Buying a property in Singapore is a major investment, and buying a building-under-construction BUC properties heightens the risk. There's no transaction history for you to check, and no way of knowing if the developer will fulfill the marketing hype. Still, you may be convinced by the lower initial costs, or by the high demand for a hot property, or a potential hot new area helmed by the future master plan. If that's the case, then here's what you better look for, before forking out the Option to Purchase or Sales and Purchase Agreement:
What is an Building-under-development condo?
These are condos that have yet to receive their Temporary Occupancy Permit (TOP). In short, they are not constructed yet; when you are looking at the condo, you will be browsing pamphlets, 3D projections, and show flats. It is typically two to three years before a new condo will TOP.
In Singapore, developers are eager to push sales as early as possible. This is due to factors like the Qualifying Certificate (QC) and Additional Buyers Stamp Duty (ABSD) for developers; these impose hefty taxes on developers if the condos are not fully built and sold off within a time limit (five years for the ABSD, and seven years for the QC*). Just this year, for example, developers collectively face taxes of around $700 million, as some properties threaten to overshoot the ABSD deadlines. So it's not surprise that developers want to start selling early, long before the units are even built.
But of course, few people would buy under-development properties without strong incentive. After all, they can't see what they're buying, and they can't rent it out immediately. For this reason, developers often give "early bird discounts". This can range from direct price discounts, to absorbing taxes like the Buyers Stamp Duty. These can make for attractive offers, but look out for the following first:
(*To be precise, the QC only applies to foreign developers, which by default includes listed companies. The QC gives a developer five years to complete development, and two more years to sell all the units).
1. Compare the prices of nearby properties
One of the main draws of under-development property is the price discount. Often, developers will advertise eye-popping price cuts, like 15 per cent off the total price. Don't be too quick to fall for it though.
The first thing you need to do is check the prices of nearby properties. Sometimes, the "discount" is not a real discount at all. For example, say the median prices of properties in the area is $1,300 per square foot. The developer could price their units at $1,495 per square foot, and then advertise a 15 per cent discount. Of course, this "discount" would then reduce the price to $1,300 per square foot anyway, so there's really nothing "special" about it.
The other reason for doing this is, of course, that there's no transaction history for under-development properties. You need to look at surrounding properties, to get a sense of rental income and capital appreciation.
Remember, you are taking a bigger risk by buying under-development. You should be compensated with a better deal. Otherwise you're better off just buying a completed property in the area, which can be rented out immediately and has a proven transaction history.
Of course, if I want to buy a property for own stay, I will choose an area of my liking and also time the purchase for my own needs. Read the property buying guide on Singapore Property to know the payment schedules.
2. Check the URA master plan
Look up the Urban Redevelopment Authority's master plan. This will tell you what the government has planned for the neighbourhood, over the next 10 to 15 years.
Many under-development properties like to advertise amenities that don't exist yet. The brochures - and salesperson - will tell you that in X years, the surrounding area will be a major lifestyle hub. Even if, when you look around right now, the place resembles one of the deserts in a National Geographic magazine. You need to check the developer's claims against the URA master plan. We've heard some serious exaggerations, where future amenities are described. During one condo launch (which we won't name out of politeness), the property agent told us the area would become "highly accessible" by public transport in a year. This turned out to mean ONE bus stop would be built nearby, sometime next year.
That aside, it's always good to consult the master plan, whether or not you're buying an under-development property. If you see restrictions on further residential development, or plans to build a mega-mall nearby, you'll know there's a good chance of the price appreciating.
3. What is the waiting time, and is it worth it?
If there is a long waiting time, such as three to four years, consider if it's worth tying up your money for so long. Remember that you're paying every month (or making progressive payments), without any rental income to mitigate the cost. Even after completion, there's a risk you won't find a tenant right away.
Remember that even a simple insurance policy can grow your money by three to four per cent per annum or if you buy a second hand insurance, you could even earn six to seven per annum (find out about it here); an under-development property does nothing but swallow money until its TOP. This is why some landlords refuse to buy under-development units, even with early-bird discounts. They want to generate rental income immediately, a proven strategy that has serious merit. Think about it before you buy.
(For home-owners, of course, this is a lesser concern. Focus on buying a property that you think you'd enjoy, and leave the investors to mull over this kind of details).
4. Ask about the facing of the unit
One thing you can't get from a show flat is the angle of the sunrise, and how it affects the unit. This is why you need to check the facing. It's not about Feng Shui (well okay, maybe it is for some people), it's about having a living room that doesn't turn into a microwave oven.
In general, avoid East-West facing units; these tend to get the full blast of the sun, and can be baking hot. South-East facing units are generally the most preferred, as they catch the morning sun, but are somewhat shaded during noon.
Brace for the sales pitch though. You'll be told you're clever for picking a unit with that facing, and that those units are selling out fast so you should write a cheque now, now, now! But stay calm and give yourself room to think.
5. Ask what happens if things don't go to plan
In Singapore, you don't really have to worry that the developer won't finish the condo (if they don't, the government will impose so many fines the developers' grandchildren will be taking a second mortgage to pay them off). What you do need to worry about are delays, or last minute changes to the designs.
For example, a developer may advertise that two rooms can easily be merged, by removing the wall between them. But later, they may change their story and say the wall can't be moved after all (e.g. the engineers decide its not safe). Sometimes, there could be more drastic changes. Car park spaces might be reduced (residents now get one lot instead of two), or balcony sizes are reduced.
Of course, the biggest worry of all is a delay in the TOP. This can drive landlords to fits, if it ends up taking an additional six months to a year before tenants can move in. It's also a major headache for home owners, who may be renting temporary accommodations (and have to waste more money stretching their lease).
Be sure to ask if the developer as some kind of contingency or caveat, if such an event were to happen. Sometimes additional guarantees are in place, such as compensating you for the lost rental income in such an event. At the very least, such guarantees are a good reflection of the developer's sincerity and confidence.
Finally, secure the lowest interest rate loan before you buy
Before you buy, secure the cheapest possible loan on the market. Remember, there's never any advantage in paying more for a home loan. You can choose to compare the different available home loan packages on iCompareLoan.com for a mortgage broker to handle the paperwork for you, free-of-charge.