Thursday, March 3, 2016

Are you paying too much for that pool view?

Most people, if not all, are acquainted with the idea that residential units with a pool view, a north-south orientation or on high floors carry a price premium. While real-estate appraisers and seasoned salespersons can easily estimate this premium, the rest of us could do with a systematic way to establish such a premium. This would be useful when comparable transactions are lacking or if we simply want to do our own homework to ensure we get a fair value of the property.

The premiums for units with a pool view or north-south orientation or on high floors differ across different developments. However, there appears to be some thresholds that real-estate appraisers work with. We spoke with senior appraisers from four consultancy firms who declined to be identified.

As a broad guide, these appraisers apply a premium of 0.3% to 0.5% per floor level for private, non-landed projects in Singapore. If the price quantum of the subject property is large, a smaller percentage of 0.3% would be applied and vice versa. Separately, appraisers apply a premium of between 1% and 3% each for units with a pool view or north-south orientation.

In a hypothetical scenario, a subject property is located on the third floor, with a pool view and north orientation. If a recent comparable transaction in the same development is $1 million for a unit on the second floor, without a pool view and with a west orientation, the appraiser might add a premium of $3,000 for a higher floor and $10,000 each for a pool view and north-south orientation, putting the value of the subject property at $1.02 million.

Smaller units also carry a price premium on a psf basis. The adjustment for size is slightly trickier, with about 10% discount applied for every doubling of floor area. For example, a 10% discount might be applied to a comparable transaction that is 500 sq ft in size when the subject property measures 1,000 sq ft.

An appraiser should preferably obtain at least three comparable transactions to value a property. He will also conduct an inspection of the subject property and may carry out additional adjustments for physical conditions and other factors. As valuation is considered both an art and a science, another appraiser appointed to value the same property would likely derive a different value. For straightforward valuation cases, the law generally tolerates up to a 5% difference in value by other qualified appraisers should any disputes arise.

A formal valuation would also entail studying the premium trend specific to the development, rather than simply applying the broad guide. Take the case of A Treasure Trove, one of the most transacted resale projects last year. A unit on the 11th floor was sold for $1,049 psf last December. In the same month, another unit on the fourth floor of the same stack was transacted at $1,020 psf. This anecdotal evidence suggests a compounded premium rate of 0.4% per level in the development. An appraiser would look for more such evidence while conducting a formal valuation.

Other anecdotal evidence suggests that a pool view in the development carries a premium of up to 4%. A 1,044 sq ft, low-floor unit with a pool view changed hands at $1,149 psf last October. Meanwhile, another unit of the same size on the same floor but without a pool view fetched $1,121 psf just two days earlier. The premium for the pool-view unit works out to about 3%. Separately, a 1,206 sq ft, low-floor unit with a pool view found a buyer at $1,070 psf in the same month. Another 1,206 sq ft unit just one floor below was transacted at $1,020 psf two months later. After adjusting for floor level, the premium is estimated at 4%.

On the city fringe, similar trends were observed for City Square Residences, another project with a high resale volume. A 1,518 sq ft unit on the ninth floor was sold for $1,318 psf last May. Another unit on the 24th floor of the same stack and size was transacted at $1,370 psf last June, suggesting a compounded premium rate of 0.3% per level. There were no resale transactions for low-floor units with a direct pool view in 2014 and 2015.

Notwithstanding this, one appraiser cautioned that such broad guides usually do not apply to high-end projects. The percentage adjustment for high-end properties could be significantly different and needs to be computed on case-by-case basis, he notes.

There has been talk of some developments defying these trends, with big units commanding higher psf prices, owing to their limited supply or luxury appeal. PropNex Realty CEO Mohamed Ismail Gafoor says he hardly sees such cases, especially in a tough market environment. “One of the few exceptions would be penthouses, as they are limited in supply and offer premium views. Large units in developments with an exclusive number of apartments may also carry a price premium. Even so, the price premium would be marginal,” he notes.

ERA key executive officer Eugene Lim is of the same opinion. “In today’s market, bigger units take much longer to sell, owing to their larger price quantum. More than 75% of the transactions nowadays are $1.5 million and below. The Additional Buyer’s Stamp Duty on a higher-priced property is very painful for the buyer. And if the buyer is a foreigner, it would mean a 15% ABSD. As a result, it would be impractical for the seller of a large unit to price it higher than smaller units [on a psf basis],” he says.

Alan Cheong, head of research at Savills Singapore, also singles out penthouses as the exception to the trend. He notes that if roof gardens and ancillary spaces are excluded, the psf price of penthouses is higher than for conventional units. “Penthouses are considered a luxury because they carry a high quantum value and buyers are often the well-heeled, who choose opulence over functionality,” he adds.