Executive condominiums (EC) are in more demand than ever, given the spikes in house prices in 2022. We expect at least four EC launches before the end of the year, and a big question now is how they are affected by the new cooling measures. Are they actually a better choice for asset progression, or should you still stick to fully private condos? Here’s a quick rehash of an old consideration, with the 2022 changes in mind:
The case of the EC in 2022
As for the overall investment potential, we have a previous article detailing the performance of 53 EC. It’s still relevant because it was only a year ago. However, the main difference today comes from the cooling measures of December 2021, which we cover in detail here.
In addition, there have been broader changes to the real estate market in general. Some considerations when buying an EC now are:
- With current private house prices, ECs are more viable
- ECs are less affected by increasing ABSD
- Growing questions about whether full privatization still matters
- Renewed concerns about mortgage rates
1. With current private house prices, ECs are more viable
In February 2022, resale detached home prices averaged $1,374 psf, while new home prices averaged $2,071 psf.
Since most upgraders need at least one unit over 1,000 square feet (three family-sized bedrooms), the typical new launch unit would cost over $2 million. This will cost many HDB modernizers, which can usually afford homes in the $1.5-1.6 million range.
Typically, this is the price of a new EC, which is often 20% less than that of a private condo.
Since the financially prudent choice is a resale condo or an EC, more renovators will likely opt for the latter. ECs can be purchased with grants, incur no ABSD to valuers (see below), and come with a new lease in the case of leasehold condos.
2. ECs are less affected by increased ABSD
The Additional Buyers Stamp Duty (ABSD) has been increased across the board, which is important for HDB valuers.
A valuer who chooses to buy his condo, before selling his apartment, must now pay 17% ABSD on the second property. They can request a refund from their CPF, as well as an ABSD rebate later*, but they must first pay the stamp duty (within 14 days of the transaction).
For a resale condo at a typical price of $1.4 million, that means an additional $238,000 up front.
For a new launch condo, buyers can at least deduct the initial ABSD from their CPF, rather than needing cash; but a new launch condo also has a higher price. At around $2 million, that would require $340,000.
As such, most HDB remodelers will first need to sell their apartment, find temporary housing, and then move on to purchasing their unit.
With CEs however, there is no initial ABSD (although you still have to sell your previous apartment within six months). This presents a much more convenient option and allows you to quickly lock down your favorite unit.
*To see here for more information on how to get ABSD remission
3. Growing questions about whether full privatization still matters
You’ll notice we said ECs are less affected, rather than completely unaffected. The increased ABSD has an indirect effect on foreigners and entities – they now pay 30% and 35% ABSD respectively.
The main advantage of full privatization, which comes after the 10and year for the EC, is that the HDB type restrictions are lifted for buyers. This means, for example, that an EC unit can be sold to a foreigner, or to a company (including property developers).
The problem is that these are the two types of buyers more heavily impacted by ABSD at the moment.
Affluent foreigners who buy high-end condos probably won’t buy EC; this batch of buyers focuses on the luxury market. This leaves middle to upper middle income foreigners as mass market condo buyers, including the EC. But with increasing ABSD, they may even be excluded from this option.
As for developers and corporates, the outlook as a whole is diminished by higher ABSD rates.
On this basis, the most significant gains for a CE may be just after the minimum occupancy period (MOP) of five years, not after full privatization.
4. Renewed concerns about mortgage rates
The United States aims to raise interest rates vigorously this year. As a knock-on effect, this could lead to increases of 0.75% in mortgage rates in Singapore. Note that this is only the to start upand the Fed signaled its willingness to raise rates further if deemed necessary.
There is also the simple fact that mortgage rates have been abnormally low for more than a decade, due to two black swans: the global financial crisis, then the Covid-19 fair as rates began to normalize. It’s a bit of a stretch to hope for another decade (if interest rates are depressed for too long, there is a risk of runaway inflation).
Homeowners with HDB loans are much less likely to see their interest rates change. Unless the CPF board reacts by raising the CPF rate*, they will continue to pay their 2.6%, which has been unchanged for over a decade now.
For CE buyers, however, HDB loans are not an option. If you buy an EC, you to have take out a bank loan. And if you’re an owner-investor looking for asset progression, it’s time to educate yourself on issues like repricing, refinancing, and understanding different loan packages.
Some upgrade companies may find the changing interest rates anxiety-inducing, compared to their old stable HDB rate. This could be a (albeit small) contributing factor in choosing a larger apartment, over a private condo or CE.
*HDB loan rates are 0.1% above the prevailing CPF interest rate, which is reviewed quarterly.
There’s also the old theory that ECs will see better appreciation than private condos.
This is based on lower initial prices, subsidies and a margin of appreciation. We don’t really want to highlight this as a truism, as it’s a very loose generalization. There are private condos that have significantly outperformed ECs, and vice versa. It also depends if you are renting the unit.
We did one last comparison on this in 2020, but here’s a quick recap.
Looking at such a chart, it is easy to conclude that CEs are more profitable.
Change the start and end point, and the story changes.
In this case, private condominiums come out on top, with an average appreciation of 42% compared to executive condominiums at 36%.
Much like what we detailed in our freehold vs leasehold study, the comparison period has a huge impact on the outcome of which is the “best” type of condo. As always, the answer on which is a better investment is always – it depends.
Remember, you have to wait five years before you can rent an entire EC; but if you buy a private condo, full rental income can start immediately. This is not reflected if you consider pure resale gains.
In these situations, you should always compare a specific condominium unit to a specific CE, to decide which has the better bottom line. You can contact us on Stacked for help, and also check out our reviews of new and resale condos, to make an intelligent comparison.