Understanding Developer Pricing Strategies in Today's Market

Developers employ different pricing strategies for their new launch projects, and these strategies can have a significant impact on potential buyers.

In the past, during a hot market, developers often launched projects at a higher profit margin, sometimes as high as 25% to 30%. While this allowed for strong profits, it also carried risks for early buyers. If the market cooled after the launch, developers could lower their profit margins to remain competitive, leaving those who bought early with higher-priced units than the current market value.

However, today's market is quite different. Developers are now much more cautious when pricing new projects.

Several factors contribute to this shift:

1.⁠ ⁠Time Constraints and Sales Targets: Developers are under pressure to sell all their units within a specific time frame. This urgency often results in more conservative pricing strategies.

2.⁠ ⁠Cooling Measures: With cooling measures like the Total Debt Servicing Ratio (TDSR), Stamp Duty (SSD), and Additional Buyer’s Stamp Duty (ABSD), the market has become less speculative, and demand is more measured.

3.⁠ ⁠Bank Commitments: Developers also face commitments with the banks they’ve taken loans from. They must meet certain sales target to obtain financing and secure the release of loan portions. To meet these criteria, developers have to sell a certain number of units early in the project.

This creates a strong incentive for developers to sell a portion of their units at launch to meet bank requirements and maintain their financing schedule.

The "Dollar Cost Averaging" Approach

In response to these factors, many developers have adopted a “dollar cost averaging” approach to pricing. Instead of launching with high margins, they typically start with thinner margins or sometimes even around break-even prices. The idea is to sell the initial units at a lower price to generate sales momentum, and then gradually increase prices in stages as the project progresses.

As the project moves closer to Temporary Occupation Permit (TOP), you’ll notice prices slowly increase. At this stage, buyers who purchased units early for investment purposes may start selling their properties once the capital gain increases significantly, surpassing the original purchase price plus taxes. This could result in a subsale, where the properties are sold at a higher price than the initial purchase, driven by market demand and appreciation..

The Advantage of a Mid- to Long-Term Investment

If you view a new launch as a mid- to long-term investment (i.e., planning to hold the property for at least 5 to 8 years after TOP), the value of your unit may potentially appreciate significantly over time. In 5 to 8 years, the average selling psf should be much higher than the price paid by early buyers before the TOP period, especially if you've bought at a lower price during the launch phase.

Why New Launches Over Resale Units?

Here are some reasons why new launches could be a better investment than resale properties:

•⁠ ⁠Predictable Price Growth: Developers often use a gradual price increase strategy, allowing early buyers to benefit from capital appreciation over time.

•⁠ ⁠First-Mover Advantage: Purchasing before the Temporary Occupation Permit (TOP) allows investors to secure a property at a lower price, with the potential for higher returns once the project completes.

•⁠ ⁠Modern Features & Amenities: New launches offer state-of-the-art facilities and modern design, which can be more attractive to future tenants or buyers.

•⁠ ⁠Lower Maintenance Costs: Newly built properties typically have fewer maintenance issues, reducing immediate repair costs for investors compared to older resale properties.

•⁠ ⁠Developer Incentives & Promotions: Developers often provide attractive sales packages or discounts that are not available with resale units.

•⁠ ⁠Capital Gains Potential: New launches can offer significant capital gains, especially if bought early in the development phase, before prices rise closer to the TOP.

•⁠ ⁠Cooling Measures Impact: The current cooling measures (like ABSD, TDSR, etc.) have made the market more stable, and developers are less likely to engage in speculative pricing, making new launches a safer investment in the long run.

Conclusion

In today’s market, developers are taking a more cautious and calculated approach to pricing, aiming to balance sales targets, bank commitments, and market conditions. By using strategies like dollar cost averaging, they ensure steady demand while still meeting financing requirements. For buyers, this means an opportunity to enter the market at a lower price point with the potential for steady price appreciation over the medium to long term. If you're looking to invest in a new launch, buying early gives you a predictable pricing advantage, with the possibility of significant value growth as the project nears completion.

Also see : New Launches vs Resale - Which is Best for You?

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