October, 2011:

The release of 8,200 flats by the HDB in September was widely anticipated by many first-time buyers, as this allowed them a choice of not only Build-to-Order (BTO) flats, but also approximately 2,847 Sale of Balance Flats (SBF) flats ready or almost ready for immediate occupation.

This month’s launch was also of particular interest to property analysts because it allowed the comparison of prices between a BTO and SBF unit in the same neighbourhood in the same month of launch.

Last month, prior to the release of details on the September combined launch, National Development Minister Khaw Boon Wan said that for SBF flats, prices will be higher because they will be ready or near completion.

However, according to prices released by HDB, a comparison between the 4 neighbourhoods with flats released under both BTO and SBF schemes – Punggol, Sengkang, Ang Mo Kio and Jurong East revealed a clear distinction between each of the neighborhoods:  BTO prices in Punggol and Jurong East were higher than SBF, while conversely SBF prices in Sengkang and Ang Mo Kio were higher than BTO. Overall, BTO prices were 7.6% lower than SBF prices (see table below):

 Source: http://www.hdb.gov.sg/

What do these numbers mean? The average BTO flat is priced 7.6% lower than a comparable SBF flat, to compensate for how the BTO flat will not be ready for occupancy until 3 years later. As seen in off-plan launches in the private market, it is also fairly typical for off-plan (or BTO) property to be priced lower or on par with similar completed current housing in the same area at the time, with the expectation that the market price of the constructed unit would often have appreciated by the time of TOP.

In line with Minister Khaw’s statement, it is logical that a buyer should expect to pay more for a completed flat as compared to one in construction. This is because the completed flat is able to generate a rental yield during the 3 years where the BTO flat is still under construction. Although an HDB flat cannot be rented out under HDB minimum occupancy rules, the buyer is able to occupy the flat (instead of paying rent elsewhere), so in a sense the SBF would be generating positive rental yield. On the other hand, the BTO buyer would have to find alternate housing elsewhere while waiting for the completion of his BTO flat, hence higher capital gains (in the form of lower current selling prices) should compensate for the rental yield he is losing out on.

Assuming a constant net capital yield per annum, the rational buyer would only choose the BTO rather than the SBF flat should the current price he pays for be lower in comparison, to compensate for the 3 year wait period where the flat cannot be occupied.

However, we see that a lower selling price for a BTO is only true for in the case of Sengkang and Ang Mo Kio. Both Punggol and Jurong East have BTO prices that are higher than SBF (see comparison table above). This could indicate that the HDB expects the pricing of flats in these areas, particularly Punggol, to stay fairly flat within the next 3 years, so prices of both the SBF and BTO flats will be on par by the time they can be put on the resale market. 

It is also likely that HDB is pricing a similar BTO flat higher than a SBF flat in the same neighbourhood during this launch in order to “clear stock” in a non-mature estate, as there are plenty of future BTO projects planned for those areas. Future releases of BTO flats in the Punggol area may well have selling prices below that of the September SBF levels. Given the announcements of more than 50,000 BTO flats to be released in the market over the next couple years, buyers of new HDB flats would be prudent to scale down their optimism on fast rising prices as previously seen in 2007 onward, as this may be a high-risk strategy for those looking to flip as soon as the minimum occupancy period is up. 

The release of 8,200 flats by the HDB in September was widely anticipated by many first-time buyers, as this allowed them a choice of not only Build-to-Order (BTO) flats, but also approximately 2,847 Sale of Balance Flats (SBF) flats ready or almost ready for immediate occupation.

This month’s launch was also of particular interest to property analysts because it allowed the comparison of prices between a BTO and SBF unit in the same neighbourhood in the same month of launch.

Last month, prior to the release of details on the September combined launch, National Development Minister Khaw Boon Wan said that for SBF flats, prices will be higher because they will be ready or near completion.

However, according to prices released by HDB, a comparison between the 4 neighbourhoods with flats released under both BTO and SBF schemes – Punggol, Sengkang, Ang Mo Kio and Jurong East revealed a clear distinction between each of the neighborhoods:  BTO prices in Punggol and Jurong East were higher than SBF, while conversely SBF prices in Sengkang and Ang Mo Kio were higher than BTO. Overall, BTO prices were 7.6% lower than SBF prices (see table below):

 Source: http://www.hdb.gov.sg/

What do these numbers mean? The average BTO flat is priced 7.6% lower than a comparable SBF flat, to compensate for how the BTO flat will not be ready for occupancy until 3 years later. As seen in off-plan launches in the private market, it is also fairly typical for off-plan (or BTO) property to be priced lower or on par with similar completed current housing in the same area at the time, with the expectation that the market price of the constructed unit would often have appreciated by the time of TOP.

In line with Minister Khaw’s statement, it is logical that a buyer should expect to pay more for a completed flat as compared to one in construction. This is because the completed flat is able to generate a rental yield during the 3 years where the BTO flat is still under construction. Although an HDB flat cannot be rented out under HDB minimum occupancy rules, the buyer is able to occupy the flat (instead of paying rent elsewhere), so in a sense the SBF would be generating positive rental yield. On the other hand, the BTO buyer would have to find alternate housing elsewhere while waiting for the completion of his BTO flat, hence higher capital gains (in the form of lower current selling prices) should compensate for the rental yield he is losing out on.

Assuming a constant net capital yield per annum, the rational buyer would only choose the BTO rather than the SBF flat should the current price he pays for be lower in comparison, to compensate for the 3 year wait period where the flat cannot be occupied.

However, we see that a lower selling price for a BTO is only true for in the case of Sengkang and Ang Mo Kio. Both Punggol and Jurong East have BTO prices that are higher than SBF (see comparison table above). This could indicate that the HDB expects the pricing of flats in these areas, particularly Punggol, to stay fairly flat within the next 3 years, so prices of both the SBF and BTO flats will be on par by the time they can be put on the resale market. 

It is also likely that HDB is pricing a similar BTO flat higher than a SBF flat in the same neighbourhood during this launch in order to “clear stock” in a non-mature estate, as there are plenty of future BTO projects planned for those areas. Future releases of BTO flats in the Punggol area may well have selling prices below that of the September SBF levels. Given the announcements of more than 50,000 BTO flats to be released in the market over the next couple years, buyers of new HDB flats would be prudent to scale down their optimism on fast rising prices as previously seen in 2007 onward, as this may be a high-risk strategy for those looking to flip as soon as the minimum occupancy period is up.