Paya Lebar site: Was bid really too low?

Two important questions have emerged following the Urban Redevelopment Authority’s (URA) decision last week to reject the sole bid for a Paya Lebar commercial site. One is whether the bid was too low and the other is whether the reserve price should be revealed for future state tenders.

A consortium comprising UOL and Singapore Land was the sole bidder, offering S$566 per sq ft per plot ratio for the site. This was 35 per cent less than what was achieved for a nearby plot six months ago that attracted ten bids. The latest site, however, had certain technical constraints, such as a canal running through it and a hotel component.

Following the URA’s rejection, the consortium – which put in the S$529.3 million bid – issued a terse statement asking for the reserve price to be made public for future tenders “as much costs and efforts are put into submissions of such a scale”.

The authorities have responded that the reserve price is not the sole factor in determining whether the sites are awarded. They say it is simply a guide and revealing it would not be meaningful as it would colour developers’ assessments – and bids.

Shedding more light on this, Associate Professor Sing Tien Foo of the National University of Singapore’s Department of Real Estate said revealing reserve prices could mean an increased likelihood of bids clustering around the number, which would not be ideal for competitive bidding and correspondingly the filling of the state’s coffers. It might also hinder the best use of land as developers might work around the figure in conceptualising their finished product.

The above argument sounds reasonable except that we tend to forget that developers do not submit offers of what they think is the fair market value. They submit bids to win, which is an entirely different matter.

In fact, recent evidence shows that the reverse may be more applicable. “Triggered” plots from the Government’s Reserve List have been just as competitive, if not more intense, and the winning bids often about 50 per cent above the revealed reserve price.

Leaving reserve prices aside, the matter I was most interested in is whether the UOL-SingLand bid was too low. In terms of gross floor area allowed, the second plot is 40 per cent larger than the first. We know that – other things being equal – larger plots command a lower psf price than a smaller one.

The second plot also has a hotel component, which is a wild card for most developers. Not many have experience in developing hotels, let alone a good track record of doing so. Hotels are also more of a long-term investment property. You cannot strata-title the rooms and sell them individually to re-coup your investments.

Even assuming that the sites are strictly comparable, is the comparison with the winning bid for the first site fair? If I hold an open house for my apartment and receive a total ten offers, what is the fair market value for my apartment? Is it not the average or median price of the ten offers?

Using this method to compute the fair value of the first site, the UOL-Singland bid would only be 11.8 per cent lower when compared to the mean and 9.2 per cent lower when compared to the median price. On a psf basis, the consortium’s bid would have ranked higher than four other bidders in the first tender – two of whom are listed entities.

After this analysis, can anyone still describe the offer from the consortium as opportunistic? And the authorities should be reminded – if they do not already know it – that their main objective is not revenue maximisation but to meet business and housing needs.

By Colin Tan – of research and consultancy at Chesterton Suntec International.