Developers take more risks amid a shortage of sites

The signs are clear for all to see: Developers’ appetite for sites has rebounded strongly.

In addition to the land parcels made available on the Confirmed List of the Government Land Sales programme, more sites have been triggered from the Reserve List in recent months. Under the Reserve List, the tenders will only be launched when a developer submits an application committing to bid at a minimum price acceptable to the Government. Developers have already triggered five residential sites from the 2H2012 Reserve List.

Amid the healthy participation in site tenders, winning bids for similarly located sites have in some cases registered double-digit percentage gains compared to the previous year.

Foreign developers are also muscling in, fuelling the increasingly aggressive competition for sites. Since last year, more foreign developers – especially those from China – have been seeking opportunities in Singapore’s private housing market, which is seen as less risky than that in China.

After a few quarters of acclimatisation, these foreign developers are now submitting aggressive bids and holding their own against the local competition in reading the market.

The lack of sufficient sites for the growing number of interested developers – both local and foreign – culminated in an astounding bid of S$73.8 million for a 1.02ha, 60-year leasehold site in Jalan Jurong Kechil two weeks ago. The tender also surprised many by the sheer number of bids – 23 in all, the highest since the Westwood Avenue residential site tender that closed in December 2009 with 32 bids.

This is history in the making, not only for the very aggressive bid but also for the high risks these developers are taking. This is because the market for 60-year leasehold apartments is largely untested.

The fact that bigger developers – who have been more successful in securing development sites – stayed away, tells you what they think of the risks of a site with a significantly shorter tenure than the traditional 99-year leasehold site sold in land tenders.

The high bids also suggest that the developers are not even thinking of building retirement homes, which the authorities may have intended, as there were options for 30-year and 45-year lease tenures.

The developer of the site could face additional risks with financing because some banks are not prepared to finance residential projects with leases of 60 years or shorter.

Well, not yet anyway. Banks today are flushed with liquidity and the risks can be managed. If there are many interested buyers, why not? After all, the market did not anticipate the strong buying response for shoebox apartments.

If the authorities were to offer more of such sites, I am sure there will be just as many interested developers. We may have reached a point where any site will do. Is the evidence sufficient justification for raising the number of sites on the Confirmed List for the next GLS programme?

I have always said that our markets have been more stable than others in the region because the authorities have made a commitment to push out as many sites as there is demand. That is why, despite the flood of liquidity in our markets, no one is panic buying. And that is also the main reason why our prices have remained relatively stable.

Yet, if we keep the rate of our site supply stable and rely more on the Reserve List, we can expect land prices to continue their upward trend because the system does not work as perfectly as it should in theory. If there is no change in the GLS, the higher land prices will probably be passed on to buyers via initial higher selling prices.

By Colin Tan – Head of Research and Consultancy at Chesterton Suntec International

Source : Today – 30 Nov 2012

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