Billionaire Kwek Leng Beng, head of Singapore’s second-largest listed developer, said last year that skyrocketing prices and restrictive rules made buying residential land here suicidal. That has not stopped international developers from rushing in.
Land prices in some parts of the country are climbing at three times the pace of apartment costs, with plot values rising by an average of 30 per cent each year since early 2011, said property broker Chesterton Singapore, which used government auction data. Singapore’s fourth-quarter home prices slid for the first time in almost two years, as curbs cooled values.
“The increase in land prices has had a tremendous impact on developers’ profit margins,” said Chesterton Singapore Managing Director Donald Han. “Those that used to enjoy margins in excess of 20 per cent will have to contend with narrower returns.”
Builders with international backing such as Kingsford Development and MCC Land (Singapore) have driven the gains as they sought to benefit from home prices that have jumped 61 per cent since mid-2009. Land prices are squeezing profits, while Singapore, ranked by Knight Frank as the most expensive to buy a luxury home in Asia after Hong Kong, has introduced measures that limit mortgages, require higher downpayments and impose new taxes to tamp housing inflation.
Profit margins have narrowed to 10 per cent from as much as 20 per cent just three years ago, said broker CBRE Group. That has hammered property stocks in Singapore, with South-east Asia’s largest developer CapitaLand’s share price down about 26 per cent in the past year and City Developments, run by Executive Chairman Kwek, losing 17 per cent.
Mr Kwek, reported to have a net worth of US$3.9 billion (S$5 billion) in the Bloomberg Billionaires Index, said in August it would be suicidal to buy land given the Government’s requirement that new homes must be sold within two years of completion.
“Non-traditional property developers, especially foreign construction companies, are also entering the real estate development field, bidding aggressively to secure land, while sacrificing their profit margins in construction,” the company said in its earnings statement in November. “This is a very potent trend that may affect the industry in the medium to long run.”
While developers are expecting prices to fall because of the measures, that is not stopping them from buying more land. “Recent bids are indicative of high competition for land bank among developers as they continue to bid aggressively to replenish their declining inventories despite a bleak outlook for property prices,” said UOB Kay Hian analyst Vikrant Pandey.
CapitaLand said on Wednesday it would continue to replenish land bank in Singapore through government auctions and private sales.
Home prices are expected to moderate this year due to the property measures, said Chief Executive Officer Lim Ming Yan, adding that some of the short-term measures such as stamp duties or taxes may be eased if housing values fall as much as 10 per cent.
For developers, recovery in demand would be a prerequisite to avoid further compression of profit margins, said Mr Nicholas Mak, Executive Director and Head of Research at SLP International Property Consultants.
“If the market is softening and units are taking longer to sell, then a rational developer will not bid so much for the land even though there are fewer land parcels,” he said. “It cuts both ways; demand will influence price.”
Some of the biggest land price increases have been for plots in Upper Serangoon and Tampines, as well as in Bukit Merah and Alexandra. These former industrial areas now host car dealerships and residential apartment buildings close to the city centre.
Bidding at auctions, especially those in which foreign developers took part, drove up prices in the areas annually by 32 per cent and 39 per cent, respectively, in the three years since early 2011. Over the same period, prices of homes built on the sites rose only 7 per cent per annum, Mr Han said.
Chinese developer Kingsford Development emerged as the top bidder for two plots in Serangoon after offering S$522 per square foot in December, showed data compiled by Chesterton, based on the Urban Redevelopment Authority’s (URA) auctions. That compares with the S$291.39 psf winning bid by Singapore developer Allgreen Properties in September 2011 in the same area, Chesterton said.
MCC Land, a unit of Metallurgical Corp of China, placed the highest offer for a Tampines plot, paying S$562 psf. The bid was about 34 per cent higher than what Singapore’s largest privately held developer Far East Organization offered for a plot in the same area in May 2012, Chesterton data showed.
The Government has been fighting property speculation since 2009 as record home prices amid low interest rates raised concerns of a bubble.
Rules were unveiled last June governing how financial institutions grant property loans to individuals. It is also limiting land supply to prevent units from flooding the market as demand declines. There are potentially 65,000 private homes that could be completed between 2014 and 2016, said Mr Mak.
The Government will cut sales of residential plots by 18 per cent for the first half from the six months ended December, the URA said in December. The 11,585 units of total supply expected for the six months to June will be below 14,155 for the first time since 2010. Of that total, the planned supply for private residential units will drop 44 per cent in the period.
Source : Today – 21 Feb 2014