By Property Soul (guest contributor)
Have you ever wondered why new projects from developers are able to command a large premium in asking price, sometimes up to fifty percent higher than recently completed nearby projects?
An interview with a VIP property buyer
Below is an abstract from my interview with a VIP property buyer (as compared to the usual retail buyers).
Me: How do you manage to buy before everyone else does?
VIP: After developers set the prices, easily twenty to forty percent higher than nearby projects they need to test the water. They will invite us to a project preview where we can pick our preferred units. Whatever price we are willing to pay, the developers can use it to convince the market that it is a reasonable market price.
Me: How do you make a profit?
VIP: Say, if we buy at $1,000 per square foot, developers can sell at $1,100 during actual launch. Phase two comes a few weeks later with prices increased to $1,200, and so on and so forth. Since we've chosen the best units, we can offload with at least twenty percent profit.
Me: And the developer has just successfully set a new high for property prices in the district!
There are three major factors that set the stage for developers to market uncompleted projects at high “future” prices (i.e. prices that already account for future price appreciation expectations):
1.The advantages of market domination
The property developer industry is an oligopoly. It is dominated by a few big players which are often large conglomerates. The entry barrier for new players in this industry is exceptionally high. With limited supply and high cost of land, it is not easy for small developers to raise sufficient funds or obtain financing from the bank. They also cannot compete with the big guys in terms of branding and their track record in past projects. Bigger players have stronger financial muscle to build their own land bank. They can drive construction of projects in time to capture a booming market.
They enjoy the benefits of economies of scale or cost leadership from a large number of ongoing projects. They have a handsome budget for marketing and for leverage to hire a good marketing agent. They have enough cash reserves to hedge against poor sales during bad times. It is therefore not surprising to see a high percentage of private housing projects all supplied by the top few developers. The advantages of market domination allow them to set their list prices at the highest possible level and to reap a huge profit.
2.Collaboration among big players
The big players have good connections amongst themselves to make the most of a mutually beneficial partnership. They can collaborate with each other by forming joint ventures to bid for land parcels, to secure borrowings from banks, or to diversify their investment. Among the top property developers, they can seek consensus and alignment on many decisions, for instance:
•When to launch or re-launch in a quiet or recovering market;
•Which type of projects to launch in different locations; and
•What projects to hold back to avoid unnecessary competitions for similar projects. When they are setting prices for a new launch, they don't have to make reference to the average transacted prices of existing developments in the same district. They can benchmark against each other’s list prices in other districts in order to set their prices at a new high in a hot market.
Of course, no developer can move new properties off the shelves without the support of local banks to provide buyers the necessary financing. It is not uncommon to see developers tying up with a few banks to offer housing mortgage packages to buyers at the sales galleries. In order to secure business from homebuyers, banks work with their valuers to ensure that the valuation of the uncompleted property matches with the selling price, so that they can disburse the exact amount of housing loan required by the buyers.
3.Willing sellers, willing buyers
In the past few years, property developers have paid a high price for land parcels sold by the government or from en bloc sales. Likewise, the tight supply and spiraling costs of construction manpower and building materials have taken a toll on the bottom line of developers. It is arguable that developers have no choice but to markup considerably to ensure their profitability, although how big a safety margin is reasonable is entirely up to their discretion. After all, if they don't make hay while the sun shines, who can tell what will happen when market direction changes? In the end, the matter boils down to market response and customer acceptance. Developers can't sell new flats at future prices if buyers are unwillingly to pay a premium price. It doesn't matter whether the selling price is twenty or fifty percent higher than the most recent transacted price of a resale flat in the same area, so long as everyone believes that the market price will be even higher by the time the new flats are ready for occupation. Believing in the future that is the magic pill of getting buyers to pay future prices in a booming property market!
By Property Soul, a successful property investor and enthusiast who shares her experiences and knowledge on
The analogy of a blissful marriage and a good property
September 9, 2013
Tonight while flipping through the local TV channels in my hotel room somewhere in Taiwan, I came across a variety show with the hosts and guests sharing their views on ‘what makes a blissful woman’.
The blissful marriage
A local celebrity backed her argument with a thought-provoking remark,
“女人不是要嫁得到，是要嫁得好。” (What women really want is not to be able to get married, but to be married to a good husband.)
What a quote! It really speaks the mind of the modern woman.
How difficult is it to find a man and tie the knot? If you are not picky, you can basically marry anyone from anywhere at anytime.
However, what women really want is to spend their life with a ‘good’ husband — a man who is loving, caring, respectful, faithful, responsible and also a good provider. And you need that experience, wisdom and maturity to see that these qualities exist in a man.
It is only through the advice of a mentor, the mistakes of others, or the past lessons you learned that you finally understand that getting married doesn’t guarantee happiness hereafter; that falling in love and living with the person are two different things; that marriage and blissfulness are two separate matters.
