New Reporter
17-08-23, 09:25
As risks heighten, it makes sense for developers to collaborate, not compete, when buying land
Aug 17, 2023
TO SHARE risks and expertise in the face of the increasingly challenging Singapore residential property development business, some new partnerships between developers have surfaced at recent Government Land Sales (GLS) tenders.
In their first-ever collaboration, mainboard-listed UOL Group : U14 +0.31% (controlled by banking and property billionaire Wee Cho Yaw) teamed up with CapitaLand Development (part of Temasek Holdings) to place the S$1.21 billion winning bid at a state tender in June for an integrated commercial and residential development site in Tampines Avenue 11.
UOL and its listed subsidiary Singapore Land : U06 0% took a half stake in the joint venture (JV), with CapitaLand Development holding the other 50 per cent.
At a GLS tender that closed in July, a tie-up between City Developments : C09 -0.45% and Frasers Property : TQ5 -1.2% offered S$828 million for a private housing site in Jalan Tembusu in District 15; this was the lower of two bids the site received.
At another state tender that closed on the same day, Frasers Property also joined forces with MCL Land for the first time, bidding for an executive condominium site in Tampines Street 62.
Meanwhile, familiar partnerships continue to feature regularly at state tenders. These include JVs involving related entities (for example, Sim Lian Land and Sim Lian Development), or unrelated but long-standing partners (such as Far East Organization and Sekisui House; or Hoi Hup Realty and Sunway Developments).
Chia Siew Chuin, head of residential research at JLL Singapore, said the practice of developers collaborating through JVs to bid for and acquire GLS sites is common and has been observed in Singapore for many years, based on data since 2011.
Taking a longer timeframe, however, a seasoned property developer said that “there are more JVs bidding at tenders today than in the 1990s and the doldrums period during part of the 2000s, when land prices were low yet few were interested as private home sale prices and interest in property were equally low”.
Here are some factors why the imperative for developers to form tie-ups to bid for land has become more acute. Firstly, absolute land price quantums have escalated because of higher unit land cost in terms of per square foot per plot ratio, and with generally larger sites being put up for sale, said the developer.
This has been exacerbated by the escalation in construction costs since 2021. These trends, along with rising interest expense and a reduction in saleable area for non-landed residential projects due to changes in definitions of floor area which kicked in on Jun 1, have put pressure on the already-thin profit margins of residential developers.
Moreover, the Buyer’s Stamp Duty that developers have to pay on residential site purchases has gone up from 4 per cent to 6 per cent since Feb 15 this year.
Residential developers here don’t have much room to raise selling prices these days. In the high-end residential segment, missing from action are foreign buyers whom developers could rely on to set higher prices. This is in the aftermath of a doubling in the Additional Buyer’s Stamp Duty (ABSD) rate to 60 per cent on foreigners for any residential property purchase since Apr 27.
Acquisition costs for local investors have also gone up. ABSD rates for Singapore citizens and permanent residents buying their second and subsequent properties were also increased in late April, albeit by a more modest three to five percentage points. Further weighing on home-buying affordability are elevated financing costs.
Developers are cognisant of buyers starting to resist high prices. And with more new project launches this year, buyers have more choices to consider.
CBRE’s head of research for South-east Asia, Tricia Song, noted that with the weaker average take-up rate at new private residential property launches in 2023 relative to 2022, developers should be prepared to take a longer time to finish selling each project.
Sword of Damocles hanging over developers’ heads
Therein lies a major risk factor residential developers have had to face since the introduction of ABSD in December 2011. When housing developers buy residential land, they can seek upfront remission on ABSD, subject to conditions. These include undertaking to complete the residential project and selling all its units within five years of the site purchase. Otherwise, the developer would have to fork out the ABSD plus interest. The remittable ABSD rate for developers used to be 10 per cent when ABSD was introduced in late-2011. Today, it is 35 per cent.
With pretax profit margins on private residential projects said to range from the “high-single digit to the teens” these days, ABSD-with-interest as penalty for not selling out a project within five years would in all likelihood put it in the red. There’s no guarantee a developer will make a profit from a residential project.
Benefits of collaboration
Instead of competing with one another to firstly buy land and then find buyers for all the housing units in the project, it can make sense for developers to collaborate.
As Chia of JLL puts it, forming joint ventures to bid for GLS sites is a “strategic approach that allows developers to pool their resources, expertise and financial capabilities, especially when dealing with unique, complex, or large-scale projects”.
She added: “They can share the risks involved in land acquisition and development, as well as leverage each other’s strengths to enhance the overall quality and viability of the proposed project.” Moreover, joining forces can help developers meet the stringent eligibility criteria set by the government for certain land sales, such as concept-and-price tenders.
Chia further noted that forming JVs can help developers free up some of their own funds for other investments or developments, while still maintaining a viable stake in the project without stretching their own resources too thin.
Setting up JVs provides a valuable platform for developers to learn best practices from one another, especially when it comes to sustainability issues.
Choosing the right partner
It is also crucial to pick the right partner. Shared values and a common vision are necessary for JV partners to come together. Another criterion in selection of partners would be the strength of the relationship or friendship between the controlling shareholders or senior management of the companies forming a JV.
In some cases, a JV can comprise an operating partner that executes the project and one or more financial partners that want some skin in the game. Some partnerships are also born out of complementary strengths.
