The real estate market continues to thrive because of the ever-rising demand for houses which are not only decent but also affordable by people. While home developers want to deliver to their customers a quality product, one of their other aim is also to generate profit levels that are healthy from the property sale for their shareholders. Consequently, below we show you the process of getting a good launch new condo price estimate.
Property Components Expenses
If you are looking at the different property expenses components, you will establish that the land component is the most expensive. This is followed by the costs of construction which in terms of accounting, it is comparable to COGS (Cost of Goods Sold). Other expenses that must also be factored in to help you come up with a new launch price including the administrative and legal cost, sales and marketing costs, profit margin, finance costs, etc.
Example: Gem Residences
The developer was awarded the site at S$345.86 million, translating to about S$755 per square foot per GFA (Gross Floor Area), in June 2015. The mass market condo construction cost including architecture design is around $350 psf. By adding up the costs, you will have the base cost. You should then take around 30% of the base cost for the purpose of covering developer profits and other expenses. You will have around $331 psf and this includes:
• Administrative expenses: This includes wages and salaries expenses, office rents etc.
• Sales and marketing expense: This includes development advertising, real estate agencies commission, Showflat building costs etc.
• Finance expenses: You must factor in the loan interests of the bank loan used for financing your development plus the loan amount.
• Profit margin: Profits percentage made by the developer from the development.
By adding them all up, you will have the new launch price estimate on per square foot (psf) basis. For Gem Residence, the land cost, construction cost, and expenses and profit margin per square foot will be $755, $350, and $331 respectively. The addition of those figures gives you $1,436 as the estimated new launch price.
With the application of the same methodology, let us find the estimated launch prices of 2 upcoming developments. For Forest Woods, the land cost, construction cost, and expenses and profit margin per square foot will be$710, $350, and $318 respectively translating to $1,378 as the estimated launch price. For Queens Peak, the land cost, construction cost, and expenses and profit margin per square foot will be$871, $350, and $366 respectively translating to $1,587 as the estimated launch price.
It is important to understand that this condo price estimate is able to work well in the present low price volatility market. If the prices of land have significantly increased from the date of tender award and launch date, then real estate developers are able to revise upwards their price and realize more profits. On the other hand, if the prices are spiraling downwards in a decreasing land prices environment, this means that the profit margin of the developer will be squeezed. As a developer, you are required to accordingly undertake a competitive market and price analysis against competitors for you to be able to sell your units.
Also, note that construction costs tend to vary. The construction cost of a luxury condo can be around $450 psf while the construction cost of ultra-luxury condominiums can cost even higher.
In conclusion, the new condo price estimate simply serves to indicate budget considerations and not to determine the valuation of the property. Therefore, to determine if you are getting a good condo deal you should not only consider the launch price but also consider the track record of the architect, main contractor, and developer.