By Property Soul (guest contributor)

Government Land Sales for residential sites in Singapore recently crossed the S$1 billion mark. A 99-year leasehold site in Stirling Road (Queenstown) was sold at a top bid of S$1.003 billion. The winning consortium is China’s Nanshan Group and Logan Property (a Chinese developer listed in Hong Kong). Nanshan has been eyeing the Singapore property market for a long time. In the past 12 months, it participated in 8 of 11 tenders in Singapore’s land auctions.

What is the role of the government?

In Singapore, land use is regulated by Singapore Land Authority and Urban Redevelopment Authority (URA). They make decisions on zoning, plot ratio and development charges which have a direct impact on the value of the sites.

The Chief Valuer at IRAS sets a minimum reserve price on the land parcels based on recent property transactions. URA then sells them to developers through public tenders. The sites will be awarded to the highest bidders if they don’t fall below 85 percent of the reserve price.

Chesterton Singapore reported that land prices have increased by an average of 30 percent each year from 2011 to 2014. Land auction data from URA also show that suburban areas such as Tampines, Clementi and Jurong West have land prices that almost doubled from 2008 to 2014.

The government can indirectly influence the selling price of new sites in at least three ways:

1) Increase or reduce the release of new sites for public auction;

2) Impose or relax cooling measures to restrict or stimulate the property market; and

3) Launch public flats to meet the demand for public housing.

Where have developers’ profit margins gone?

Building up the land bank and replenishing the stock of sites are important to a property developer. The successful acquisition of land parcels means a pipeline of new projects to launch. The successful launch of new projects can do wonders to the company’s financial results.

The number of bidders in public auctions have increased from an average of 8.25 in the second half of 2015 to 13.3 this year. In 2017 so far, two out of four land tenders were awarded to foreign bidders. Keen competition from cash-rich foreign counterparts are forcing local developers to bid aggressively. If they are conservative in their bidding, they will be easily outbid by China developers who are eager to take a share of the Singapore property market.

A recent report by Cushman & Wakefield mentioned that developers are paying an average of 29 percent more for residential sites over comparable sites sold within the past five years. In the second half of 2016, developers were paying only a 13 percent premium on average.

Land prices have shot up. But property prices are falling. How badly are developers’ margins affected? In 2009, developer net margins stood at an average of 35.7 percent. It dropped to 11.8 percent in 2014 for private condominiums and 4 percent for ECs.

Are developers committing suicide?

Back in August 2013, City Development Limited’s Kwek Leng Beng told the media that “if the Qualifying Certificate is there, it will be suicidal to keep tendering at high prices just because we want a land bank.”

According to the Qualifying Certificate regulation, new projects must be sold within two years after obtaining the Temporary Occupation Permit, or face extension charges on the unsold units. If developers can’t sell all the units in their project after five years, they have to pay Additional Buyer Stamp Duty on the remaining units.

With a gross floor area of 954,327 sq ft, the Stirling Road site can be developed into a maximum of 1,110 units. The bidding price of S$1.003 billion translates into S$1,050.71 psf. The average construction cost of a mass market condominium is $350 psf. Assuming the developer takes 30 percent of the total of land cost plus construction cost (i.e. 30% of $1,050 + $350 = $420 psf) to cover all necessary expenses and a minimum profit margin, the developer would have to sell at a minimum launch price of $1,820 psf ($1,050 + $350 + $420) in order to make a profit.

This is an aggressive jump from the nearby new project Queen’s Peak, which was released last November with a launch price of $1,580 psf. One reason why Queen’s Peak was selling well is largely the result of strategic pricing by developer MCC Land (HY Realty). It was also launched at the right time when homebuyers believed that prices have come down to a reasonable level for such a good location.

Will the Stirling Road site share the same luck? Who can guarantee the market condition by the time the project is ready to launch?

What is the potential price to pay?

The last price record for a residential site was created 20 years ago when Hong Kong tycoon Li Ka-shing’s Cheung Kong Holdings paid $683 million or $456 psf for the 99-year Costa del Sol site on Bayshore Road in January 1997. What happened to the developer after they paid the top price?

Not long after Cheung Kong won the land auction, Singapore was hit badly by the Asian Financial Crisis. This was followed by the bubble bursting, SARS outbreak and economic recession in Singapore in the mid-2000s.

When Costa del Sol was launched in May 2000, the initial launch price was $765 psf. The developer told the media and early buyers that selling prices would stay the same in subsequent launch phases even if property prices fell. But by February 2005, prices had been lowered to $650 psf for the re-launch of about 600 units.

After the project’s completion in 2003, for several years blocks of units in the project were still unsold and left vacant. It was not until August 2007 that Hotel Properties’ Ong Beng Seng and his family helped to clear an entire block of 180 remaining units that the 906-unit project finally concluded its 10-year episode.

In the Stirling Road record-breaking auction, MCL Land was the second highest bidder who lost to the Chinese developer at the price of S$925.7 million. Is it a terrible loss or a blessing in disguise? Only time will tell.

By guest contributor Property Soul, a successful property investor, blogger, and author of the No B.S. Guide to Property Investment.

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