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20-02-14, 10:34
http://www.bloomberg.com/news/2014-02-19/singapore-s-soaring-land-prices-suicidal-for-developers.html?x=3
Singapore’s Soaring Land Prices ‘Suicidal’ for Developers
By Pooja Thakur Feb 20, 2014 10:12 AM GMT+0800
Billionaire developer Kwek Leng Beng said last year that skyrocketing prices and restrictive rules made buying residential land in Singapore “suicidal.” That hasn’t stopped international developers from rushing in.
Land prices in some parts of the island-state are climbing at three times the pace of apartment costs, with plot values rising by an average 30 percent per year since early 2011, according to property broker Chesterton Singapore Pte, which used government auction data. Singapore’s fourth-quarter home prices slid for the first time in almost two years, as property curbs cooled values in the Southeast Asian city.
“The increase in land prices has had a tremendous impact on developers’ profit margins,” said Donald Han, managing director of Chesterton’s Singapore unit. “Developers that used to enjoy margins in excess of 20 percent will now have to contend with narrower returns.”
Builders with international backing such as Kingsford Development Pte and MCC Land (Singapore) Pte have driven the gains as they sought to benefit from home prices that have jumped 61 percent since mid-2009. Land prices are squeezing their profits, while the city, ranked by Knight Frank LLP as the most-expensive to buy a luxury home in Asia after Hong Kong, has introduced measures that limit mortgages, require higher down payments and impose new taxes to tamp housing inflation.
Profit margins have narrowed to 10 percent from as much as 20 percent as recently as three years ago, according to broker CBRE Group Inc. That’s hammered property stocks in Singapore, which have declined 1.1 percent this year, extending their 9.7 percent drop in 2013, according to the FTSE Strait Times Real Estate Index.
‘Potent Trend’
While developers are expecting prices to fall due to the measures, that isn’t stopping them from buying more land.
CapitaLand Ltd. (CAPL), Southeast Asia’s biggest developer, said yesterday that it will “continue to replenish landbank” in Singapore through government auctions and private sales.
Home prices are expected to moderate this year because of the government’s property measures, said Chief Executive Officer Lim Ming Yan, adding that some of the curbs may be eased if housing values fall as much as 10 percent.
CapitaLand’s operating profit totaled S$527.7 million ($417.6 million) in the year ended Dec. 31, missing the UOB Kay Hian’s full-year expectations. It had 3.4 million square feet of buildable area as of June, according to a July 25 presentation.
“Recent bids are indicative of high competition for landbank amongst developers as they continue to bid aggressively to replenish their declining inventories despite a bleak outlook for the property prices,” said Vikrant Pandey, an analyst at UOB Kay Hian Pte in Singapore.
‘Bidding Aggressively’
City Developments Ltd. (CIT), run by Kwek, has declined 18 percent in the past year. The island-state’s second-biggest developer reported in November that third-quarter income fell 10 percent, adding that builders are beginning to cut prices for existing and new projects and accept lower profit margins.
Kwek 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, also are entering the real estate development field, bidding aggressively to secure land for development, while sacrificing their profit margins in construction,” the company said in the earnings statement in November. “This is a very potent trend that may affect the industry in the medium-to-long run.”
Suburban Land
City Developments declined to comment further before its earnings on Feb. 27. The company’s landbank in Singapore as of June was 1.2 million square feet on which it can build 3.5 million square feet, according to a presentation on Aug. 6.
A plot in Bukit Merah, a residential area carved out of a hill about 5 kilometers (3.1 miles) from the central business district, sold for S$1,162 ($921) per square foot of maximum buildable floor area in April 2013, according to data from the Urban Redevelopment Authority. That’s a 20 percent increase from an auction in the same area four months earlier and almost double the price recorded in 2007.
Some of the biggest land price increases have been for plots in Upper Serangoon in the east and Tampines, near Singapore’s Changi Airport, as well as in Bukit Merah and Alexandra. These former industrial areas now host car dealerships and residential apartment buildings close to the city’s center.
Foreign Bidders
Bidding at auctions, especially those in which foreign developers took part, drove prices up in the areas by 32 percent and 39 percent annually respectively in the three years since early 2011. Over the same period, prices of homes built on the sites increased only 7 percent per annum, Chesterton’s Han said.
Land prices have almost doubled in the past six years in suburban areas such as Tampines, named after a forest of ironwood trees, Clementi, in the west near the National University of Singapore, and Jurong West, known for its bird park, URA’s auction data showed.
Kingsford Development, a closely held Chinese developer based in the northern city of Shenyang, emerged as the top bidder for two land plots in the Serangoon area in the island’s northeast where Little India is located. The company bid S$522 per square foot in December, according to data compiled by Chesterton, based on URA’s auctions.
That compares with the S$291.39 per square foot winning bid by Singapore developer Allgreen Properties Ltd. in September 2011 in the same neighborhood, Chesterton said. The average annual increases in the area are 40 percent.
