By: Pio Granada
Right now, in a world riddled by a global pandemic, Real Estate prices have plunged down 10% to 30%, in some cases more severely than that. It is a buyer’s market. For investors, this is a big opportunity, however in the short term you are faced with challenges such as finding a tenant and low rental yields. This is so, most especially in the office and residential sector. Not having a tenant or long vacancy may not be so appealing for some, if you are in it for the long game and have the capital to sustain the investment through the pandemic then buying in the fire-sale secondary market is a good move. On the other hand, if you need to keep investment overhead low, avoid the hardship of finding a tenant during a global pandemic, and can’t afford to fork over a lumpsum of cash to get a property at a good price, then a pre-selling investment might be the best play for you.
Developers are now offering 5% to no down payment for high-end to ultra-luxury properties which have never before been offered with such generous payment terms. This might be a once in a lifetime chance to own a high-end property with a zero-interest scheme and relatively low cash flow requirements.
According to Ayala Corp Chairman Jaime Augusto Zobel de Ayala, one of the Philippines’ top business leaders which owns Ayala Land Inc (one of the leading property developers in the country), said that the Philippine economy would likely recover to pre-pandemic levels by the fourth quarter of 2022.
Why is this piece of information so relevant to a residential pre-selling investment play? This essentially means that the down trend of low rental yields, high residential vacancies and tenant scarcity is likely continue until 4th quarter 2022. Investors who have made a play to buy low may only start to get sensible rental yields and perhaps even their first tenant in 2022. So, to insulate yourself from this capital intensive and cash flow restricting investment (especially if you are planning to loan & offset it via rental income – a high risk move by the way!) how might we formulate a great pre-selling investment strategy?
Here are some steps to make a great pandemic proof pre-selling investment:
1. LOCATION, LOCATION, LOCATION!
The first step is of course to choose an unassailable location. What do I mean about unassailable? Meaning its pandemic proof, recession and depression proof. As with everything Real Estate has cycles, right now we are on a depression cycle. Meaning prices have taken a nose dive, there is high vacancy and developers are not launching any new projects soon. So what makes a location unassailable:
a. People want to live there because of the lifestyle it represents.
b. It is unique and unreplaceable (hard to replace) for example Bonifacio Global City (BGC), Taguig hosts the Philippine Stock Exchange and has a growing high street/café/park urban culture not replicated anywhere else in the country. Not to mention the bus transit system which has designated stops with in the district.
c. Strategically located and highly accessible with future intrastructure to make accessibility easier is being built. With e-commerce road accessibility is still a thing, so if you live somewhere that's too far or hard to reach, all your Lazada orders will just be returned to sender or you will be paying a King's ransom for every shipment. Look at the infra projects in the Build,Build, Build program and see how they connect to pre-selling projects.
d. High internet bandwidth and good 5G signal.
e. A complete business district meaning there are offices, hopitals, retail/restaurants, warehouses, schools and hotels in the area or close to it.
f. High historical capital appreciation.
g. Natural disaster proof or almost – non-flooding, far from faultline, shoreline and above sea level.
h. Walkability and bike friendliness – just compare the side walks/bike lanes of Cubao, Makati and BGC. Which one do you prefer to have a stroll or bike around on to clear your head?
i. Good local governance.
2. Choose a pre-selling project that will turn over after 2022
As full recovery is not predicted to happen until 4th quarter 2022. It is not a good idea to get a project that turns over during these depressed times. We are forecasted to enter the recovery phase by the end of the year as vaccines are being rolled out. Ayala mentioned end of 2022 as the beginning of full recovery. Knowing this, it is best to find something that is ready for occupancy when the market is fully recovered, giving your investment optimal rental yields. In the same token capital appreciation will already have recovered and by then you can flip the property. If you time the sale right, you might not even have to pay the turnover balance as this will be passed on to your buyer.
3. Choose the right developer and project
It goes without saying that you must choose a developer that has a consistent track record in delivering projects (with quality finishes/good build), recession proof, great property management and give high capital appreciation for its clients. Up to a certain point a developer has a degree of control on the price appreciation before market forces totally take over as it holds less and less inventory. It is best to choose a high-end to a luxury class developer. Why? These developers especially the likes of Ayala Land Premier, Alveo or Shang have typically no inventory to only a handful of units left by the time the project is turned over. This is important because if your developer still has units left when you are trying to flip you are forced to compete with them. This also means that if there is high supply for the type of unit you are selling, your pricing options will be limited - a very typical scenario with mid to low end projects. That being said the next consideration is choosing the right project for you. First you must be clear with your intentions and ask yourself:
a. Am I going to rent out the unit?
b. When am I selling it: before/ on turnover or will I lease it out for X number of years and then flip it?
c. Who is going to manage the property?
