reporter2
20-07-22, 10:26
Large GLS residential sites may help tame land prices, but also heighten risks for developers
Jul 07, 2022
WHEN the second half 2022 Government Land Sales (GLS) programme was unveiled on Jun 7, observers were generally not surprised that the authorities had raised the supply of private housing units (including executive condominium or EC units) from the confirmed-list sites by 26 per cent versus H1.
Developers’ unsold inventory is dwindling, and home prices are rising — making an increase prudent.
What did surprise some observers was the introduction of 2 mega sites: the maiden GLS site in Marina South that can generate nearly 800 private homes, and a commercial and residential site in Tampines Avenue 11 that can yield 1,190 private homes.
https://i.imgur.com/unnghjG.png
https://i.imgur.com/H2pSFm6.png
The announcement came just a few days after the state tender closed for a mega site in Dunman Road (for 1,040 private homes), fetching just 2 bids.
What was the government’s intention when it decided to inject the 2 large sites in the GLS confirmed list, where sites are released according to schedule, regardless of demand? Property consultants expect each of these sites to fetch about S$1 billion or more. Given the large total value, the sites may attract only the bigger developers. Why did the authorities choose not to carve these 2 sites into smaller parcels instead, which would have created opportunities for a bigger pool of land-starved developers to participate in state land tenders?
From an urban planning perspective, there are merits to the plan. Larger sites allow for more comprehensive development than if the site were to be subdivided into smaller plots, which then end up with 3 or 4 parties each envisioning their own schemes and creating a hotchpotch of uncoordinated concepts and designs.
Having a couple of mega sites anchor the confirmed list of the H2 GLS programme would also mean less competition for these sites, possibly mitigating land price escalation.
As Citi analyst Brandon Lee wrote in a June report, however, this could also result in the “small- to mid-sized developers vying aggressively for the remaining 4 (plots on the H2 confirmed list), which should continue to keep overall land prices high”.
Had the government carved out the Marina South and Tampines sites into, say, 2 to 4 smaller plots each, it could perhaps have offered 8 to 10 sites to generate private homes (including EC units) on the H2 confirmed list, instead of just 6.
This could satiate the hunger of a wider pool of developers, and “moderate rising land prices, which in turn will result in ever-increasing property launch prices”, said veteran property consultant Nicholas Mak of ERA Realty Network.
In any case, while a big site tends to draw fewer bidders, there is no guarantee that there won’t be a bidding frenzy.
With the Dunman Road tender, the winning bid — S$1.284 billion (or S$1,350.50 per square foot per plot ratio) from a tie-up between SingHaiyi Group and Haiyi Holdings — was 20 per cent above the only other bid (from City Developments : C09 +1.05%in partnership with 3 fellow Hong Leong Group Singapore stablemates).
Also, selling ultra-large sites at a time of uncertainty on multiple fronts creates additional risk for the property market as well as developers.
Interest rates are rising fast. There is talk of recession hitting several countries in the next couple of years. And construction costs have continued to increase due to continuing supply-chain disruptions and rising energy prices following Russia’s invasion of Ukraine.
These factors affect all developers. Those bidding for large residential sites will face heightened risks. Following last December’s property cooling measures, housing developers will have to pay a 35 per cent additional buyer’s stamp duty (ABSD) on their residential site purchase price (with interest) if they fail to complete construction of a new project and sell all its residential units within 5 years. The risk increases for big projects with more units.
These days, profit margins for most residential developers are in the low-teens. Land cost typically makes up 60-70 per cent of a residential project’s total development cost. A 35 per cent ABSD would wipe out a developer’s profit on a project. And, a large project hit with a cashflow problem could trigger a domino effect on the developer’s other projects or businesses — and the rest of the market.
Imagine if the developer that pays S$1 billion for, say, the Marina South or Tampines mega site ends up having to fork out the 35 per cent land ABSD for failing to dispose of all the residential units within the stipulated deadline. That would work out to S$350 million, and that’s not even taking into account the interest of 5 per cent per annum.