Who knows what interesting bedfellows may emerge at GLS tenders in the months to come?
https://www.businesstimes.com.sg/opinion-features/risks-heighten-it-makes-sense-developers-collaborate-not-compete-when-buying-land
Aug 17, 2023
TO SHARE risks and expertise in the face of the increasingly challenging Singapore residential property development business, some new partnerships between developers have surfaced at recent Government Land Sales (GLS) tenders.
In their first-ever collaboration, mainboard-listed UOL Group : U14 +0.31% (controlled by banking and property billionaire Wee Cho Yaw) teamed up with CapitaLand Development (part of Temasek Holdings) to place the S$1.21 billion winning bid at a state tender in June for an integrated commercial and residential development site in Tampines Avenue 11.
UOL and its listed subsidiary Singapore Land : U06 0% took a half stake in the joint venture (JV), with CapitaLand Development holding the other 50 per cent.
At a GLS tender that closed in July, a tie-up between City Developments : C09 -0.45% and Frasers Property : TQ5 -1.2% offered S$828 million for a private housing site in Jalan Tembusu in District 15; this was the lower of two bids the site received.
At another state tender that closed on the same day, Frasers Property also joined forces with MCL Land for the first time, bidding for an executive condominium site in Tampines Street 62.
Meanwhile, familiar partnerships continue to feature regularly at state tenders. These include JVs involving related entities (for example, Sim Lian Land and Sim Lian Development), or unrelated but long-standing partners (such as Far East Organization and Sekisui House; or Hoi Hup Realty and Sunway Developments).
Chia Siew Chuin, head of residential research at JLL Singapore, said the practice of developers collaborating through JVs to bid for and acquire GLS sites is common and has been observed in Singapore for many years, based on data since 2011.
Taking a longer timeframe, however, a seasoned property developer said that “there are more JVs bidding at tenders today than in the 1990s and the doldrums period during part of the 2000s, when land prices were low yet few were interested as private home sale prices and interest in property were equally low”.
Here are some factors why the imperative for developers to form tie-ups to bid for land has become more acute. Firstly, absolute land price quantums have escalated because of higher unit land cost in terms of per square foot per plot ratio, and with generally larger sites being put up for sale, said the developer.
This has been exacerbated by the escalation in construction costs since 2021. These trends, along with rising interest expense and a reduction in saleable area for non-landed residential projects due to changes in definitions of floor area which kicked in on Jun 1, have put pressure on the already-thin profit margins of residential developers.
Moreover, the Buyer’s Stamp Duty that developers have to pay on residential site purchases has gone up from 4 per cent to 6 per cent since Feb 15 this year.
Residential developers here don’t have much room to raise selling prices these days. In the high-end residential segment, missing from action are foreign buyers whom developers could rely on to set higher prices. This is in the aftermath of a doubling in the Additional Buyer’s Stamp Duty (ABSD) rate to 60 per cent on foreigners for any residential property purchase since Apr 27.
Acquisition costs for local investors have also gone up. ABSD rates for Singapore citizens and permanent residents buying their second and subsequent properties were also increased in late April, albeit by a more modest three to five percentage points. Further weighing on home-buying affordability are elevated financing costs.
Developers are cognisant of buyers starting to resist high prices. And with more new project launches this year, buyers have more choices to consider.
CBRE’s head of research for South-east Asia, Tricia Song, noted that with the weaker average take-up rate at new private residential property launches in 2023 relative to 2022, developers should be prepared to take a longer time to finish selling each project.
Sword of Damocles hanging over developers’ heads
Therein lies a major risk factor residential developers have had to face since the introduction of ABSD in December 2011. When housing developers buy residential land, they can seek upfront remission on ABSD, subject to conditions. These include undertaking to complete the residential project and selling all its units within five years of the site purchase. Otherwise, the developer would have to fork out the ABSD plus interest. The remittable ABSD rate for developers used to be 10 per cent when ABSD was introduced in late-2011. Today, it is 35 per cent.
With pretax profit margins on private residential projects said to range from the “high-single digit to the teens” these days, ABSD-with-interest as penalty for not selling out a project within five years would in all likelihood put it in the red. There’s no guarantee a developer will make a profit from a residential project.
Benefits of collaboration
Instead of competing with one another to firstly buy land and then find buyers for all the housing units in the project, it can make sense for developers to collaborate.
As Chia of JLL puts it, forming joint ventures to bid for GLS sites is a “strategic approach that allows developers to pool their resources, expertise and financial capabilities, especially when dealing with unique, complex, or large-scale projects”.
She added: “They can share the risks involved in land acquisition and development, as well as leverage each other’s strengths to enhance the overall quality and viability of the proposed project.” Moreover, joining forces can help developers meet the stringent eligibility criteria set by the government for certain land sales, such as concept-and-price tenders.
Chia further noted that forming JVs can help developers free up some of their own funds for other investments or developments, while still maintaining a viable stake in the project without stretching their own resources too thin.
Setting up JVs provides a valuable platform for developers to learn best practices from one another, especially when it comes to sustainability issues.
Choosing the right partner
It is also crucial to pick the right partner. Shared values and a common vision are necessary for JV partners to come together. Another criterion in selection of partners would be the strength of the relationship or friendship between the controlling shareholders or senior management of the companies forming a JV.
In some cases, a JV can comprise an operating partner that executes the project and one or more financial partners that want some skin in the game. Some partnerships are also born out of complementary strengths.
Who knows what interesting bedfellows may emerge at GLS tenders in the months to come?
https://www.businesstimes.com.sg/opinion-features/risks-heighten-it-makes-sense-developers-collaborate-not-compete-when-buying-land