Value Investing Is Outdated, Here’s Why I Agree And What Has This Got To Do With Real Estate Part 3

This blog post is a continuation of part 2. If you haven’t read part 2 yet, please read that first. If you have done so, let’s go ahead and continue with the rest of this article.

Are “Undervalued” Properties Truly Worthwhile?

If you follow articles from Edgeprop, you will find that they have a weekly column that highlights properties with significant gains and losses. This information immediately tells you that timing is not crucial for real estate. The property market was supposedly red hot in 2021, with private home prices surging 10.6%. However, if you take a closer look, many sellers still chalk up significant losses.

Let us look at some of these top gainers and losers to understand this better. The first property we will be looking at is Boulevard 88. In January 2022, there was a subsale transaction of a 2777 sqft unit with a selling price of $12.5mil. The owner purchased the unit from the developer back in June 2019 at $9.38mil. Within a short span of 2 and a half years, capital gains were $3.12mil.

Timing Is Not The Most Crucial Factor When It Comes To Gains And Losses In Real Estate. Source URA, Edgeprop Singapore

In hindsight, purchasing this Boulevard 88 might be a no-brainer until you look at the psf of this unit. At $3,377 psf in 2019, it is about 50% higher than what you could have bought in the resale market at the nearby freehold Cuscaden Residences. Most value investors will never touch this with a ten-foot pole.

Cuscaden Residences. Freehold, A Stone’s Throw Away At A Fraction Of Boulevard 88’s Price in 2019

Someone Else’s Losses May Not Necessary Be Your Gains

On the other hand, the situation was very different in March 2022 for one unit seller at Belle Vue Residences. This unit was a 3552 sqft penthouse sold for $4,702,000. Bought initially in September 2012 for $7,400,000, the owner is looking at a net loss of $2,698,000.

A Wheel Of Fortune does Not decide top Gains And Losses! Source, URA Edgeprop Singapore

From a psf perspective, the initial price of $2,082 may seem exceptionally reasonable for a high-end freehold property in swanky district 9. However, market demand today only places a $1,324 psf price tag on it. Value investors will think units like these are great buys at such incredible prices and act on them.

A look at Belle Vue Residences with a PSF of only $1324. Source: SRX.

Undervalued Does Not Mean It Has To Go Up. It Could Very Well Be The New Valuation

Before you start jumping in, let’s assume we can turn back time. Back in 2019, there was only one single transaction in Belle Vue Residences. Instead of purchasing that “overpriced” Boulevard 88, you could be the one to acquire this “undervalued” unit at Belle Vue Residences. The initial owner bought this 2013 sqft unit at $5,100,000 back in 2011 and is now willing to sell to you at $3,850,000. This sale would mean that the previous owner will suffer a significant loss of $1,2500,000.

A Classic Case Of An “Undervalued Property”. Source SRX

Purchasing a unit like this may seem like a terrific deal. All you need to do is sit on the sidelines for a while and wait for prices to go back up. Unfortunately, there was no price “reversion” in the last couple of years. While on the other hand, prices at Boulevard 88 continue to break new ceilings.

“Undervalued” Prices Do Not Have To Revert To Normal. It Could Very Well Be The New Valuation. Source. SRX

Catalysts Are Crucial When It Comes To Asset Prices

The main issue with purchasing these so-called “undervalued” properties or assets is the assumption that prices should revert to normal with time. And when it does, that’s when you lock in profits. However, there is always a catalyst for why an asset or property value will increase over time. If you think about it, why would anyone else in the future pay you a higher price for the same four walls? After all, nothing else has changed in essence for the case of the unit at Boulevard 88. There is no vacant possession yet, so it is impossible to view and experience the condo for yourself. Furthermore, there were no additional works to renovate to elevate the unit’s value to another level. So why did the buyer pay a higher price to buy the same thing two years later?

In part four, I will highlight the importance of having catalysts in the influence of asset prices. If you ignore catalysts and purely focus on how “undervalued” you can get a property or asset for, I think you might be in for a rude shock. The most important thing to analysing any subject matter is from a first-principles angle. That way, we would have a much clearer understanding of how capital appreciation occurs and why would anyone pay a higher price for the one we pay for today. Meanwhile, stay safe and always do your homework!

Article contributed by Jerry Wong.

Jerry Wong is a versatile professional, serving as a realtor at Propnex Realty and contributing his interior designer expertise at the award-winning ProjectGuru. With accolades in both realms, Jerry’s passions extend beyond his work, with his greatest joy in facilitating connections between individuals and properties, deriving immense satisfaction from helping clients achieve their goals.