Among the listed property groups that participate in GLS tenders — such as City Developments : C09 +1.05%, UOL : U14 +0.41%, GuocoLand : F17 +1.27%, Wing Tai : W05 +0.59% and Chip Eng Seng : C29 -0.78%— how many have annual operating profit after taxes and minority interests of S$300 million to S$400 million these days?
For some companies, the ABSD land penalty would be enough to wipe out all operating profit (excluding fair-value gains from divestments or revaluations of properties). There would be implications for other parties in the development chain, including the project’s main building contractor, its subcontractors, material suppliers and the consultants. End-unit buyers in the project may also be hit with delays in the completion and handover of their units.
Yes, developers can form consortiums to bid for mega sites to mitigate risk. But they would still have exposure for their proportionate share in projects adversely affected.
In 1981, Indonesian businessman Hendra Rahardja’s Superland Development acquired 2 adjacent land parcels totalling about 8 hectares in the Marina Centre area under the 1980 GLS Programme.
He hoped to build 2 futuristic hotel towers (with some 2,500 rooms) and a convention centre. The groundbreaking was held in May 1982.
But Rahardja soon became a victim of the hotel and property glut, and the project was hit with cashflow problems. When his banks turned off the credit taps, work on his Rahardja Centre came to a halt.
That was in early 1984, before the mid-1980s recession. Over the next 5 years, all that remained of the site were 2 big pits marking the excavation for piling works — until Pontiac Land took over the site, teaming up with Kajima Corporation to develop it into the Millenia Singapore integrated office, retail and hotel project.
The Rahardja Centre project did not include residential units, and there was no ABSD back then. But its story is a grim reminder of the risks that come with developing mega sites, especially in times of uncertainty and if we are heading into a perfect storm.
Given the current uncertainty on the geopolitical and macro-economic fronts, from a risk management perspective, it might have been better for the overall stability of the Singapore property market if the authorities were to cut some larger residential sites into smaller plots.
https://www.businesstimes.com.sg/opinion/large-gls-residential-sites-may-help-tame-land-prices-but-also-heighten-risks-for-developers
Jul 07, 2022
WHEN the second half 2022 Government Land Sales (GLS) programme was unveiled on Jun 7, observers were generally not surprised that the authorities had raised the supply of private housing units (including executive condominium or EC units) from the confirmed-list sites by 26 per cent versus H1.
Developers’ unsold inventory is dwindling, and home prices are rising — making an increase prudent.
What did surprise some observers was the introduction of 2 mega sites: the maiden GLS site in Marina South that can generate nearly 800 private homes, and a commercial and residential site in Tampines Avenue 11 that can yield 1,190 private homes.
https://i.imgur.com/unnghjG.png
https://i.imgur.com/H2pSFm6.png
The announcement came just a few days after the state tender closed for a mega site in Dunman Road (for 1,040 private homes), fetching just 2 bids.
What was the government’s intention when it decided to inject the 2 large sites in the GLS confirmed list, where sites are released according to schedule, regardless of demand? Property consultants expect each of these sites to fetch about S$1 billion or more. Given the large total value, the sites may attract only the bigger developers. Why did the authorities choose not to carve these 2 sites into smaller parcels instead, which would have created opportunities for a bigger pool of land-starved developers to participate in state land tenders?
From an urban planning perspective, there are merits to the plan. Larger sites allow for more comprehensive development than if the site were to be subdivided into smaller plots, which then end up with 3 or 4 parties each envisioning their own schemes and creating a hotchpotch of uncoordinated concepts and designs.
Having a couple of mega sites anchor the confirmed list of the H2 GLS programme would also mean less competition for these sites, possibly mitigating land price escalation.
As Citi analyst Brandon Lee wrote in a June report, however, this could also result in the “small- to mid-sized developers vying aggressively for the remaining 4 (plots on the H2 confirmed list), which should continue to keep overall land prices high”.
Had the government carved out the Marina South and Tampines sites into, say, 2 to 4 smaller plots each, it could perhaps have offered 8 to 10 sites to generate private homes (including EC units) on the H2 confirmed list, instead of just 6.
