psf) property?” I was asked this question by a client-turned friend two weeks ago.
In return, I replied, “If so, why do you think buyers are still buying when the psf price is high?”
And with that, our quick coffee catch-up ended up as a two-hour-long property discussion, where we delved into the fundamentals and reviewed historical pricing for comparison. What a day that was!
Two weeks on, as I am wondering what topic to address on the blog today, that discussion came to mind.
As such, this blog post’s topic of discussion will be addressing whether the price per square foot property is truly a good indicator of a “good” property purchase.
What is Price Per Square Foot (psf)?
For many Singaporean homeowners and even new property investors, pricing and affordability are one of the largest concerns.
And as a result, the price per square foot has become a common (albeit not fully accurate) indicator that people have been taught to look out for.
Price per square foot (psf) = Total price of the property ÷ Total square footage of the property
Since this formula essentially tells you how much you are paying per unit area of the property, it is understandable why people will equate low psf as good and cheap and high psf as bad and expensive.
Does Low Psf Translate to a “Good” Property Purchase?
While many people consider price psf as one of many important factors, let us take a look at it in conjunction with two other important indicators and see if it holds up to scrutiny.
Psf and Affordability
A “good” property also needs to be an affordable property to a certain extent.
For homeowners, it is what will ultimately impact your ability to get financing.
For investors, that is what will impact your rental yield and holding power.
Take a look at this example:
A smaller property (300 square feet) with higher psf ($2,500) will cost the homeowner/investor $750,000.
In comparison, a larger property (1000 square feet) with lower psf ($1,500) will easily cost $1.5 million.
If you are new to purchasing properties, do note that the general rule of thumb is as follows: smaller properties almost always command a higher psf compared to larger developments.
And as such it is usually hard to compare apples and oranges.
And even so, it does not take into consideration many other factors that affect a property’s value.
Psf and Rental Yield
There is no real correlation between psf and rental yield. Banks do not consider psf when granting loans, tenants will not care about the psf before deciding to pay the rent, so why should you?
Imagine these two scenarios:
A: You purchase a property outside of the Core Central Region at $1,500 psf at a total price of $1 million. Based on current average statistics, you will probably net 2.5% rental yield annually.
B: You purchase a property inside the Core Central Region at $2,500 psf also at the same price of $1 million.
The total quantum is the same in both scenarios, but the property inside the Core Central Region has a higher per square foot.
Now in terms of ROI, wouldn’t the second scenario (albeit a higher psf) work out better for you as an investor?
This is the reason why when looking for investment properties, one should not be so quick to dismiss properties based on single criteria like high per square foot.
To make an informed decision, one needs to take into consideration a whole variety of factors combined.
Case Study Comparison: Profitability in the Long Run of Low Psf Vs. High Psf Properties
Lastly, to conclude our discussion on why psf is not the best indicator of a “good” property buy, let us look at some factual numbers.
Here is a comparison of two 99 years leasehold developments – the Stars of Kovan (Sale psf: ~$1,450) and Kovan Melody (Sale psf: ~$1050).
Both condominium projects were located in a similar vicinity and with close accessibility to the Mrt.
As a buyer in 2016, if you were comparing them purely on psf, Kovan Melody with a lower psf of almost $400 difference would look very much more attractive.
The more “expensive psf” Stars of Kovan appreciated almost 16% in value, outperforming the “cheaper psf” Kovan Melody by almost 3 times!
If you had considered other factors, like the newness of the facilities (Stars of Kovan was launched much later in 2015 compared to Kovan Melody in 2006), the quantum (Stars of Kovan offered 1 -3 bedders whereas Kovan Melody had much larger sized apartments in the 2 – 4 bedder range) and more, you might have realized the appreciation potential of Stars of Kovan despite its more expensive psf.
Other Factors You Should Consider:
- Location – Accessibility and proximity typically affects the value of a property significantly
- Future development in the region – The URA Master Plan, is a helpful indication of potential growth
- Property Layout – Check if the layout is efficient (lower psf may not be good if the actual liveable space is much smaller)
- Supply and demand – Do you have stronger bargaining power in current market conditions
- Interest rates – Are the interest rates attractive?
- Lifestyle – Do you need a large space, or a smaller space is sufficient?
Psf is Just One of Many Factors When Evaluating Property
Learnt something new today? I sure hope you keep this in mind when evaluating your next property purchase!
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Rick Huang, Associate Deputy Group Director of OrangeTee & Tie, has been in the Real Estate industry for a decade.
He is driven, committed and is enthusiastic about real estate investments.
Today, he leads Team Youhome.sg, and together, he aims to provide his clients with the best experience in their property journey.
The team focuses on understanding the client’s finances and needs and is determined about delivering the best solutions and results for them.
Amidst the hustle and bustle, Rick enjoys quiet time and indulge himself in the intricate art of tea-brewing and teapot appreciation.
He would also take this chance to energize himself and reflect on his personal development and areas of improvement.
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