Should you invest in the primary or secondary market?

The primary market consists of new properties purchased from a developer and is alternatively referred to as projects or ‘under-con’ property. Image from Pixabay

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By Vigneswar Rajasurian

Market conditions and government incentives make it a good time to invest in property.

Yet the age-old question remains – should investors purchase a property from the primary market or secondary market?

The primary market consists of new properties purchased from a developer and is alternatively referred to as projects or ‘under-con’ property.

The secondary market refers to sub-sale properties which are those purchased from individuals.

Even if a property may be newly completed and not lived-in yet, if the property is purchased from an owner instead of directly from the developer – it still falls under the sub-sale category.

Each real estate market has its pros and cons for investors, as discussed below.

There are lower upfront costs involved when purchasing a new property that is under construction. (Rawpixel pic)

Advantage of primary market

The strongest argument for the purchase of new projects is the lower upfront costs when compared to sub-sale purchases.

Rebates and discounts including absorption of legal fees are often offered by developers, making it more affordable, especially for first-time investors.

Investors purchasing eligible residential properties may also leverage on the Home Ownership Campaign (HOC) that provides stamp duty exemption on the SPA and loan agreement.

The defect liability period, essentially a warranty provided by the property developer, also makes the purchase of a new property less of a strain.

New and modern facilities in strata properties help attract more potential tenants and require less maintenance, usually resulting in lower maintenance fees when compared to older properties in the vicinity.

Investors enjoy the flexibility to choose from unit types and floor levels compared to the sub-sale market where availability is dependent on individual owners.

In this instance, lower to mid-level floors in high-rises make the most sense to investors in terms of ROI since each higher floor usually entails additional costs when purchasing properties in the primary market.

For primary markets, lower to mid-level floors in high-rises yield greater ROI since each higher floor usually entails additional costs.

Disadvantages of primary market

Since property prices in the primary market are set by the developer instead of market forces, some property prices may be inflated or sold at future value.

Rental yields and capital appreciation are also more speculative in comparison to the sub-sale market where statistical data is readily available on portals such as PropertyGuru.

Projects in new townships would also take longer to appreciate as surrounding infrastructure and amenities mature.

As a safeguard, take note of boosters near the development such as commercial zones, public infrastructure including highways and LRT/MRT stations and other amenities that will lend towards greater capital appreciation and desirability.

Purchasing properties under construction means investors must also be prepared to face risks of delay or abandonment should the developer fall into liquidation.

However, Liquid Ascertained Damages (LAD) and provisions in the Housing Development Act (1996) may mitigate the costs of delay or abandonment to a certain extent.

Upon vacant possession, a huge influx of units could flood the market thereby making finding a potential tenant or buyer competitive.

An investor should consider furnishing the unit they purchase so it can be rented out sooner. (Rawpixel pic)

Investors should look into furnishing their units to get higher returns or at the very least stand apart from the competition to rent the unit out faster.

Investors will also experience negative cash flow from paying the loan instalment during construction, which could continue post-completion if rental rates do not match monthly repayments.

Another issue to note is that facilities and common areas in strata properties may also not match expectations.

Advantages of secondary market

The sheer volume and volatility of the secondary market means the sub-sale market generally has better bargains as asking prices are set by market forces.

In a time of pay cuts and redundancies, investors should particularly look for properties listed at below-market-value by owners desperate to dispose of the property quickly.

Although a tad challenging, finding these deals can be made easier with the expertise of a property agent.

Rental yields and capital gains for sub-sale properties are readily available on property portals. (Rawpixel pic)

Rental yields and capital gains for sub-sale properties are available on portals such as PropertyGuru. This makes investing in sub-sale the safest and most tangible option when compared to the primary and auction market.

Purchasing sub-sale also means more options in matured townships with plenty of amenities, commercial zones and infrastructure that lend to investment potential.

‘What you see is what you get’ with the secondary market so investors may choose renovated homes with more rooms that suit investment or avoid any surprises as to the quality and standard of facilities.

Disadvantages of secondary market

However, buying ‘as-is’ also means that investors have to spend on repairs and defects that crop up once the purchase is concluded.

Upfront costs are also higher in the sub-sale market without rebates and discounts offered when purchasing from developers. Besides the 10% downpayment, investors can expect to pay legal fees, transfer costs, taxes and more.

Combined with the effort and costs of renovation or repainting to make the property attractive for rental, sub-sale investors must have cash-at-hand.

Since availability is dependent on individual owners, investors face limitations as to unit types and pricing if listings in the development are scarce.

Information on older properties may be more difficult to obtain and investors must rely on their own market research and that of real estate agents.

Buying sub-sale properties also mean that investors have to spend on repairs and defects. (Rawpixel pic)

Identify your investment objectives

Determine the kind of investor you wish to be based on your budget and preferences.

Some investors prefer shorter-term investments so purchase projects under construction and sell upon completion. Purchasing new properties is also less of a hassle and poses less of a financial barrier to first-time investors.

Other investors focus on holding on to properties in key locations for greater capital appreciation or aim for the best rental yield to derive positive cash flow each month hence the tangible nature of the sub-sale market offers more certainty.

Either way, to minimise risks, investment decisions should be driven by returns, derived from research and due diligence rather than emotions.

Read here for more about the latest buyer trends and investor preferences.

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