Pros and Cons of Buying Properties from Primary and Secondary Markets

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Pros and Cons of Buying Properties from Primary and Secondary Markets

As the "sell and build" concept is favoured in Malaysia, we usually cross our fingers and buy property off the plan from developers, hoping that we would end up with something that is reasonably decent, if not perfect. In the past couple of years, house buyers have found such properties popular due to the discounts and freebies offered by developers.

Although this seems to be the general trend (and real estate agents have long been lamenting the stiff competition posed by new and upcoming off-the-plan properties), figures from the National Property Information Centre (NAPIC) indicate otherwise. According to the figures, the number of transactions involving residential developments stood at 89,286 units in the first half of last year. Of that, 21,766 units were sold by developers while the rest were transacted in the secondary market. Whatever it is, whether one buys from the developer or not depends on one's individual needs and preference.

"Many people buy properties lured just by the attractive design or affordable pricing, but more thought needs to be put in when choosing between the two options, as both have their respective pros and cons," says Dr Tan Loke Mun, deputy president of the Malaysian Institute of Architects (PAM).

Off the plan

The term "off the plan" means "choosing to buy a particular property based on a plan provided by the developer". In other words, it refers to the purchase of properties that are yet to be built.

'Off the plan' properties are also commonly referred to as primary market properties as they are largely made up of units newly built by developers and then handed over directly to the first purchaser, says Allan Soo, managing director of Regroup Associates Sdn Bhd.

He adds that off-the-plan properties appeal to investors as well as those who are buying for occupation, including first-time house buyers. Obviously, a person buying a property to live in would prefer something new for the price that they pay.

Industry players attribute the preference for off-the-plan properties to factors such as price, lifestyle and individual expectations.

For instance, newlyweds shopping for their first home would have to work within budget constraints, says Siva Shanker, chief executive of Linear Estates. Thus, they often opt for off-the-plan properties, which are usually cheaper than completed units in the secondary market.

"Prices [of off-the-plan properties] are usually cheaper, and in a rising property market, purchasers buying off the plan are most likely to enjoy good capital appreciation on the property, sometimes even before its completion," says Datuk Jeffrey Ng, president of the Real Estate and Housing Developers' Association of Malaysia (Rehda).

Capital appreciation is what most real estate speculators look for, thus it comes as no surprise that they too, are among those who prefer off-the-plan properties. Buying off-the-plan properties from developers at low prices and later selling it at an appreciated price in the secondary market enables them to make gains.

In contrast, a select group of investors prefer to invest in completed properties in the secondary market, believing that such properties offer good investment returns, says Siva of Linear Estates.

"These investors buy secondary or completed properties in prime locations, renovate and furnish the units to increase their market value before selling them to make a profit. That's their investment strategy," he adds.

Siva explains that secondary properties are usually sold by those who bought them directly from a developer or from another owner. In essence, they're not "off the plan" as the unit has been completed.

However, note that the term "completed property" has two meanings: It could either refer to those available in the secondary market as described by Siva, or units fully constructed by a developer to be sold to buyers only upon their completion, such as in the "build and sell" concept.

"At times, a project is developed on a 'sell and build' concept but on completion, there will be several unsold units. These are also called completed properties although the developer didn't opt for the 'build and sell' concept," says Soo.

Real estate agents say fans of the secondary or completed property market have a preference for a particular property type and location not available in the primary market.

Others who choose to purchase or invest in secondary market properties do so because they wish to upgrade by moving to a bigger home in a better location. "The secondary market has been enjoying steady growth mainly due to the economic growth of the country, which has resulted in higher per capita income. Once people secure better income, they are inclined to upgrade, moving to more established locations or better addresses," remarks Rehda's Ng, who is also managing director of Asia Pacific Land Bhd.

Off the plan: Pros and cons

The biggest advantage of buying properties off the plan is that purchasers are assured of owning a brand new home. They are attracted to the fact that they have first choice of owning and occupying the property.

"For those who are buying to occupy, there is a general preference for off-the-plan properties, which come with the standard 18-month defect liability period. It entitles the owner to get the developer to rectify any defects in the unit, like bathroom leakage, cracks in the wall, or door hinges that are not properly installed," says Regroup's Soo.

