In recent days, I was asked by a client why the price Per Square Foot (PSF) for a freehold landed property was lower than that of a leasehold condo. This is a good question, and one that reflects on how we should – and should not view a property’s value through the lens of price psf.
Understanding Price PSF versus Quantum
The price psf is an estimate of how much you’re paying for each square foot, whereas the quantum is the overall price of the unit. Note that the smaller the unit, the higher the price psf tends to be.
For example, consider The M Condo, near Beach Road. This is considered one of the most affordable prime region properties; one-bedroom units here sold for under $1 million.
However, if you look at the price psf, you will see that the units can cost as much as $3,000 psf. This is almost double the average psf of a bungalow in Sentosa Cove (around $1,780 psf).
However, the average quantum of a Sentosa Cove bungalow is $12 million.
As such, you can see that the bigger the unit, the lower the price psf tends to be, and vice versa.
A smaller property will almost always cost more on a psf basis. This is why compact units (510 sq. ft. or less) are characterised by a very high psf, with a very low overall quantum.
Price psf is not very useful when comparing between dissimilar property types
It is almost meaningless to compare the price psf between a landed property and a condo; this will not give you any accurate sense of value, as the two property types are too different; it’s like comparing between apples and oranges.
Likewise, it doesn’t make sense to compare the price psf of a condo in Tampines, to a condo that’s in Tanglin. The locations are too different for the numbers to indicate anything. You need to compare condos in Tampines to other condos in Tampines, for the price psf to matter.
When should we use price psf as a measurement?
Price psf is a useful measurement for the following cases:
- Examining the overall values in a neighbourhood
- Comparing between broadly similar property types
- Non-residential portions of a property
1. Examining the overall values in a neighbourhood
As a quick and loose guideline, price psf is often used to evaluate how “prime” a particular neighbourhood is. For example, prime districts such as 9, 10, and 11 (Orchard and the CBD) tend to see a price psf of about $2,800, whereas fringe regions can see anywhere from $1,300 to $1,700 psf.
This is a good approximation of how developed or accessible a particular neighbourhood is. In general, neighbourhoods where the average price psf is higher will have more amenities, or be more centrally located.
Tracking the average psf in a neighbourhood can reveal signs such as gentrification. For example, due to the gentrification in Tiong Bahru, the average price psf for condos here rose from a mere $1,212 psf in 2010, to $1,913 this year; a steep climb of close to 58 per cent.
2. Comparing between broadly similar property types
If you’re trying to find properties that are of value for money, price psf is best used between two similar property types; the more similar the better.
For example, if you’re comparing between two units in the same block of the same project, then price psf can be an excellent indicator of value.
The more similar the units are in terms of size, layout, and location, the more accurate price psf becomes as an indicator of value.
3. Non-residential portions of a property
If you’re lucky enough to own properties such as a shophouse, which also has a commercial space attached, price psf is important to know. This is especially so if you’re renting out the commercial element to a business.
You might want to work out how much rental income you’re getting on a psf basis (e.g. rental income of $730 psf). This can differ based on the business involved (it’s why some landlords may prefer, say, retail stores to Food & Beverage tenants).
As a home owner, quantum also matters more than price psf, as it affects affordability
It is the total price of your home, and not its price per square foot, that determines affordability. If your budget is $1.5 million, then shop around and get the right property for you at that price; don’t worry too much if it’s $2,000 psf or $1,300 psf.
Ultimately, the price psf is just one indication of value, amid many more important factors – from location to facing to overall price movements in the area.
You can consider the price psf if, say, a very similar unit happens to be available in the same block, or the next block over. In such an event, a lower price psf could be a “tiebreaker” between the two.
For further help, you can get more updates on home ownership and property investment at Ron Chong.net, or just contact me directly on Facebook.