Whatever it is we are buying, we often ask ourselves the question: “Is it worth it?” Would you buy a $30 plate of chicken rice? How about $500 for a brand new MacBook? Of course, we are exaggerating here. These prices are off the charts, in both directions. We all have an innate understanding of value. When something is overpriced or highly discounted, it often catches our attention. Everyone wants a good deal. However, we might find ourselves occasionally paying more than we should. Perhaps, emotions were running high. Or maybe, we really just wanted to buy that item way more than an average person. Our inner sense of value gets distorted by our desires and emotions. Especially when it comes to Real Estate and for that matter, your own home.
In order to not get swayed by circumstances and changes in our mood, we look to objective measures of value. The Value Effect in MOAT Analysis looks at how a property is priced compared to the median price of comparable properties. In this article, we will talk about why value matters, how we can measure value, and how to use value to guide our property buying decisions.
Why does Value matter?
Reading the subheader, you may think “Duh, of course it matters”. It might seem like a rhetorical question but we are actually to go into the “why” rather than the “whether”. From a theoretical perspective, an objective measure of value is important because it helps us consistently compare across the board for different kinds of properties and share this accepted measure of value with others. Knowing this helps us determine if we’re paying too much or getting a good deal. This is the main reason why.
For properties, Value is also extremely important because it gives us some hints on the future value of the property. Undervalued properties now are expected to be more fairly valued in the future. Likewise for overvalued properties. This is what we would expect. However, some properties are under or overvalued for an underlying reason. If such a reason is the main driver of the abnormal valuation, it may stay under or overvalued for as long as that reason persists. It might be because of its great location, amenities, etc. Whatever it is, the other aspects of our MOAT Analysis aims to fill that gap.
Value matters the most when we intend to transact. When buying or selling something, its value needs to be communicated in order for it to attract a fair price. If you are looking for a property to stay for life and do not intend to sell it ever again, the future value of the property might not matter that much to you. You might only care how much it costs you now and would like to buy the chosen property at the best price possible. For property investors, Value matters because it would directly affect your investment returns. A value-based investment decision would mean buying undervalued properties that have great features and hence a high potential for growth.
With some hard work, it is possible to find such Disparity gaps in the market. It could be due to market factors or seller-related factors that discount the price of said properties. Buying a property is typically a huge decision unless you’re a billionaire investor. It is not a decision that people take lightly because it will take up years and maybe decades of savings for just that one purchase. Some good deals might stay on the market for a while because interested buyers might take a long time to come to that decision or let go of existing properties. The long transaction duration due to all the documentation and legal processes adds to why Disparity gaps might stay for more than just a few months.
How can Value be measured?
As a standalone measure, Value Effect captures the performance of the property relative to the median price of comparable properties. A score of 3 would indicate that the PSF of the property we are looking at is very close to the median price. A low score signals that the property is overpriced and a high score signals that the property is underpriced, all relative to the median price. Note that we consciously use the word price rather than value.
Price is what the market is willing to pay for the property. Value is the “true price” of the property because of its inherent features, and its ability to hold on to its previous price tag. Properties are very difficult to value. Even banks will have a tough time with this if there isn’t a large sample of transactions to help us find the average value. Ultimately, if you think of value deeply, you might ask, “Value for whom?” After all, not all of us like the same kind of property. Not all of us look for the same features. Because of all these moving parts and variables, it is difficult to find the true value of a property.
That should not stop us from trying though. The Value Effect in our MOAT Analysis looks at price performance around the median regional PSF as a measure of value. The tool uses dynamic data, which helps us track live changes in the change of regional median price and how a property performs relative to this benchmark. We use this as a proxy for the value of the property. Why is the regional median a good approximation of value? The key idea is that we capture the price variation across the region and take the median property price to remove the noise coming from specific locations or properties with super high or low prices.
By obtaining the median value this way, we are able to have a comparable benchmark to score properties against.
Value as a guide for decision making
How can we use the Value Effect to help us make better decisions when buying properties? While this is only one of the ten aspects of our MOAT, Value Effect is most useful as an initial indicator. There are some important questions to answer once you know whether property is over or undervalued.