The defect liability period also applies to "build and sell" properties purchased directly from the developer.

Off-the-plan developments also appeal to young house buyers who are looking for modern facilities: New projects are said to be much better in terms of quality, design and layout, and overall project planning and implementation. This is especially true if purchasers are looking for unique features in a property. For instance, says Tan of PAM, the gated community concept now extends to landed properties as well but is mostly available in new housing developments only.

Another advantage of off-the-plan properties is their relative affordability compared with completed properties.

More often than not, says Siva, properties sold by developers are a lot cheaper compared with similar types of properties available on the secondary market, thus making primary market properties a favourite among those looking for affordable homes, be they new house buyers or property speculators.

"Because speculators want to make quick profits, they choose off-the-plan properties because one cannot buy a secondary market or completed property today and sell it a year later at a higher price as the capital appreciation rate may not be as high," says a property consultant.

However, off-the-plan properties also come with their fair share of disadvantages and house buyers should be aware of them to avoid misunderstandings with the developers, says Soo.

The most common disadvantage is that purchasers buy a particular unit based on what they see on paper, be it an artist's impression or a technical plan.

"There is always the element of surprise because when completed, a unit might not resemble what was seen in the show house or product brochures," says Soo.

Another downside to buying properties off the plan is the fear that the project might not be completed on time as promised or worse, it could be abandoned by the developer. "Unless the developer has a good reputation and is financially strong, there is a risk of the project not progressing to completion or being riddled with poor workmanship," says Ng.

Secondary market: Pros and cons

"With secondary market properties, it's a case of 'what you see is what you get' because the property is tangible, completed. It is there to be seen and felt by the buyer before buying," offers Siva of Linear Estates.

Based on his years of experience, Siva notes that purchasers who buy off-the-plan properties do not know what is in store for their entire residential area in the future. This includes the possibility of developments such as highways and public amenities like bus stops being built at their doorstep.

"Recently, many houseowners in certain parts of the city were shocked to find that their new houses are now facing highways, and they now suffer from noise and air pollution. In some cases, owners were surprised to find a bus stop or a monsoon drain right at their front gate and they can't do much about it," he says.

While these situations can be avoided by buying from the secondary market, it does not mean that completed properties do not spring surprises either, says Soo. "However, when compared to buying based on a plan, buying something that is completed and has been there for some years gives a certain amount of confidence to the buyer."

The other merit of buying from the secondary market is that buyers have the option of residing in established and much-sought-after locations.

"For those insisting on a prestigious street address or locality, in most instances, going for secondary properties will be the best and only option available," says Tan of PAM. He adds that mature and established locations have little or no space left for new and affordable developments.

Note, however, that secondary market properties are more pricey than off-the-plan developments, more so if they are in prime locations.

"If you want to live in an established neighbourhood, it comes with a price because a secondary market property's capital value would appreciate with time and this will be factored into the price of the unit," says Siva.

Another pertinent point to note when buying from the secondary market is that the properties might be old and require renovation. Property consultants advise those who are considering properties older than 10 years to set aside a fair amount of money for renovation and refurbishment.

"It is common to have termite problems, leaking roofs, old electrical wiring that needs changing and much more. The same problems can be present in new properties too, but the chances are slim. So, when investing in a secondary property, be financially prepared," advises Tan.

Whether choosing to buy off the plan or from the secondary market, be sure to keep your options open, regardless of whether the property is for investment or own occupation. Do consider also factors that aren't directly linked to the physical property per se, but to the entire process of owning the property.

One of the key reasons why house buyers prefer off-the-plan properties is because developers provide purchasers with all the necessary assistance, plus even some freebies.

"The purchaser is normally offered a hassle-free package deal from facilitation in end-financing, EPF withdrawal and stamp duty exemption to interest-free loans during construction, free or subsidised legal fees and free kitchen cabinets," says Ng of Rehda.

These benefits often do not come with secondary market properties as they are often sold by individual owners or through their appointed real estate agents.

So do take into account such value-added services as well before making a final decision.

Source: theedgedaily.com
This article appears in Personal Money.