This could satiate the hunger of a wider pool of developers, and “moderate rising land prices, which in turn will result in ever-increasing property launch prices”, said veteran property consultant Nicholas Mak of ERA Realty Network.
In any case, while a big site tends to draw fewer bidders, there is no guarantee that there won’t be a bidding frenzy.
With the Dunman Road tender, the winning bid — S$1.284 billion (or S$1,350.50 per square foot per plot ratio) from a tie-up between SingHaiyi Group and Haiyi Holdings — was 20 per cent above the only other bid (from City Developments : C09 +1.05%in partnership with 3 fellow Hong Leong Group Singapore stablemates).
Also, selling ultra-large sites at a time of uncertainty on multiple fronts creates additional risk for the property market as well as developers.
Interest rates are rising fast. There is talk of recession hitting several countries in the next couple of years. And construction costs have continued to increase due to continuing supply-chain disruptions and rising energy prices following Russia’s invasion of Ukraine.
These factors affect all developers. Those bidding for large residential sites will face heightened risks. Following last December’s property cooling measures, housing developers will have to pay a 35 per cent additional buyer’s stamp duty (ABSD) on their residential site purchase price (with interest) if they fail to complete construction of a new project and sell all its residential units within 5 years. The risk increases for big projects with more units.
These days, profit margins for most residential developers are in the low-teens. Land cost typically makes up 60-70 per cent of a residential project’s total development cost. A 35 per cent ABSD would wipe out a developer’s profit on a project. And, a large project hit with a cashflow problem could trigger a domino effect on the developer’s other projects or businesses — and the rest of the market.
Imagine if the developer that pays S$1 billion for, say, the Marina South or Tampines mega site ends up having to fork out the 35 per cent land ABSD for failing to dispose of all the residential units within the stipulated deadline. That would work out to S$350 million, and that’s not even taking into account the interest of 5 per cent per annum.
Among the listed property groups that participate in GLS tenders — such as City Developments : C09 +1.05%, UOL : U14 +0.41%, GuocoLand : F17 +1.27%, Wing Tai : W05 +0.59% and Chip Eng Seng : C29 -0.78%— how many have annual operating profit after taxes and minority interests of S$300 million to S$400 million these days?
For some companies, the ABSD land penalty would be enough to wipe out all operating profit (excluding fair-value gains from divestments or revaluations of properties). There would be implications for other parties in the development chain, including the project’s main building contractor, its subcontractors, material suppliers and the consultants. End-unit buyers in the project may also be hit with delays in the completion and handover of their units.
Yes, developers can form consortiums to bid for mega sites to mitigate risk. But they would still have exposure for their proportionate share in projects adversely affected.
In 1981, Indonesian businessman Hendra Rahardja’s Superland Development acquired 2 adjacent land parcels totalling about 8 hectares in the Marina Centre area under the 1980 GLS Programme.
He hoped to build 2 futuristic hotel towers (with some 2,500 rooms) and a convention centre. The groundbreaking was held in May 1982.
But Rahardja soon became a victim of the hotel and property glut, and the project was hit with cashflow problems. When his banks turned off the credit taps, work on his Rahardja Centre came to a halt.
That was in early 1984, before the mid-1980s recession. Over the next 5 years, all that remained of the site were 2 big pits marking the excavation for piling works — until Pontiac Land took over the site, teaming up with Kajima Corporation to develop it into the Millenia Singapore integrated office, retail and hotel project.
The Rahardja Centre project did not include residential units, and there was no ABSD back then. But its story is a grim reminder of the risks that come with developing mega sites, especially in times of uncertainty and if we are heading into a perfect storm.
Given the current uncertainty on the geopolitical and macro-economic fronts, from a risk management perspective, it might have been better for the overall stability of the Singapore property market if the authorities were to cut some larger residential sites into smaller plots.
https://www.businesstimes.com.sg/opinion/large-gls-residential-sites-may-help-tame-land-prices-but-also-heighten-risks-for-developers