New Reporter
17-03-23, 16:40
Ho Bee hasn’t clinched a Singapore residential plot in over a decade. That may be a good thing
Mar 16, 2023
HO Bee Land has been achieving relatively high return on equity (ROE) of at least 7.5 per cent in eight out of the past 10 years.
This can be credited to the group’s strategy of building up a strong recurring income stream. Ho Bee’s rental income has grown from S$14.4 million in 2012 to S$259.7 million in 2022, largely from its UK and Singapore office assets. The mainboard-listed group developed The Metropolis office project on a site next to Buona Vista MRT station that it clinched in 2010. In London, it owns eight office assets, bought between 2014 and 2022.
The group was a stock market darling from 2006 to 2010, reaping bumper profits from developing homes in the Sentosa Cove waterfront residential district. But it has not acquired any new residential development sites in Singapore since 2008, when it was part of a joint venture that won the last condo development site in Sentosa Cove.
That may not be such a bad thing, given how developers’ margins on Singapore private condo projects have fallen.
Pre-tax profit margins are now mostly around 8-13 per cent. They used to be around 15-20 per cent, or even more before the total debt servicing ratio (TDSR) framework was introduced in late June 2013 to cap how much homebuyers could borrow.
Back in the early 1990s, when property prices were skyrocketing amid a speculative buying frenzy, developers’ profit margins even went as high as 100 per cent.
In the past couple of years, however, pandemic-driven supply chain disruptions have pushed up construction costs. A rising interest rate environment is not helping. Commission rates that developers have to fork out to property agents have also been climbing steadily.
ABSD conundrum
Then there’s the additional buyer’s stamp duty (ABSD) on residential property purchases, rolled out in December 2011. Analysts say this has curtailed developers’ ability to raise selling prices, while also having the unintended effect of pushing up private residential land bids.
For housing developers to qualify for upfront remission of the ABSD (the current rate is 35 per cent) on residential site purchases, they have to complete and sell all units of a development within five years.
Developers rush to sell their projects to meet this deadline, then feel famished for land and start bidding aggressively for development sites. So, what has emerged is a churning pattern in which developers race, often together, to exhaust their unsold inventory, before starting a fresh round of land bingeing. This tends to perpetuate the cycle of high land bids and thin margins.
With the danger of ABSD payment hanging over them like a sword of Damocles, developers don’t have much leeway to time their launches to maximise profits.
According to some industry watchers, developers these days decide on their launch price with a target to clear at least half of the project’s units during the initial launch weekend. Some aim to reach the 60-70 per cent mark within one or two months of launch. A developer that manages to move, say, 30 per cent of units at launch weekend may be left under a cloud of uncertainty. Among other things, it would worry about competition from newer projects, the risk of further cooling measures if the market heats up or, conversely, if the economy dives, the impact that would have on potential buyers.
Assuming a developer is working with a 10 per cent profit margin and the land price makes up 70 per cent of the total development cost, a 35 per cent ABSD payment for failure to sell out the development within the stipulated deadline would push the project into the red.
Adding to the margin pressure for residential developers is the two-percentage-point hike in the buyer’s stamp duty rate from Feb 15, 2023. Furthermore, revisions in definitions of floor area that will take effect on Jun 1 this year will eat into developers’ saleable area and margins for condo projects. As interest rates continue to rise, developers will also have to consider whether some homebuyers will take a pause and delay their purchases.
Less risky model in Australia
Avoiding that ultra-competitive environment, Ho Bee has focused its residential development energies in Australia. It is buying big land parcels and putting in infrastructure such as roads, bridges, water and electricity. It then carves out smaller plots for sale to local Australians to build their own landed homes.
Since 2019, Ho Bee has acquired large land parcels in Queensland and Victoria. In total, it would be able to create nearly 5,000 smaller land lots for sale. Market watchers estimate the pre-tax profit margin from this model at around 18-25 per cent, which would be similar to what Ho Bee could earn from developing high-rise condos in Australia.
Unlike with condo development, however, Ho Bee incurs less risk as a developer of master-planned residential communities.
In Australia, property buyers make a 10 per cent down payment to the developer. The balance is payable only upon completion.
If property prices fall significantly in the time between sale and completion – this could be a span of three to five years for a condo development – there is a high risk of the earlier buyers walking away.
In the sale of a land lot, completion takes place much sooner – in a year’s time – reducing the risk to the developer.