MCC Land
MCC Land, a unit of Metallurgical Corp. of China Ltd., placed the highest offer for a plot in Tampines, an area to the east of the city center, paying S$562 per square foot. The bid was about 34 percent 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.
Developers’ profit margins have declined 50 percent over the past six months and could fall further to under 10 percent over the next 12 months if prices remain flat, Standard Chartered Plc analysts led by Regina Lim said in a note to clients in September.
Singapore Land Ltd., (SL) Wheelock Properties (Singapore) Ltd., Wing Tai Holdings Ltd. and Keppel Land Ltd. are the most exposed to margin compression based on land purchases made over the past 12 months, according to the note.
‘Main Culprit’
Wheelock could make a net profit of less than 5 percent on a condominium project at Ang Mo Kio, in the northeast of the island-state, Standard Chartered’s Lim said in a separate note to clients in January.
“Rising land prices are the main culprit for margin compression.” Lim said in the September note.
Most Singaporeans live in government-backed housing. Under first Prime Minister Lee Kuan Yew, the city was transformed from a colonial backwater during its independence in 1965 into one of Asia’s most prosperous nations. Public housing was a priority of Lee’s. His government built modern apartments where 82 percent of Singaporeans now live, according to the Housing & Development Board’s website.
Singapore has been seeking to combat property speculation since 2009 as record home prices amid low interest rates raised concerns of a housing bubble. The government unveiled new rules in June governing how financial institutions grant property loans to individuals.
At the same time, the government is limiting the supply of land 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, according to Nicholas Mak, executive director and head of research at SLP International Property Consultants.
Cutting Supply
The government will cut sales of residential plots by 18 percent for the first half from the six months ended December, according to a statement from URA on Dec. 18. 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, when 10,500 units were made available. Of that total, the planned supply for private residential units will drop 44 percent in the period.
The property market is stabilizing, the central bank said on Jan. 15. Fourth-quarter home prices slid 0.9 percent, trimming annual gains to the smallest since 2008, government data last month showed. Home sales fell in January, marking the slowest start to the year since 2009, as developers sold fewer projects after the property curbs crimped demand, a government report showed on Feb. 17.
Curb Outlook
Singapore may start easing some of the “short-term” measures such as stamp duties or taxes for homebuyers if home prices fall between 5 percent and 10 percent, CapitaLand’s Lim said in an interview yesterday, adding that it’s his personal view that conditions were not yet in place for the measures to be loosened.
For developers, recovery in demand would be a prerequisite to avoid further compression of profit margins, said SLP’s Mak.
“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.”
Singapore’s Soaring Land Prices ‘Suicidal’ for Developers
By Pooja Thakur Feb 20, 2014 10:12 AM GMT+0800
Billionaire developer Kwek Leng Beng said last year that skyrocketing prices and restrictive rules made buying residential land in Singapore “suicidal.” That hasn’t stopped international developers from rushing in.
Land prices in some parts of the island-state are climbing at three times the pace of apartment costs, with plot values rising by an average 30 percent per year since early 2011, according to property broker Chesterton Singapore Pte, which used government auction data. Singapore’s fourth-quarter home prices slid for the first time in almost two years, as property curbs cooled values in the Southeast Asian city.
“The increase in land prices has had a tremendous impact on developers’ profit margins,” said Donald Han, managing director of Chesterton’s Singapore unit. “Developers that used to enjoy margins in excess of 20 percent will now have to contend with narrower returns.”
Builders with international backing such as Kingsford Development Pte and MCC Land (Singapore) Pte have driven the gains as they sought to benefit from home prices that have jumped 61 percent since mid-2009. Land prices are squeezing their profits, while the city, ranked by Knight Frank LLP as the most-expensive to buy a luxury home in Asia after Hong Kong, has introduced measures that limit mortgages, require higher down payments and impose new taxes to tamp housing inflation.
Profit margins have narrowed to 10 percent from as much as 20 percent as recently as three years ago, according to broker CBRE Group Inc. That’s hammered property stocks in Singapore, which have declined 1.1 percent this year, extending their 9.7 percent drop in 2013, according to the FTSE Strait Times Real Estate Index.
‘Potent Trend’
While developers are expecting prices to fall due to the measures, that isn’t stopping them from buying more land.
CapitaLand Ltd. (CAPL), Southeast Asia’s biggest developer, said yesterday that it will “continue to replenish landbank” in Singapore through government auctions and private sales.
Home prices are expected to moderate this year because of the government’s property measures, said Chief Executive Officer Lim Ming Yan, adding that some of the curbs may be eased if housing values fall as much as 10 percent.
CapitaLand’s operating profit totaled S$527.7 million ($417.6 million) in the year ended Dec. 31, missing the UOB Kay Hian’s full-year expectations. It had 3.4 million square feet of buildable area as of June, according to a July 25 presentation.
