New Reporter
03-05-23, 11:04
Having a constant pipeline beats a start-stop strategy for housing developers
Apr 24, 2023
Leslie Yee
WHILE housing prices here continue to rise, developers appear to be trigger-shy when buying land.
In the first quarter of 2023, private home prices rose 3.2 per cent from the previous quarter and 11.3 per cent year on year, according to flash estimates by the Urban Redevelopment Authority.
Yet, this year’s maiden state land tender for a 99-year leasehold private housing site at Lentor Gardens in the Yio Chu Kang area drew just one bid.
GuocoLand and Hong Leong Holdings’ Intrepid Investments jointly secured this site for S$486.8 million, or nearly S$985 per square foot per plot ratio (psf ppr).
The new development could yield around 533 homes, and 6,458 square feet of childcare facilities.
https://i.imgur.com/AXUoIRj.png
In contrast, nine bids were submitted for the state tender for the nearby plot that houses Lentor Modern, which GuocoLand secured in July 2021.
The price psf ppr for the Lentor Gardens site is the lowest fetched among the five sites in Lentor Hills Estate for which state tenders have closed since July 2021. It is about 11 per cent lower than the winning bid for the Lentor Central site, and nearly 13 per cent below that for the Lentor Hills Road (Parcel B) plot, at the tender which closed in September 2022.
Instead of popping the champagne in celebration, are nerves jangling in the boardrooms of GuocoLand and Hong Leong? Directors may wonder why nobody else bid for a housing site in the suburbs, where demand is often largely supported by locals buying for owner occupation.
Hibernate
Perhaps, housing developers are wise to keep their powder dry. Response to some new launches this year has been weaker versus some launches in 2022. And housing demand could falter if a slowing economy leads to job market weakness.
Developers have also been hit by a change in the definition of floor area, which could eat into saleable area of projects, and an increase in the buyer’s stamp duty.
Crucially, interest rates are rising and may stay high for some time. Versus early 2022, the three-month compounded Singapore Overnight Rate Average is up by around 340 basis points. Many private home buyers are seeing their affordability crimped by pricier home loans.
Developers are also hurt by higher debt costs. Assuming an average of S$250 million of debt is drawn down for three years on a project that costs S$500 million, financing costs will rise by about S$26 million when interest rates jump by 340 basis points. In this case, gross development cost increases by over 5 per cent.
Maybe, housing developers are wise to shut shop temporarily and not undertake new projects here until conditions turn more favourable.
Think about it. A property group which earns recurrent income from owning investment property can enter hibernation mode in property development for several years. Monies earned from investment properties can help cover overheads and pay dividends during this period.
The said group can resume buying land some years later if housing demand starts to heat up and interest rates are lower. After all, it may take a fairly quick 12 to 18 months between buying a housing site at a state tender and launching units for sale.
Might adopting a start-stop strategy in land acquisition of housing sites here trump that of consistently replenishing residential development land bank?
Housing developers bear high risks. If a developer fails to complete the project as well as sell all homes within five years, it faces paying a hefty amount of additional buyer’s stamp duty. Hence, buying any housing development site is nerve-racking.
Project pipeline
Nonetheless, I think consistently buying land, so there is a constant pipeline of housing projects, is a viable strategy. This appears to be a path taken by groups such as City Developments Ltd (CDL), GuocoLand and UOL Group.
First, while Singapore is small and many residents buy public housing flats, the private housing segment represents a large addressable market.
Should developers sell 8,000 to 9,000 new condominium units a year at around S$2 million to S$2.2 million per unit, this market is worth S$16 billion to S$20 billion annually.
Moreover, sound fundamentals underpin private housing demand. If Singapore’s economy grows and people get richer, there will be continuous demand for high-quality housing.
Helped by rising income and crystallising profits from owning Housing and Development Board (HDB) flats that were bought from the HDB, many people can and will pursue their private housing aspirations.
Second, developers who are active in the local private housing market can get a competitive edge.
Much of the work in any project is generally outsourced, be it to architects, builders, sales agents and others.
Nonetheless, there is value to a property group from having an experienced in-house residential development team. And such a team can only be built up if the developer is constantly working on projects.
A developer with a strong team may do better at project conceptualisation, managing service providers and understanding buyer behaviour. Also, a developer builds up a track record from doing a slew of projects. All the above could lead to achieving better sales rates and higher selling prices.
Third, timing the housing market here to perfection is tough. Occasionally, the government swiftly and unexpectedly introduces property cooling measures.
Still, if home prices generally rise, a developer with various projects at different stages of development should do fine.
Profit margins across projects could vary, depending largely on whether a site was bought amid intense competition or otherwise; or the strength of buying sentiment at the time of a project’s launch. However, on average, the said developer should achieve decent returns.
Also, building homes here offers home-grown developers the advantages of avoiding foreign currency risk and transparent regulations.
Expectations of homebuyers are rising. Developers who are constantly learning from doing projects will likely be best able to meet higher and changing expectations.
A sole bidder for a site will not get the satisfaction of winning by outbidding others, hopefully by a whisker. But, even as competitors hibernate, one can be right to put money to work by buying land here.
https://www.businesstimes.com.sg/opinion-features/having-constant-pipeline-beats-start-stop-strategy-housing-developers
Apr 24, 2023
Leslie Yee
WHILE housing prices here continue to rise, developers appear to be trigger-shy when buying land.