All things considered, Ho Bee’s lack of success in finding new Singapore residential development sites may have turned out to be a blessing in disguise.
https://www.businesstimes.com.sg/opinion-features/columns/ho-bee-hasnt-clinched-singapore-residential-plot-over-decade-may-be-good
Mar 16, 2023
HO Bee Land has been achieving relatively high return on equity (ROE) of at least 7.5 per cent in eight out of the past 10 years.
This can be credited to the group’s strategy of building up a strong recurring income stream. Ho Bee’s rental income has grown from S$14.4 million in 2012 to S$259.7 million in 2022, largely from its UK and Singapore office assets. The mainboard-listed group developed The Metropolis office project on a site next to Buona Vista MRT station that it clinched in 2010. In London, it owns eight office assets, bought between 2014 and 2022.
The group was a stock market darling from 2006 to 2010, reaping bumper profits from developing homes in the Sentosa Cove waterfront residential district. But it has not acquired any new residential development sites in Singapore since 2008, when it was part of a joint venture that won the last condo development site in Sentosa Cove.
That may not be such a bad thing, given how developers’ margins on Singapore private condo projects have fallen.
Pre-tax profit margins are now mostly around 8-13 per cent. They used to be around 15-20 per cent, or even more before the total debt servicing ratio (TDSR) framework was introduced in late June 2013 to cap how much homebuyers could borrow.
Back in the early 1990s, when property prices were skyrocketing amid a speculative buying frenzy, developers’ profit margins even went as high as 100 per cent.
In the past couple of years, however, pandemic-driven supply chain disruptions have pushed up construction costs. A rising interest rate environment is not helping. Commission rates that developers have to fork out to property agents have also been climbing steadily.
ABSD conundrum
Then there’s the additional buyer’s stamp duty (ABSD) on residential property purchases, rolled out in December 2011. Analysts say this has curtailed developers’ ability to raise selling prices, while also having the unintended effect of pushing up private residential land bids.
For housing developers to qualify for upfront remission of the ABSD (the current rate is 35 per cent) on residential site purchases, they have to complete and sell all units of a development within five years.
Developers rush to sell their projects to meet this deadline, then feel famished for land and start bidding aggressively for development sites. So, what has emerged is a churning pattern in which developers race, often together, to exhaust their unsold inventory, before starting a fresh round of land bingeing. This tends to perpetuate the cycle of high land bids and thin margins.
With the danger of ABSD payment hanging over them like a sword of Damocles, developers don’t have much leeway to time their launches to maximise profits.
According to some industry watchers, developers these days decide on their launch price with a target to clear at least half of the project’s units during the initial launch weekend. Some aim to reach the 60-70 per cent mark within one or two months of launch. A developer that manages to move, say, 30 per cent of units at launch weekend may be left under a cloud of uncertainty. Among other things, it would worry about competition from newer projects, the risk of further cooling measures if the market heats up or, conversely, if the economy dives, the impact that would have on potential buyers.
Assuming a developer is working with a 10 per cent profit margin and the land price makes up 70 per cent of the total development cost, a 35 per cent ABSD payment for failure to sell out the development within the stipulated deadline would push the project into the red.
Adding to the margin pressure for residential developers is the two-percentage-point hike in the buyer’s stamp duty rate from Feb 15, 2023. Furthermore, revisions in definitions of floor area that will take effect on Jun 1 this year will eat into developers’ saleable area and margins for condo projects. As interest rates continue to rise, developers will also have to consider whether some homebuyers will take a pause and delay their purchases.
Less risky model in Australia
Avoiding that ultra-competitive environment, Ho Bee has focused its residential development energies in Australia. It is buying big land parcels and putting in infrastructure such as roads, bridges, water and electricity. It then carves out smaller plots for sale to local Australians to build their own landed homes.
Since 2019, Ho Bee has acquired large land parcels in Queensland and Victoria. In total, it would be able to create nearly 5,000 smaller land lots for sale. Market watchers estimate the pre-tax profit margin from this model at around 18-25 per cent, which would be similar to what Ho Bee could earn from developing high-rise condos in Australia.
Unlike with condo development, however, Ho Bee incurs less risk as a developer of master-planned residential communities.
In Australia, property buyers make a 10 per cent down payment to the developer. The balance is payable only upon completion.
If property prices fall significantly in the time between sale and completion – this could be a span of three to five years for a condo development – there is a high risk of the earlier buyers walking away.
In the sale of a land lot, completion takes place much sooner – in a year’s time – reducing the risk to the developer.
All things considered, Ho Bee’s lack of success in finding new Singapore residential development sites may have turned out to be a blessing in disguise.
https://www.businesstimes.com.sg/opinion-features/columns/ho-bee-hasnt-clinched-singapore-residential-plot-over-decade-may-be-good