If you are going to manage the unit, then it has to be close to where you live. If you are going to sell it before turnover, then the project location is almost going to be a non-factor outside of the sellability of the property.
Once this is decided its important now to consider the innovations, the level of luxury, sellability and how strategically located that project is in the given vicinity. With the pandemic, even after people are over it by the time the chosen property is handed over, people are still most likely to avoid crowded places. Therefore, choosing a low density building or gated community with a maximum of 12 units per floor or 20 homes per hectare are going to be optimal. Not to mention the peace and quiet, with that kind of population density offers.
Another factor is technology, since the project is going to delivered in the future this is very important as future buyers would not like something that is already obsolete. So look for smart home features or readiness (a developer giving smart home freebies is a big plus), contactless features and other innovations. Receptacles for charging electric cars in parking slots would also be very forward thinking.
LEED certification is a bonus as it guarantees energy efficiency (lower electric bills), water usage efficiency, non-toxicity of materials, good ventilation and etc depending on the level of certification.
4. Select the right unit.
When selecting a pre-selling investment. We have to go granular, as different units have different rental yields as same unit types can be priced differently. We have to go with the best per SQM price vis-à-vis rarity (always count the units per type) of the unit within the project. Get the unit with a sensible layout, potential views and unique attributes that will make it highly leaseable and sellable in the future. Try to dissect the units with the floor plans, maps and rendered images of the unit to extrapolate the unit features. Get as much information as you can from the developer (a good agent can extract and provide pertinent information) and try to imagine yourself living there. A virtual walkthrough, a showroom visit will most definitely help. Make sure there no surprises on turnover.
Another factor is the leasability and saleability of a particular unit type, now this is where local knowledge kicks in. An agent/broker who specializes in your area of choice would know the demand for a 1 bedroom, 2 bedroom and etc.
Lastly, ask yourself would I let any of my children or a friend I care about live here? It is understood that this is an investment but if its not good enough for you or your children, why should anyone bother to rent or buy it? Remember this, price is not the only factor. Buying a cheap unit that you cannot flip or rent out is just a non-starter.
5. Choose payment terms that match your cash flow
As mentioned, developers are offering out of this world terms right now. This will allow you to allocate capital to different investments (or your business) and earn from that money instead of expending your capital outright for a secondary market property that will most likely have low to no rental yield thereby constricting your income. Plus, you will now have dues to pay and a yearly real property tax expense. If you can’t flip or get a tenant you are seriously screwed. If you have the holding power then good, if this doesn’t suit you, this strategy might be the right fit.
Select a term that affords you the longest possible drawn out payment scheme with the smallest possible monthly amortization and down payment for the desired unit. It is also typical now to get a discount for a down payment of 10%, which was rare as a Dodo pre-pandemic. Then get the biggest possible turnover balance/last lumpsum payment (minimum 70% of the total contract price) with this you can now the allocate that capital elsewhere to something that produces good income while you are paying for the unit.
On the turnover year, you may be presented with the opportunity to flip the unit especially if you selected a good unit that’s now sought after by buyers and the developer has no units of this kind on offer. Deferring bulk of the payment now puts you in a good position to flip. Take note you have only invested about 10 – 30% of the price! Of course, more often than not: selling after the turnover will give you more optimal returns and selling after leasing out for a number of years gives you the maximum!
6. Choose a developer accredited local broker/agent...
Who is investment savvy to guide you through the process. It is better if that broker/agent is accredited with multiple developers and has in depth local knowledge on the selected area so you can compare all options objectively with most of the information laid out. It is a big plus if that broker or agent can lease out or sell the unit when the time is right.
So there you have it, 6 easy steps for a pre-selling investment play. This strategy gives any investor the opportunity to work out a relatively low cash flow intensive investment while avoiding the absolute headache of finding a tenant in these trying times. This also allows an investor who has loaded up on good deals to diversify his or her portfolio. If you would like a real world example of how this is done with calculations on ROI, rental yield, IRR, cash multiple and different investment metrics don’t hesitate to give me call or text:
Pio Granada, RES
PRC Reg. # 009602
RE/MAX Capital
BGC Southern
www.bgcsouthern.com
+63.916.7113518
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