In the first quarter of 2023, private home prices rose 3.2 per cent from the previous quarter and 11.3 per cent year on year, according to flash estimates by the Urban Redevelopment Authority.
Yet, this year’s maiden state land tender for a 99-year leasehold private housing site at Lentor Gardens in the Yio Chu Kang area drew just one bid.
GuocoLand and Hong Leong Holdings’ Intrepid Investments jointly secured this site for S$486.8 million, or nearly S$985 per square foot per plot ratio (psf ppr).
The new development could yield around 533 homes, and 6,458 square feet of childcare facilities.
https://i.imgur.com/AXUoIRj.png
In contrast, nine bids were submitted for the state tender for the nearby plot that houses Lentor Modern, which GuocoLand secured in July 2021.
The price psf ppr for the Lentor Gardens site is the lowest fetched among the five sites in Lentor Hills Estate for which state tenders have closed since July 2021. It is about 11 per cent lower than the winning bid for the Lentor Central site, and nearly 13 per cent below that for the Lentor Hills Road (Parcel B) plot, at the tender which closed in September 2022.
Instead of popping the champagne in celebration, are nerves jangling in the boardrooms of GuocoLand and Hong Leong? Directors may wonder why nobody else bid for a housing site in the suburbs, where demand is often largely supported by locals buying for owner occupation.
Hibernate
Perhaps, housing developers are wise to keep their powder dry. Response to some new launches this year has been weaker versus some launches in 2022. And housing demand could falter if a slowing economy leads to job market weakness.
Developers have also been hit by a change in the definition of floor area, which could eat into saleable area of projects, and an increase in the buyer’s stamp duty.
Crucially, interest rates are rising and may stay high for some time. Versus early 2022, the three-month compounded Singapore Overnight Rate Average is up by around 340 basis points. Many private home buyers are seeing their affordability crimped by pricier home loans.
Developers are also hurt by higher debt costs. Assuming an average of S$250 million of debt is drawn down for three years on a project that costs S$500 million, financing costs will rise by about S$26 million when interest rates jump by 340 basis points. In this case, gross development cost increases by over 5 per cent.
Maybe, housing developers are wise to shut shop temporarily and not undertake new projects here until conditions turn more favourable.
Think about it. A property group which earns recurrent income from owning investment property can enter hibernation mode in property development for several years. Monies earned from investment properties can help cover overheads and pay dividends during this period.
The said group can resume buying land some years later if housing demand starts to heat up and interest rates are lower. After all, it may take a fairly quick 12 to 18 months between buying a housing site at a state tender and launching units for sale.
Might adopting a start-stop strategy in land acquisition of housing sites here trump that of consistently replenishing residential development land bank?
Housing developers bear high risks. If a developer fails to complete the project as well as sell all homes within five years, it faces paying a hefty amount of additional buyer’s stamp duty. Hence, buying any housing development site is nerve-racking.
Project pipeline
Nonetheless, I think consistently buying land, so there is a constant pipeline of housing projects, is a viable strategy. This appears to be a path taken by groups such as City Developments Ltd (CDL), GuocoLand and UOL Group.
First, while Singapore is small and many residents buy public housing flats, the private housing segment represents a large addressable market.
Should developers sell 8,000 to 9,000 new condominium units a year at around S$2 million to S$2.2 million per unit, this market is worth S$16 billion to S$20 billion annually.
Moreover, sound fundamentals underpin private housing demand. If Singapore’s economy grows and people get richer, there will be continuous demand for high-quality housing.
Helped by rising income and crystallising profits from owning Housing and Development Board (HDB) flats that were bought from the HDB, many people can and will pursue their private housing aspirations.
Second, developers who are active in the local private housing market can get a competitive edge.
Much of the work in any project is generally outsourced, be it to architects, builders, sales agents and others.
Nonetheless, there is value to a property group from having an experienced in-house residential development team. And such a team can only be built up if the developer is constantly working on projects.
A developer with a strong team may do better at project conceptualisation, managing service providers and understanding buyer behaviour. Also, a developer builds up a track record from doing a slew of projects. All the above could lead to achieving better sales rates and higher selling prices.
Third, timing the housing market here to perfection is tough. Occasionally, the government swiftly and unexpectedly introduces property cooling measures.
Still, if home prices generally rise, a developer with various projects at different stages of development should do fine.
Profit margins across projects could vary, depending largely on whether a site was bought amid intense competition or otherwise; or the strength of buying sentiment at the time of a project’s launch. However, on average, the said developer should achieve decent returns.
Also, building homes here offers home-grown developers the advantages of avoiding foreign currency risk and transparent regulations.
Expectations of homebuyers are rising. Developers who are constantly learning from doing projects will likely be best able to meet higher and changing expectations.
A sole bidder for a site will not get the satisfaction of winning by outbidding others, hopefully by a whisker. But, even as competitors hibernate, one can be right to put money to work by buying land here.
https://www.businesstimes.com.sg/opinion-features/having-constant-pipeline-beats-start-stop-strategy-housing-developers