“Recent bids are indicative of high competition for landbank amongst developers as they continue to bid aggressively to replenish their declining inventories despite a bleak outlook for the property prices,” said Vikrant Pandey, an analyst at UOB Kay Hian Pte in Singapore.
‘Bidding Aggressively’
City Developments Ltd. (CIT), run by Kwek, has declined 18 percent in the past year. The island-state’s second-biggest developer reported in November that third-quarter income fell 10 percent, adding that builders are beginning to cut prices for existing and new projects and accept lower profit margins.
Kwek 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, also are entering the real estate development field, bidding aggressively to secure land for development, while sacrificing their profit margins in construction,” the company said in the earnings statement in November. “This is a very potent trend that may affect the industry in the medium-to-long run.”
Suburban Land
City Developments declined to comment further before its earnings on Feb. 27. The company’s landbank in Singapore as of June was 1.2 million square feet on which it can build 3.5 million square feet, according to a presentation on Aug. 6.
A plot in Bukit Merah, a residential area carved out of a hill about 5 kilometers (3.1 miles) from the central business district, sold for S$1,162 ($921) per square foot of maximum buildable floor area in April 2013, according to data from the Urban Redevelopment Authority. That’s a 20 percent increase from an auction in the same area four months earlier and almost double the price recorded in 2007.
Some of the biggest land price increases have been for plots in Upper Serangoon in the east and Tampines, near Singapore’s Changi Airport, as well as in Bukit Merah and Alexandra. These former industrial areas now host car dealerships and residential apartment buildings close to the city’s center.
Foreign Bidders
Bidding at auctions, especially those in which foreign developers took part, drove prices up in the areas by 32 percent and 39 percent annually respectively in the three years since early 2011. Over the same period, prices of homes built on the sites increased only 7 percent per annum, Chesterton’s Han said.
Land prices have almost doubled in the past six years in suburban areas such as Tampines, named after a forest of ironwood trees, Clementi, in the west near the National University of Singapore, and Jurong West, known for its bird park, URA’s auction data showed.
Kingsford Development, a closely held Chinese developer based in the northern city of Shenyang, emerged as the top bidder for two land plots in the Serangoon area in the island’s northeast where Little India is located. The company bid S$522 per square foot in December, according to data compiled by Chesterton, based on URA’s auctions.
That compares with the S$291.39 per square foot winning bid by Singapore developer Allgreen Properties Ltd. in September 2011 in the same neighborhood, Chesterton said. The average annual increases in the area are 40 percent.
MCC Land
MCC Land, a unit of Metallurgical Corp. of China Ltd., placed the highest offer for a plot in Tampines, an area to the east of the city center, paying S$562 per square foot. The bid was about 34 percent 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.
Developers’ profit margins have declined 50 percent over the past six months and could fall further to under 10 percent over the next 12 months if prices remain flat, Standard Chartered Plc analysts led by Regina Lim said in a note to clients in September.
Singapore Land Ltd., (SL) Wheelock Properties (Singapore) Ltd., Wing Tai Holdings Ltd. and Keppel Land Ltd. are the most exposed to margin compression based on land purchases made over the past 12 months, according to the note.
‘Main Culprit’
Wheelock could make a net profit of less than 5 percent on a condominium project at Ang Mo Kio, in the northeast of the island-state, Standard Chartered’s Lim said in a separate note to clients in January.
“Rising land prices are the main culprit for margin compression.” Lim said in the September note.
Most Singaporeans live in government-backed housing. Under first Prime Minister Lee Kuan Yew, the city was transformed from a colonial backwater during its independence in 1965 into one of Asia’s most prosperous nations. Public housing was a priority of Lee’s. His government built modern apartments where 82 percent of Singaporeans now live, according to the Housing & Development Board’s website.
Singapore has been seeking to combat property speculation since 2009 as record home prices amid low interest rates raised concerns of a housing bubble. The government unveiled new rules in June governing how financial institutions grant property loans to individuals.
At the same time, the government is limiting the supply of land 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, according to Nicholas Mak, executive director and head of research at SLP International Property Consultants.
Cutting Supply
The government will cut sales of residential plots by 18 percent for the first half from the six months ended December, according to a statement from URA on Dec. 18. 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, when 10,500 units were made available. Of that total, the planned supply for private residential units will drop 44 percent in the period.
The property market is stabilizing, the central bank said on Jan. 15. Fourth-quarter home prices slid 0.9 percent, trimming annual gains to the smallest since 2008, government data last month showed. Home sales fell in January, marking the slowest start to the year since 2009, as developers sold fewer projects after the property curbs crimped demand, a government report showed on Feb. 17.
Curb Outlook
Singapore may start easing some of the “short-term” measures such as stamp duties or taxes for homebuyers if home prices fall between 5 percent and 10 percent, CapitaLand’s Lim said in an interview yesterday, adding that it’s his personal view that conditions were not yet in place for the measures to be loosened.
For developers, recovery in demand would be a prerequisite to avoid further compression of profit margins, said SLP’s Mak.
“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.”