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Is the property price in a long-term uptrend or downtrend?
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Is the district or regional median price in a long-term uptrend or downtrend?
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Is the current price supported by the other MOAT scores?
When people are looking to buy properties, they often shortlist their favourites and make a deep comparison before decisions are made. The decision to buy a property is situated in a larger set of alternatives. We look at whether the property we are looking at is in a long-term uptrend or downtrend. This gives us a clue on the price trajectory of the property. Likewise, with the larger district and region contexts.
When looking at the under or overvaluation, we check with the other MOAT factors to see if the property is truly under or overvalued. For example, if a property scores high on Value Effect (undervalued) and also has a high score for all other MOAT aspects. This tells us that the true value of the property is likely higher. If the property, district and region is also in a long-term uptrend, it is a strong signal that the property is genuinely undervalued.
We compare 3 projects using MOAT as an example. We’re comparing City Suites, Mi Casa, and The Interlace. All of these properties performed well on the MOAT Analysis, with the total score of 70 and above for each. The purpose of this exercise is to demonstrate how to best use the Value Effect to guide decisions. We complement this with other MOAT aspects and long-term analysis of the property and the district.
Let’s first look at City Suites. It has a Value Effect score of 5. This suggests that it is greatly discounted when compared to the regional median psf. Is it truly undervalued? We have some information going for and against the case. The high score on rental demand, parent’s attraction, estate potential, and bala’s curve supports the undervalued case. The reason why we see the discounted price is due to low volume, distance from MRT and low density. While this project has certain aspects going for it, the reasons for the price discount is not negligible. The low number of transactions and distance from the MRT might make it hard to exit the property despite the discounted price.
True to the MOAT Analysis, the number of transactions is scarce. Perhaps due to the small density (56 units) in this project. Thankfully, City Suites is situated in a larger long term trend. District 12 has grown 26% from 2015 to 2022 (accurate as of 23 May). This district outperforms the RCR average price performance in the same period (15% growth).
Looking at City Suites alone, it would seem like there is value to be reaped by investors. This is assuming that the buyer is fine with the low volume for transactions and the distance from the MRT, which might slow down the exit timing and make it more difficult to sell in the future. A chance for a persistent undervaluation is possible. However, being a freehold condominium helps to retain value despite it being difficult to exit. Investors with golden hands would not find themselves challenged in getting returns.
In our second example, Mi Casa (99 leasehold, completed 2013) is in District 23 and the OCR. Mi Casa scored the same as City Suites on the total score but are totally different properties. City Suites (Freehold, completed in 2017) is in District 12 and the RCR. Looking at Mi Casa, there is a similar concern of density and volume. But the distance from the MRT is much better.
Looking at the long-term price trend, Mi Casa is definitely situated in a longer uptrend and is somewhat undervalued (and underperforming) since 2018. Leasehold condominiums and apartments in District 23 grew 37% from 2015 to 2022 (accurate as of 23 May). In the same period, similar properties in the OCR region grew 20% while Mi Casa only grew 14%.
The Interlace is a 99-year leasehold project in District 4, which was completed in 2013. From the MOAT Analysis, it scored a 2 on Value Effect (priced above regional median). However, looking at the volume, density, rental demand, and estate potential, the “overvaluation” may be justified. The price trends show a different story. While The Interlace is priced above the regional average, it is still below the average price for District 4. This puts The Interlace in a slightly delicate position. The slower growth (3% from 2015 to 2022, accurate as of 23 May) might be a reflection of the low scores on the Value, MRT, Parent’s Attraction, and Quantum Effects.
Closing Thoughts
The Value Effect in the MOAT is an indication of whether a property is over or undervalued. In order to further study the true value of the property, you have to look at price trends and other aspects of the MOAT Analysis.
To wrap up the article, the biggest caveat on value is that it is subjective to the individual. But for us to communicate and talk about value, objective measurements are needed. To the individual, some aspects are more important than others. It really depends on why you are buying the property. If you wish to know more about how the MOAT Analysis can serve you on your journey, contact us here or drop a direct message to your favourite Inside Sales Team member.
