Strategy: Investing in pre-construction new development
Posted by Wei Min Tan on September 1, 2017
Investing in pre-construction refers to buying based on plans and renderings, before a property has been completed. Often developers start selling 1-2 years in advance of anticipated completion date. New developments can be either:
(i) ground up construction, where the whole building is brand new
(ii) conversion, which means the building is existing/prewar and the developer is converting only the interior
The advantage to the buyer, who is buying based on floor plans and viewing finishes at the sales office, is the pre-construction discount. Booking a unit typically requires 10 to 25 percent of the property price. The balance is due at closing which is also when the property is completed, during which time prices would have increased as well.
New developments have the best amenities which are very attractive to tenants. This strategy works well for all client categories – those who want to rent out, use as vacation home or simply park funds.
The risk is that, if there’s a recession and the project stalls, the buyer’s 10 to 25 percent booking down payment would be tied up or even lost.
New developments are either luxury or ultra luxury. The selection process is similar, where we would recommend 3-5 projects based on the client’s objective and based on appreciation potential. We look for appreciation drivers in the neighborhood, where is rental demand coming from, whether rental yield meets expectations etc.
At the apartment level, it may get confusing because there are so many units to choose from. We would advise based on layout, floor, exposure and what the market wants.