If there is a probability formula of a blissful marriage, it may have one-third depending on the husband, another one-third resting with the wife, and the last one-third counting on compatibility and fate. Of course, picking the good versus the bad guy is a critical factor here.
The good property
While browsing the new titles in a bookstore today, I flipped through a book written by a successful property investor. The author has a similar advice for property buyers,
“投资买房不是要买得到，是要赚得到。” (Property investment is not just to buy over the property, but to be able to make a profit from it.)
How difficult is it to buy a private property? You can step into a sales gallery and book a unit in an hour’s time. You can leave a cheque with a property agent to ballot for a unit on behalf of you. You just put down a deposit and you can call the property your own. It is almost a no-brainer if you are happy with buying anything at any price in any market.
And when the market is good, everyone makes money from properties. How can you not be able to drift forward when you are riding the tide, with the wind and waves in your direction?
But do you really know what is a good location or a good project? Can you tell units with good facing, layout and fengshui from the bad ones? Do you know how to pick a good property that guarantees a handsome profit the moment you buy? Can your unit still fetch a good rent even when the rental market is soft? Do you see why a good property can generate positive income regardless of a bull or bear market?
Afterall, the success of property investors is not measured by how well they do when times are good, but how they perform when times are bad.
It is only through years’ of experience, the lessons of others, or the losses you made that one day you finally come to realize that buying a property doesn’t necessarily guarantee a profit at the end; that buying a property and investing in a profitable one are two separate things; that speculators and professional investors are two different species.
If there is a probability formula of finding a good deal, it may have one-third from the buyer’s insight, another one-third to do with the buyer’s discipline (hardwork, patience, persistence, etc.), and the last one-third counting on market conditions and opportunities.
And of course, buying the right property at the right time makes all the difference here.
The what, why and how of properties
August 11, 2013 3 Comments
Time flies. My little girl turns two today. Happy birthday sweetheart!
With a limited vocabulary, her favorite words are “what”, “why” and “how”. And she enjoys dragging the vowels to show her emotions.
Here is a typical example:
“See what we have in the fridge.”
“Whaaat?”
“Fresh milk or orange juice?”
She opens the freezer and points at the ice-cream.
“No, you can’t have this for breakfast.”
“Whyyy?”
“Because you’ll have a stomach upset.”
“Hooow?”
“Er …”
“No no,” she shakes her head and walks away.
A toddler asks what, why and how all the time. But as we grow older, we gradually lose our natural curiosity to question the things around us.
Perhaps we are too lazy and don’t bother to know what is happening. Maybe it is too tiring to find an explanation to everything. Or we have tried but still have no answer to our question.
Likewise, when people are buying or investing in properties, many don’t bother to ask questions. Some have asked, but they haven’t asked the right questions.
Asking the ‘what’ questions
Find and compare all the offers and options in the market.
- What is available in the uncompleted and resale market?
- What is the price difference for new and old flats in the same district?
- What prices are people buying at the top and bottom of the previous property cycles?
- What are local sellers offering compared with what property seminars are marketing in the same overseas market?
Asking the ‘why’ questions
Understand the reasons why things happen the way they are.
- Why is there no choice but to buy at the current market?
- Why developers can sell new projects at future prices?
- Why the government has to constantly announce new cooling measures?
- Why the current market only left first-time buyers or upgraders buying new projects?
Asking the ‘how’ questions
Validate the information given to find out the truth.
- How to generate a decent rental return buying at the current market?
- How to maintain a positive cashflow when market conditions change?
- How to look for good tenants for projects in this area?
- How to find future buyers to offload properties bought in this overseas market?
Having the courage to say ‘No’
If you have asked yourself the right questions, and have done your homework to find some answers, you should be able to form your own opinion.
Never go with the crowd blindly and make a property decision based on the comments of the people around you. Don’t fall into the trap of buying a place using the criteria of industry analysts, property developers or marketing agents.
Remember that this is your home and you are the one paying for it. As soon as you are not being unrealistic, you should make decisions using your own set of criteria. If your priorities are not met, you don’t have to buy.
Whether the property you bought is good or bad, it is not your fate, it is your choice. You should have the choice to say ‘No’, the courage to walk away and stand by what you believe in.
Dietrich Bonhoeffer, a German anti-Nazi theologian, once said,
“It is the nature, and the advantage, of strong people that they can bring out the crucial questions and form a clear opinion about them. The weak always have to decide between alternatives that are not their own.”
As I am writing this, my two-year-old is standing behind me, getting into a tub of ice-cream with a spoon she finds somewhere.
“What are you eating?”
“Whaaat?”
“Mommy says no ice-cream for breakfast.”
“Whyyy?”
“So you’re not listening to Mommy?”
“Hooow?”
I try to grab the ice-cream from her but in vain.
“No no,” she smiles mischievously and walks away.
