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Investing in New launches: The Sorrento Case Study

We look at new launches along West Coast Highway / Ayer Rajah Expressway and zoom in on why some have done better than others in terms of sales and potential rental yield.

Posted on 11-Jun-2015
By: SRX

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Investing in New launches: The Sorrento Case Study

When a developer launches a new project in Singapore, hundreds of millions of dollars are at risk and the amount of time and effort invested in the project are so large that it’s difficult to quantify.

As such, the pressure on developers to achieve their business plans is immense.

Since January 2014, developers have launched 42 projects with varying degrees of success.  We have compiled a complete new launches scorecard of these projects in SRX Property Research.

The Sorrento private condo was one of five projects from that cadre that has sold all of its available units to date.

In an effort to understand why the Sorrento has been successful, let’s put ourselves in the shoes of an investor and go back to 2014, the year it was launched.

As an investor, the first thing we do is set our financial objectives.  In our case, we would like invest in a new launch that is an up-and-coming area that will provide us with a good rental yield and long-term capital appreciation.

Next, we select a location.

In our case, we identify the area along West Coast Highway / Ayer Rajah Expressway as a promising place to invest. 

On paper, this area looks like a very good location to buy a rental.  Not only is it an easy shot to the financial district, but the area consists of National University of Singapore (NUS), West Coast Park, nearby grocery stores, and good access to public transportation. 

Furthermore, the Pasir Panjang terminal will relocate and eventually the vacated land will be redeveloped for residential and commercial purposes.

It’s easy to imagine renting to an expatriate professional who works downtown or a visiting professor at NUS who wants to put on her Birkenstocks and read poetry under the shade of a tree in West Coast Park.

Now that we have our financial objectives and locations set, the third thing we do is shortlist condominiums for further investigation.  We decide that we want to limit our list to new launches as we want to go new and take advantage of developer discounts due to the Cooling Measures.

This requirement leaves us with four choices:  Waterfront@Faber, The Sorrento, The Orient, and the Bijou.  

The Waterfront@Faber is a 99-year leasehold while the other three are freehold.

As an investor in rentals, we have a strong bias towards 99-year leasehold as buyers tend to pay a premium for the privilege of a freehold tenure, which, in turn diminishes the rental yield. 

Intuitively, we know this to be true.  We can’t charge more for a freehold unit that is similar to that of a 99-year leasehold.  The renter gets no benefit from the property being a freehold so he or she is not going to pay a premium in rent just because we paid a premium to buy it.

Our intuition is backed by SRX Property facts.  As we know from the SRX Property’s rental yield heat maps, the national average rental yield for leasehold is 3.5% versus 3.0% for freehold.  It is even more dramatic as you drill down into each district.

We shortlist Waterfront@Faber, in part because it is leasehold, and in part because we like that it will overlook a river close to a bend, which checks a box for us both in terms of view and Feng Shui.

Now we look at the three freeholds.  We like the design and floorplans for The Bijou and The Orient, but they are above our budget.  While we are tempted, we must stay disciplined and adhere to the financials above all else.

This leaves us with two projects in our comparison:  The Sorrento and Waterfront@Faber. 

We like both projects in terms of design, and each location has its pluses for attracting renters.  We have a slight bias towards the Sorrento because it will be so close to NUS.

However, at $1,373 psf (price-per-square foot), the Sorrento is trading at about 11% more than that of Waterfront@Faber.

Now we need to sharpen our pencils and determine if we can justify the extra money for the Sorrento.

In Sorrento’s favour, it is a freehold that is priced more closely to the leasehold Waterfront@Faber than the freeholds Bijou and The Orient. 

If history holds true, we should be able to achieve a slightly better capital appreciation by buying a freehold at a leasehold price.

As such, we can justify paying a slight premium for the Sorrento over Waterfront@Faber.

But to finalize our analysis, let’s compare the rental yields we can expect to capture if we were to purchase one of our two finalists.

The quickest way to do this is to go to SRX AnalyzerTM and compare the rents of existing, nearby condos.  We will take the average rent of all the leases in the apartment buildings.  We are not concerned that these buildings may be older and less chic than our finalists.  The most important determinant of rent is location.

In addition, we are conservative investors and, therefore, we are happy to use conservative estimates of rent rather than guesstimate the rent that we could get for our modern unit several years from now.

For the Waterfront@Faber, we select the five closest condos with a significant number of rentals: Botannia, Carabelle, Monterey Park, The Infiniti, and Faber Crest.

The average rent psf in the neighbourhood is $3.21.  Next, we calculate our expected rental yield, which is the projected annual rental income divided by the purchase psf or ($3.21*12)/$1,233.  We can expect to earn a rental yield of 3.12%.

For the Sorrento, we select the five closest condos with a significant number of rentals:  Clementiwoods, Blue Horizion, Varsity Park, The stellar, and Westcove.

For The Sorrento’s neighbourhood, we find that the average rent psf is $3.46.  For this new project, we calculate an expected rental yield of (3.46 psf*12)/1,373 = 3.02%.

Waterfront@Faber has a higher expected rental yield at 3.12% versus 3.02%, but 0.1% is not a large difference, especially given that The Sorrento is a freehold.

So where do we invest?

The choice between investing in The Sorrento and the Waterfront@Faber is a tough one but, in the end, we must make a judgement based on both our quantitative analysis and our business instincts.

We judge The Sorrento to be the better investment for the following reasons:

  1. It falls within our budget;
  2. It’s a freehold that approaches a leasehold price;
  3. It returns almost the same expected real yield;
  4. It’s closer than the Waterfront@Faber to key work areas like NUS and the Central Business District, which we believe means that we will have a larger pool of renters from which to choose.

Now, let’s see what other investors ended up deciding.

The Sorrento has sold all its units while Waterfront@Faber has sold 60%.  As you can see from our New Launches scorecard at srx.com.sg/research, both projects have achieved strong results during a tough market of Cooling Measures.

The case study we introduced in this article is just one way to analyse an investment opportunity. 

We encourage you to use SRX Property’s superior information and applications as the foundation of your analysis but to seek advice from experienced professionals before you make your final business decision.  For a summary of the methodology and applications used in this case study, check out Cool Tech at SRX.com.sg.  

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