Roll of honour or dishonour?

There were two good property reads this week. One was a perceptive commentary which had “ghost towns” in its headline but it was not images of vacant HDB flats that came to my mind. But more of that later as I first need to lay the foundation for that story with the other, which should then lead us nicely to my comment on ghost towns.

The focus of this other news analysis was on the winning margins of tenders for state land. Two state land parcels with residential components have so far this year already fetched winning margins exceeding S$100 million. Are there more to come? There was only one such case for the whole of last year.

Whether by coincidence or not, these huge winning margins were achieved shortly after the announcement of cooling measures mid-January.

Market watchers say this was due to a bigger divergence of views among developers on the impact of the measures.

I am not too sure about this analysis but I am pretty certain that developers do not bid according to their views of what they feel is a reasonable value for the site given the cooling measures.

When they bid, it is to win and so it has to be above this figure. The difference is the element of risk that the developer undertakes. When the developer gets it right, the rewards are great.

I would say the margin between the highest and second-placed bid reflects more of the intensity of the competition. The divergence of views and the level of risk-taking would be more accurately reflected in the difference between the top bid and the lowest bid.

I am also not sure if being a member of this S$100 million club is a roll of honour or dishonour? I am sure no developer would like to be reminded that they were involved in sites which they could have gotten for S$100 million less.

However, in today’s liquidity-laden market, the red faces and embarrassment do not last long. I would even go so far to say that the real losers are those who have yet to secure a site.

Judging from the wide participation and aggressive bids submitted for recent tenders, it would appear that the deep hunger among developers for development sites has returned.

Are we surprised? Developers are turning around their projects so quickly these days, with at least one taking a mere five months. Give an extra month for sales to reach the break-even mark and they are back in the market for more sites.

For these super-efficient developers, they need two sites per developer per year. Do we have enough sites? How many developers still need sites? And how many foreign developers have entered our market since last year?

Appreciate this and you will understand why the winning margins are once again starting to grow wider. And why collective sales are becoming popular again, notwithstanding the hassle of acquiring such sites.

And why you cannot discount the possibility that the massive S$1.7 billion Pine Grove collective sale could attract keen competition from several parties.

Is it time to raise the supply of sites? More importantly, is it right to continue to raise the supply of sites?

On Monday, we were told that global growth could be significantly dampened in the face of major new uncertainties brewing across the world. Japan’s March 11 catastrophe and the ongoing turmoil in the Middle East pose very significant uncertainties for the world – and at a time when recovery in the advanced economies remains fragile and inflation is rising across East Asia. Is this the cue for more stimulus measures and continued low interest rates?

Many of us have heard of price bubbles but how many know of quantity bubbles? This is the term that is most commonly used in reports to describe the ghost towns of China in Inner Mongolia and other remote parts of the country, where row upon row of housing apartment blocks are left practically vacant.

Housing prices have not corrected even though the apartments are not tenanted as the owners are able to hang on to them because of the low holding costs.

Will such images of vacant apartment blocks populate our housing landscape in Singapore in the not-too-distant future? If our mortgage rates continue to remain persistently low, such an outcome is entirely plausible.

By Colin Tan – Head, Research & Consultancy, at Chesterton Suntec International

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