Buying Built-To-Order (BTO) flat for the first time is an undeniably stressful, intimidating and tedious process. HDB has launched series of subsidized BTO projects and grants to aid us financially. However we may notice that the Resale transaction price in certain location is lower than BTO sale price. How do we determine the value of our house then? Two Valuation Approaches will be discussed in this post.
Upcoming November 2017 BTO – Geylang
This data is taken from Singapore Real Estate Exchange (SRX). Notice that HDB 3 Rooms BTO is more expensive than Resale. If you have yet to visit SRX, please do so as it contains a lot of useful information for first time buyers like us. Such as nearby amenities, affordability, BTO vs Resale Price and more.
However the data presented in SRX isn’t all perfect. We could trust the BTO Price forecast but for Resale Price, it should not be used to compare with BTO Project. Reason being…
- Imprecise Location – Price data is grabbed from the entire Geylang town when the BTO project is located just beside Eunos MRT.
- Resale Floor Level differs – Higher levels are usually pricier.
- Floor Area and Model Type differ – Price/sqm is more accurate form of measurement.
- Remaining Lease differs – Flat price usually drop drastically after 40 years as the buildings start to require more maintenance and the End of Lease seems attainable in this lifetime. (unless there is speculation of enbloc SERS)
Only four per cent of HDB flats have been identified for SERS since it was launched in 1995 and authorities continue to maintain strict selection criteria for the scheme. So please do not assume that all old HDB flats will be automatically eligible for SERS.
Lawrence Wong, March 2017
Valuation Approach 1: Direct Comparison
Since we have understood the key factors that affect HDB pricing, we can now zoom into resale transactions that are similar to the BTO Project. Using StreetDirectory and HDB Resale Flat Prices, we are able to narrow down the past 2 years of resale transaction price around the Nov 17 BTO Project in close proximity.
From here, you can either do averaging for all the data after adjusting the price to 99yr lease. (linear adjustment will do although there’s inaccuracy due to price inelasticity during the first few years of lease commencement).
If you are as lazy as me, we can just use the 2007 Lease Commencement data since it is the newest estate. Valuation of Geylang 3rm 60m3 HDB via Direct Comparison Approach should be about $494,000. (After lease adjustment).
Valuation Approach 2: Rental Income
Rental rate has a direct correlation with the property sale price. After all, Resale Price and Rental are correlated and are derivatives of demand and supply. Hence we will be using Basic Rental Income Approach to determine the Value of Leasehold Property. (Warning – Math Intensive)
Rental Statistic can be found here.
- [g] Rental Growth Rate can be calculated using the gradient of the trendline.
- For Geylang 3rm HDB, g = -$9.1 Quarterly = -1.76%
- [R] Net Operating Rental Income can be calculated using Y-intercept * 0.85.
- For Geylang 3rm HDB, Rent Before Tax = $1867/mth
- NOI = $1587/mth = $19045/year
(Included 10% Property Tax & 5% Insurance/Maintenence)
- [e] Risk Adjustment Discount Rate. Depends on individual, I’m using 2.5%.
- 2.5% comes from the annual interest gain if the CPF money is placed inside OA instead of paying off mortgage installments.
- [t] Time Interval of Rental Adjustment. Assumed to be 1 year.
- [n] Remaining Lease. 99 yrs.
Valuation of Geylang 3rm 60m3 HDB via Rental Income Approach should be about $440,000.
Conclusion
- BTO Forecast Price
- $325,000
- Resale SRX Median Price
- $275,000
- Valuation via Direct Comparision (DC)
- $494,000
- Valuation via Income Approach (IA)
- $440,000
Based on the two discussed simple valuations, the BTO is sold at a great discount of about +- $150,000. Since the valuation via IA is less than DC, it is an indication that the resale market will be depressed further in the future if the rental continues its downward trend.
The stark difference between the Median Resale Price and Valuation Price is mainly due to the location proximity as well as the remaining lease left. It is safe to conclude that BTO flats are indeed sold at a huge discount for us.
If you are thinking of selling the BTO after MOP of 5 years to earn the difference of about 150k. Read up about Sales Proceeds in the next Article: Can you Earn Cash from Selling HDB? (Coming Soon)
This post is catered to Singapore but the methodology can be used anywhere else. If you have a better approach to valuate, do share with us (=
Cheers!
Majulah Millennials 