Golden era of development

Early this week, a developer gave itself a pat on the back for delivering good returns on its maiden residential project. Considering that almost every established developer made record profits in their recent history, was it such an achievement?

If ever there was a period which could be described as a golden era for developers, the years from 2007 to the present day – with the exception of 2008 – must be it.

Laden with massive liquidity from huge profits earned on sold-out projects, it is no wonder that developers’ appetite for development sites has remained unabated.

The aggressive bidding for the most recent state sale of a residential plot at the corner of Sembawang Road and Canberra Drive, was the second tender to confirm that the ramping up of land supply has not had a major impact.

One major reason for the high bids and good participation rate was that there are still some developers who have yet to replenish their land bank. They are likely to ramp up their bids even higher.

However, what is interesting is that quite a number of developers continue to participate in such tenders even though they have already been successful in earlier rounds.

Perhaps reflecting the greater risks going forward, there appear to be more joint ventures – some with strategic tie-ups with contractors. With so many projects coming up over the next few years, securing a contractor will prove more difficult over time.

Flush with liquidity, developers probably feel there is no other better option. In any case, should their bids be successful, it may have an averaging down effect on their overall land cost.

The market continues to surprise even the most seasoned of developers. After bidding aggressively for a site and turning it around in double-quick time within nine months, some developers are caught in a dilemma when their projects sell out in days. They are back to square one but with even greater cash resources.

Thus, we may have a scenario where sites are taken up even quickly as they are made available, and this will probably be so even when land prices start to decline to more moderate levels. How much more land supply will it take to satisfy this seemingly insatiable appetite?

If developers continue to be able to unload their apartments, the risks are slowly being transferred to the investors. And when developers are in a healthy position, do not expect them to chop prices any time soon.

It can even be argued that it is in the developers’ interest to continue to participate in land tenders even when bid prices are coming down. This is because the most vulnerable are those who paid the highest prices for their sites. Developers with lower land cost are able to undercut their rivals.

I end this piece with this last paragraph of a recent article on asset bubbles by an NUS don: “While the ‘efficient market hypothesis’ prescribes minimal government intervention … regulators should prevent huge asset bubbles rather than look for ways to cure the economy only after a crash. By that time it may be too costly.”

Colin Tan, head of research and consultancy at Chesterton Suntec International.