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.
How to calculate price per square foot?
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.
And when it comes to the affordability of any property, the quantum (total price) is ultimately more indicative than the psf.
Why so?
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.
Now, can you see why the psf is a misleading indicator for affordability?
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.
In fact, psf is usually only a better indicator of affordability when you are comparing properties of similar sizes.
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.
However, because of the proximity to the bustling Central Business District and easy access to many local attractions, you also can expect a much higher rental yield – up to 4%.
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.
Fast forward 4 years later, the numbers show a different story!
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:
As can be seen, psf is just one of many factors in determining a “good” property purchase.
So, regardless if you are a homeowner or investor, there are far more factors [Right Time To Buy Property Article] you should make sure to analyse, for example:
- 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?
Conclusion
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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Self Introduction
Greetings! My name is Rick Long, and I am proud to serve as the Associate Division Director of Huttons Asia Pte Ltd, with over a decade of experience in the real estate industry.
My passion for helping clients find their dream homes has grown exponentially during my tenure in the field. As a graduate of Singapore Polytechnic, I have always valued the importance of hard work and determination.
My prior experience serving in the airforce instilled in me the value of teamwork, perseverance, and discipline.
Over the years, I have been privileged to receive several accolades for providing exceptional service and dedication to my clients.
My ultimate goal is to ensure that each individual I work with has the best possible experience, whether they are buying or selling a property.
One of the most rewarding aspects of my work is receiving glowing five-star reviews from satisfied clients.
Knowing that I have positively impacted someone’s life is truly humbling, and it motivates me to continue striving for excellence every day.
When I am not working, I enjoy spending quality time with my loved ones, indulging my passion for sports, and exploring the rich and diverse culinary landscape of Singapore.
Amidst the bustling pace of life, I relish moments of calm by immersing myself in the art of tea-brewing and teapot appreciation.
Thank you for taking the time to learn a little more about me. I look forward to the opportunity to work with you.
Additionally, Rick is a proud fur daddy to two rescue kitties and loves spending his free time with his wife and furbabies. He believes in giving back to the community and volunteers his time to animal welfare causes whenever possible.
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