What is the difference between the appeal of new launches and resale private properties with Property Developer’s Discount?

This post was originally posted here. The writer, Kyith Ng is a veteran community member and blogger on InvestingNote, with a username known as @kyith and has 1102 followers.

With a Property Developer’s Discount, would that affect the property market? On 29th Sep, URA has announced that they will restrict the re-issuing of options to purchase (OTPs) to the same buyer for the same unit within 12 months of expiry.

These new restrictions written into the law would:
Restrict developers from providing an upfront agreement to buyers to re-issue the OTP and

Restrict developers from re-issuing the OTP for the same property to the same buyer, within 12 weeks after the expiry of the earlier OTP
Sometimes, when you are not in the industry, I did not comprehend the ramifications of these changes. My friend has to explain to me what it all means.

Typically, when I buy a property, the transaction starts with obtaining an option to purchase or OTP and a deposit of 1 to 5% of the property price. I would have 14 to 21 days to exercise the OTP, meaning I would have to cough out the rest of the amount needed for the downpayment.

If I do not do that, the OTP will lapse. If I put down a 5% deposit, I would forfeit 25% of the deposit. If I put down 1%, I would forfeit 100% of the deposit.

The issue is…. some developers decided to play around with this OTP.

After the 2018 cooling measures, some developers would extend the OTP validity period. Developers would also re-issue lapsed OTPs.

Now, if I do not have the finances ready to purchase the condo, some of the developers would be very happy to re-issue the OTP to me after the OTP lapse. This gives me enough time to sell off my existing property, getting some cash to pay for the downpayment.

What was achieved through this?

The sales figures for the projects looked better than reality.

I think if you are on social media, you would see those images posted by your property agent friends how HOT the deal was.

This gives you the feeling that many of your peers are trying to get into some good deals here.

In reality, not all of those sales figures that you see were eventually followed through. You could have 600 units sold but 300 returned.

What URA wanted to stem out was: This creates wrong market signals.

It distorts the market into thinking like the whole of Singapore, despite the ABSD and TDSR, are so flushed with cash to afford.

But Re-issuing OTP is Not the Only Distortion to the Demand and Supply of the Property Market

Property Agents, like insurance agents and car salespeople, mostly work on incentives.

Incentives would motivate people to sell certain kinds of things, as opposed to something else. For example, the quantum of premiums and the commission structure would motivate agents to sell cash-value insurance.

Higher commission for certain models of vehicles would nudge salesperson to influence clients that certain vehicles should be strongly considered.

You could hide or withhold information about certain products that paid less well but in truth, more suitable for the client. This is not lying just not revealing.

If a resale property agent list and successfully sell a resale property, this seller agent will earn 2% of the transacted value from the seller.

This seller agent would have to give 1% to the buyer’s agent.

Some seller agent may reduce their commission to 1.5% or even 1.0% of the transacted value. What this will result is that the buyer’s agent will get 0.75% or 0.50% respectively. It is debatable whether reducing the commission is a good idea.

The Fat Discount Given to Property Agents for Marketing New Private Property Developments

What I have explained above is the resale market. Post-July 2018, property agents marketing newly launched properties have enjoyed a significant rise in commissions.

Developers of newly launched private properties started giving discounts to property agents in order to give them incentives to move sales to clear the developer’s inventory.

Take Treasure at Tampines for an example.
The developer of Treasure at Tampines was willing to give the property agents who were able to move sales 4% of the listed price in commission.

This is not fixed.
Arena Residence was able to give up a 4% discount to the listed price.
The discount for Mon Jervois was a high 8%.

Now, you may ask the question: Why don’t developers just lower the sale price?

These new launches are released in tranches to the public, if there is too much volatility in the sale prices, this would upset the buyers from the previous release if those who bought the latest release got it cheaper.

So the route that they take is to vary the margins they earned, vary the incentives given to property agents to motivate them to market the property in their own way.

How This Developer Discount Creates Incentives that May have Tilted the Market

These discounts given to agents could range from 3% to 8%.

The higher the discount, it usually means the property is less in demand and developers need to give a greater incentive to motivate agents to help move sales.

Suppose an agent sold a unit of Mon Jervois for $4.8 million. He or she will pocket $384,000 in commissions.

For an equivalent resale unit that is worth $4.8 million, he or she would pocket $48,000 in commission.

Now if you are someone looking for a property agent for advice which would be a better purchase: A resale condo or a new development.

What would be your advice to this prospect? The one you could potentially earn $384k or $48k?

The answer is quite obvious here.

It gives the agent an incentive to better market the proposition of new development, and emphasize the downside of choosing a resale.

It is no wonder those agents who were dealing with resale would now be more willing to do new launches.

There may be something more.

Now property agents cannot give these all or part of these discounts from developers to the property buyer. This is not legal.

If they were able to give some of these discounts to the buyers, the buyer would have gotten a cheaper private property.

But that does not stop some property agents from giving relatives of the property buyer an introducer fee. This is an indirect way for the property agent to give the prospective buyer a discount.

Some property agents were willing to do this, some are not willing to.

The buyers probably know about this, so they would try their luck and ask each agent. For those who toe the line, they risk losing the deal to those who do not toe the line.

As a client, for the same property development, you might not buy at a more attractive price as some of your future neighbors.

All this really creates an opaque layer that benefits those in the know and penalizes those who do not know enough.

Bottomline

The government wanted everyone to see the property market as real as possible. In a lot of ways, it means the demand and supply data should show what is actually happening.

But the tightening measures from the government have resulted in developers coming up with antics (re-issuing OTP, discount to property agents) that have created a market that looked like:
More buyers than actually is

Property agents recommending new launches over resale to prospects

Uneven private property cost price for buyers
Currently, you may be able to observe a spread between the values of resale properties and new launches. Are the resale private property cheap or are the new development units too inflated?

I do not have a good answer to that. The reality may be that actual demand for private properties is much more muted than what we perceive.

The carrots given out have swayed the marketing and messaging to the general public to the side of new launches.

When the incentives changed (e.g. government coming down hard on these discounts), perhaps the messaging to the general public will change to how undervalued these resale are versus the new ones!

These inefficiencies in pricing in the property market may have created areas where you may be able to profit from if you are in the know. This is much like the equities and bond markets.

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