No end to bidders for land?

The headline of a news report for a recent tender for private housing development screamed “Serangoon site draws just 4 bids”. Another said the top two bids were just 2.6 per cent apart. It was alluding to the fact that the margins between the top bids before the Aug 30 cooling measures were mainly in the double digits, peaking at 31 per cent for a condominium plot in Yishun in August. They are now in the single digits.

For sure, these are all legitimate market signals but are we reading too much significance into them? Yes, we know developers, as a group, have become more cautious. The recently-released real estate sentiment index said as much. But these developers are in the tender to win it, not just to nick it by a small margin. If they keep losing it by the odd percentage point, I am sure they will up the ante for the next tender.

I would suggest that the real story behind these land tenders – coming fast and furious at a pace never witnessed before – is this: Is there no ebb to the demand for land for residential developments?

Before the dust settles on one tender, another is announced. Except for one site for executive condominium development, there has been no strong indication that the demand for land has waned in a big way.

And the demand will still be there as long as there are home sales. So, the market signal to slow the demand for land has to come from the demand side of the housing equation.

Interestingly, the analyses on which the news report was based for the story on the closing gap between the top bids did not mention anything about the gap between the highest and lowest bids.

If we are saying that there is now a greater consensus of views, then why are the margins between the top and lowest bids still showing the wide divergence among developers. Mostly, the margin is about 40 per cent, going up to as high as close to 100 per cent.

Property is all about location and we see it in the bids for the various plots. Those with smaller winning margins were for sites in the far-flung areas, while the wider margins were for plots closer to the city. When tenders for plots closer to the city are offered, then we may see wider margins once again.

In any case, four bids is not in any way a poor market response. We have to look at the location and, mind you, the winning bid is still not cheap. The analysis is not wrong, but let’s complete it and give it a fuller picture.

Another story which caught my eye recently was the fuss about the Urban Redevelopment Authority’s estimates of future housing supply. The worry was that some investors might make the wrong decision to buy, thinking supply for the year was low when it was actually high, and would, therefore, have difficulty finding tenants later.

Firstly, since when did it become the top priority of investors to buy properties off the plan for rental income? If their first priority is to collect rental income, they would be better off picking a completed property. The reality is that most investors today buy for capital gains first before rental income.

Also, should not the proportion of investor buyers vis-a-vis owner-occupier purchasers for projects completing in the year be more important when analysing the rental potential?

A 400-unit project which secures Temporary Occupation Permit today also does not mean that all 400 units will be potentially be up for rental tomorrow. In reality, the handing over of keys for the entire project can take between three and six months, depending on the size of the development. Investors who get their keys within a month have a head start over those who receive them three to four months later. The time lag can make a big difference to the rental income achieved.

Fewer units are being completed this year and the number of rental contracts has actually gone up by about 5 per cent but there has still been a slowdown in the pace of rental growth. This can only happen because a higher proportion of the completed units were up for rental rather than owner-occupation.

In any case, it was clear that these figures were compiled based on feedback from developers. The market is more dynamic now than in the past and circumstances can and do change.

The numbers will only be more critical if sales are allowed only upon completion of the units. If the vast majority of units were to be unleashed on the market at the same time, then prices could be influenced significantly.

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

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