Different Strokes For Different Segments If Developers Cut Prices

Source : The Business Times, April 18, 2008

In cutting prices by 3-5 per cent at three existing projects and achieving encouraging sales, property giant Far East Organization may have set the cat among the pigeons.

Other developers must now ask themselves whether to embrace this strategy. Of course, the bigger ones have the financial muscle to hold back launches and sales for months and don't need to chop prices to entice buyers in the face of weaker market sentiment.

But there are opportunity costs involved in letting projects linger on the market and in holding on to sites - especially ones with a 99-year leasehold - instead of launching the project.

Of course, cutting prices is never easy from a developer's standpoint. To what extent can developers cut prices without further eroding confidence in the market? And how much of a price cut is necessary to lure buyers?

The margins also dictate the extent to which developers can afford to cut prices on a particular project - and factors to consider include the price at which they bought the land and whether they have locked in construction costs.

But apart from the broad parameters, there are more specific considerations that can sway a developer's decision.

In the current market, for example, it makes more sense to trim prices of mass market projects (anything priced at $1,000 psf and below) as buyers are more likely to be owner-occupiers than speculators and investors. And because these buyers are more price sensitive, even a modest price-cut of up to 5 per cent - like what Far East did - can help speed up the buying decision.

For mid-tier projects (priced at $1,000 to $2,000 psf), the speculators and investors feature more prominently in the pool of buyers. Any price cut in this segment would have to be more significant - say about 10 per cent - to draw buyers.

For high-end developments ($2,000 psf and above), buyers tend to be foreigners, investors and speculators. 'I don't think it's so much a case of price sensitivity in this sector,' says Knight Frank executive director (residential) Peter Ow. 'Even if you cut prices, buyers may not come in. These are people whose decisions will be affected by the volatility in global financial markets.'

Another point to note is that because high-end prices have gone up so much in the past couple of years, the level of perceived risk for someone buying an investment property in this market segment is much higher today.

DTZ executive director (research and consultancy) Ong Choon Fah makes another point: 'These investors are mobile with their funds - and may be looking at other global cities like London and New York, where opportunities have emerged as prices have fallen.'

A seasoned investor told BT that prices in the high-end segment may have to be cut at least 20 per cent before risks drop sufficiently to attract potential investors. For that reason, developers of upmarket properties will also resist making price cuts of this quantum. But then, another group of people may hold the key to price chops in this segment: specuvestors.

Those who bought multiple units in high-end projects a few years earlier on deferred payment schemes may be willing to let go of their units at below current market prices before the projects receive Temporary Occupation Permit, which is when they'll have to pay the bulk of their purchase price to the developer.

If sufficient numbers of these units are transacted in the secondary market at prices below current values, it would set lower price benchmarks for the surrounding areas. And that would increase pressure on developers to lower their prices.

A major consideration for lowering prices is appeasing those who bought earlier at higher prices. In the past, developers have done this by offering furnishing vouchers to their early buyers. Another tactic has been to cut prices discreetly. 'Within any project, there may be price variations of up to 20 per cent depending on height and facing of units. Developers may be able to trim prices by up to 10 per cent without making it so obvious,' says Mr Ow.

Against this, the high construction costs may reduce a developer's ability to manoeuvre and cut prices - especially if the site was bought at a steep price.

Still, the months ahead may prove fruitful for bargain hunters.