Sale of adjacent sites doesn’t moderate prices

It was no surprise that some developers tried to secure adjacent private housing plots in two Government Land Sales tenders that closed simultaneously last Thursday. The only question was how strong the interest would be and whether this batch tender method would help moderate or even lower land prices.

The experiment by the Urban Redevelopment Authority (URA) of closing the tenders for the two adjacent sites at the same time was a variation of an earlier one that involved closing the tenders for three plots of land in different locations simultaneously.

It was hard to judge whether the earlier experiment in July was a success because the demand for sites then had been very strong. One could argue that the winning bids would have been even higher had the sites been offered individually.

In the latest case, the two sites in Upper Serangoon View attracted eight bids each, with five of the bidders featured in both tenders. This suggested that developers were intolerant of potential competition close to their projects or saw opportunities of economies of scale to be reaped by developing both sites together.

Kingsford Development, owned by three Chinese nationals, lodged the highest bids for both sites at an identical S$522 per sq ft per plot ratio, very much above market expectations. Based on the winning bids, the outcome of the latest experiment strongly suggests that offering adjacent sites is not the way to go. Instead of moderating land prices, this method appears to have had the opposite effect.

It was also not surprising that a Chinese developer had submitted the top bids for both sites. Chinese developers are well-known for their huge projects in China and around the region as well as the rest of the world. It is only in land-scarce Singapore that real estate projects are bite-sized.

In a sense, Chinese developers and others who have experience with huge projects elsewhere will have the upper hand when it comes to tenders involving adjacent sites.

If more sites are sold this way, it may eventually lead to a situation where more land is concentrated in the hands of fewer developers. This will ratchet up land demand and lead to desperately high bids for other sites sold in the normal way.

The higher land costs may be more easily passed on to buyers as the developer would have some sort of monopoly in the locality with less competition.

In its annual Financial Stability Review released this week, the Monetary Authority of Singapore highlighted its concerns over high household debt and property price levels though the credit profile of housing loans had improved.

One of the major reasons property prices have remained high despite numerous rounds of cooling measures is that developers continued to put in firm bids for land, it said.

The minimum launch price for any developer has to start at the level that recovers all costs — never below it. Even if financing and construction costs remain stable, we know this minimum cost is rising because land prices are higher.

From this minimum cost, the developer will push the market to the level that it will bear. This is why most property analysts do not expect average housing price levels to come down any time soon unless developers are forced to sell at a loss by future market circumstances.

So unless the authorities introduce more cooling measures to curb private housing demand, developers will continue to compete keenly for sites: They need projects to justify their existence and an avenue to put their past profits to work.

Short of that, if there is anything else that the authorities can do to ensure a healthy market and reduce the Singapore economy’s risk exposure to property, it is to find ways and means to stabilise land prices.

By Colin Tan – Director of Research and Consultancy at Suntec Real Estate Consultants

Source : Today – 6 Dec 2013