EC does it – 65% profit margin for EC sold in 2014 & 2015

By Feily Sofian / EdgeProp Singapore | June 12, 2015 9:00 AM SGT
Not too long ago, executive condominium (EC) launches attracted strong interest because of their value proposition compared to private mass-market homes. But recently, they made their way back into the headlines for less optimistic reasons as buyers’ appetite waned on the back of loan restrictions, resale levy rule and oversupply fear.
At a glance, EC is still value for money as they are about 18% cheaper than new condominium launches in their vicinity. Furthermore, ten years after their completion, they would be fully privatised, enjoying the same status as condominiums. The 18% discount is partly due to lower construction cost incurred for EC projects which is around 15% lower than condo. It also compensates for the resale and leasing restrictions associated with public housing for a period of ten years.
This leads us to a question on how much the EC would be worth when they become fully privatised, whether they would finally be on par with comparable condominiums or still significantly discounted. The hypothesis is that EC projects would still be cheaper than comparable condo projects even after privatisation given the difference in building quality. The number of comparable condo projects for the study is limited as they must be located in the vicinity of the subject EC and of similar age.
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Notwithstanding, the study found that in 2015, privatised EC projects are still traded at a discount relative to comparable condominiums. The price gap, however, has narrowed to around 9%, instead of the original 18% approximated at launch (See Figure 1). This seems to be more than fair if EC construction cost is 15% lower than condos.
Figure 1: Price gap between EC and comparable condo projects narrows with time

Source: URA, The Edge Property

As an example, Lilydale EC in Yishun was launched in 2001 at an average price of $353 psf, 26% or $126 psf below the average launch price of $479 recorded for nearby condos such as Euphony Gardens, Yishun Emerald and Yishun Saphire. Fast forward to 2015, the condos were transacted at $716 psf with Lilydale trailing closely at $700 psf.
In another instance, The Quintet EC was launched in 2003 at an average price of $367 psf, at 25% or $119 psf discount compared to The Warren condo which was launched in the vicinity at an average price of $486 psf. In 2015, units at The Warren were transacted at an average price of $829 psf. Meanwhile, The Quintet units changed hands at $745 psf, just 10% below The Warren.
There were exceptions though. Some ECs were transacted at higher price than the condo projects of their generation. For example, Bishan Loft EC was launched in 2001 at an average price of $421 psf. The same year saw three condos in the vicinity – Rafflesia Condominium, Seasons View and The Gardens at Bishan - being launched at an average price of $614 psf. In 2015, the three condos sold for an average price of $1,009 psf, while Bishan Loft fetched $1,201 psf.
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Has the price gap between EC and condo narrowed earlier even before the EC becomes privatised? Using the same set of properties, we analysed the price gap between EC and condo projects five years after their completion. It seems that the price gap between EC and condo has already narrowed to around 12% just five years after the ECs were completed, with another five years to go before they become privatised and free from public housing encumbrances.
Some reports claimed that ECs only become profitable only after they become fully privatised. This is debatable considering the first few batches of EC projects were launched in 1996-1997 at peak prices, pre-Asian Financial Crisis. These ECs were completed in 1999-2000. Hence, when after the five years Minimum Occupation Period was up, the first resale ECs would be on the market in 2004-2005, a period marked by prolonged slump in property prices.
EC profit margin higher than mass-market condos
A majority 98% or 322 EC units sold in 2014 and 2015 were profitable (See Table 1). Quantum-wise, the average profit of $388,047 was comparable to private mass-market homes which averaged $372,201. However, because EC purchase price was discounted, the profit margin for ECs averaged 65% compared to 46% witnessed for private mass-market homes. The largest profit of more than 100% accrued to units bought between 2001 and 2006. Meanwhile, only six units were in the red. The average loss was $41,053 or 4%. All the transactions would have been profitable if not for Seller’s Stamp Duty payable.
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Table 1: Nearly all EC transactions in 2014 and 2015 were profitable

Source: URA, The Edge Property

The highest profit of $1.1 million or 190% was traced to a unit at Bishan Loft (See Table 2). The owner had purchased the unit direct from developer NTUC Choice Homes and Chip Eng Leong back in 2001 for $426 psf. He sold it in March 2014 for $1,234 psf.
Table 2: Top five gains for EC units sold in 2014 & 2015

Source: URA, The Edge Property

On the rental front, rents for privatised EC projects averaged $2.40 psf per month. This works out to a gross rental yield of around 3.9%, on par with 99-year leasehold resale condo in the mass-market segment.
Given the solid track record of existing EC projects in terms of capital appreciation and rental yield, the recent tepid response towards new projects seems to be confined to certain areas where past launches could have soaked up demand. However, the tapering of BTO supply this year could divert some buyers back to the EC market.
Demand continued to be robust in areas where new launches were scarce. For example, Lake Life EC in Jurong West is almost fully sold. The area has not seen new EC launch since Summerdale and The Floravale in 1997. Similarly, the launch of Westwood Residences last Saturday, also located in Jurong West, was also well-received. These projects also benefited from value-added works and further initiatives planned for the Jurong Regional Centre.
Prospective buyers might also watch out for Woodlands. The area is on track to be the next Jurong or Tampines with a lineup of transit, business and lifestyle initiatives unveiled in the latest Master Plan. On the drawing board are Woodlands North and Woodlands South stations along the Thomson-East Coast MRT line which will significantly reduce commuting time to the downtown. Woodlands North station is also the site of the Rapid Transit System that will link Singapore to Johor Bahru. Also in the pipeline are a green boulevard and a link mall to enhance connectivity and walkability to the north coast waterfront. Existing projects in Woodlands with balance units include Bellewoods and Twin Fountains. No other project is expected to be launched until next year.
Ultimately, the question buyers should consider is whether the discount offered by a particular EC project would at least compensate for the lower construction cost, also bearing in mind that some EC projects offer quality finishes that are almost on par with condos.
This article appeared in The Edge Property Pullout of Issue 680 (June 8) of The Edge Singapore.
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