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7 important considerations when buying under-development properties

Posted by dev@admin on March 4, 2016
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Singaporeans have acquired a taste for under-development properties, for three reasons: the discounts are steep, we have reputable developers, and we’re really naïve. Singaporean buyers trust developers so much, they could replace show flats with half-assembled Lego sets and still find buyers. That’s a problem, because here’s what we often miss:

1. While completion is not often a risk, quality still is

Singapore’s property firms are well regulated, so there’s little threat of a developer failing to complete construction. But there’s no guarantee they will finish construction well, or even in a satisfactory manner.
There have been incidents of BTO and DBSS flats being rife with defects. Even high end private property may not be finished with the quality you expect, as is the case with The Seaview.

If you’re lucky these defects will be trivial – tiles that scuff easily, or the occasional leak. But a major defect, such as poor ventilation or a bad layout for plumbing, can be permanent. If the corridor outside your unit constantly floods and the water seeps in, for example, there’s nothing any repair man can do.

For this reason, owner-occupiers should be extra cautious when buying under-development properties. If you intend to stay there for 20 or 30 years, or even the rest of your life, you may be better off skipping discounts and buying what you can see.

2. There is a risk of delay

The property will be completed, but I suspect you’d like it done before denture shopping becomes a big part of your day. Property development can be delayed for any number of reasons – from bureaucratic tangles (the developer needs to co-ordinate with multiple government bodies) to contractors who steal materials.

For owner-occupiers, this could mean a whole other year of living with the in-laws.
For landlords, every month of delay is a month of lost rental income.

3. The show flat may not be an accurate representation

Show flats are like glamour shots – they look good, but it’s the attractiveness that comes from posing, clever lighting, and a whole team of image consultants.

In fact, show flats were so misleading, the government had to pass actual laws to govern how much they could be dressed up. Before 2012, it was even possible for show flats to not match the actual dimensions of real units.

There are ways to spot which show flat elements are fake (if you like us on Facebook we’ll update you on that in a coming article.) But for now, just remember not to trust the show flat. It’s unlikely your unit will be that good looking, not without an award winning design house and a $100,000 renovation budget.

On a related note…

4. The view may not be what you imagined

Some people try to work out the view by staring at the architectural model. They may as well try work out airplane blueprints by looking at its Lego set. No matter what the sales person tells you, bear in mind that the view can be unpredictable.

You may end up having a better look at the canal’s puke-strewn contents than the park connector it’s in. In one unlucky development, which I won’t name, another condo was completed in front of it, less than three months after the residents moved in.

For some of those residents, their sea view was replaced by rows of strangers watching TV in the next condo.

With resale properties, good views are obvious, and sellers are always eager to show them off. Have a look at some of the best views on 99.co, before you decide to put money one that’s still imaginary.

5. If you are trying to flip the property, you’re playing a dangerous game

There are people who try to buy while the property is still being developed, and then sell upon completion. This usually happens three to four years from the time of purchase.

This is a dangerous game, because property is better suited to be a long term investment. There’s no guarantee that the property market will be doing well three to five years from now.

Take into account factors like potential delay (see point 2), and you’ll realise you’re holding on to an illiquid asset that can quickly turn into a liability.

6. The “defects free” period is often loaded with conditions

Under-development properties have a “defects free” period, during which the developer is obliged to correct any defects. The duration of the period varies (check with the agent). The terms and conditions are easy to decipher, if you are used to language challenges such as deciphering ancient Egyptian.

The defects free arrangement can be loaded with loopholes for the developer (e.g. yes, we’re supposed to replace cracked windows, but you installed a safety grill and that counts as a modification, so buy yourself a new one.)

I’d tell you to “read the terms and conditions carefully,” but that’s useless advice; like writing “don’t drown” as a swimming tip. Instead, I’ll just say you should set aside some extra money to deal with the defects.

Trust me, there’s a good chance you’ll end up paying for them yourself.

7. The rental yields are speculative

Rental yields are a bizarre thing – there are properties within three minutes of an MRT station that find few tenants. There are properties located so far from town, the tenants might seriously consider buying a camel or two to make the trip; but everyone’s eager to stay there.

There are too many variables at stake, and the best way to determine rental yield is…well, is to see what it’s been renting for. You can’t do that with a property that doesn’t exist yet.

As such, buying an under-development property to rent can be a classic case of counting chickens before they’re hatched. Work out a worst case scenario (vacancies, or rental income 30 per cent below expectations), and see if you can still afford the risk.

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