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Published October 4, 2006

Developers bet big on Sentosa Cove condos
Up to 40% margins possible with prices at prime values


(SINGAPORE) Sentosa will be home to Singapore's second integrated resort with casino by 2010 - but the gambling has already started.

Betting on huge profit margins at Sentosa Cove, Lippo Realty recently bid 130 per cent more than the price paid for the first condominium site in December 2003; while Ho Bee Group - which launched the first condo there - will soon launch The Coast at around $1,400 psf, 75 per cent more than an apartment cost there less than three years ago.

The odds are in favour of even higher prices. Last month, Lippo bid a new benchmark price of $234.7 million for the 240,000 sq ft, 99-year leasehold site. Based on data compiled by CB Richard Ellis (CBRE), the price works out to be $818 psf per plot ratio, 28 per cent more than the price for the most recent site sold about a year ago.

Joseph Tan, director (residential) at CBRE, also noted that Lippo's bid price matches those of recent freehold sites sold in District 9. He even believes that Sentosa Cove could become a 'pace-setter' in the movement of prime prices in the residential market.

Lippo has not been awarded the site yet but BT estimates that based on its bid price, the new condo could be launched at around $1,600 psf. When Ho Bee Group launched the first condo The Berth by the Cove in November 2004, average price was just $800 psf. When The Azure by Frasers Centrepoint was launched in September 2005, prices had risen by as much as 25 per cent. By July, City Developments' The Oceanfront @ Sentosa Cove was selling for $1,300-$1,350 psf, about 60 per cent more than The Berth.

Ho Bee should not be too sore, though. A financial analyst who did not want to be named projected a profit of about $173 million for the group from proceeds of The Coast. She is not too concerned about rising land prices at Sentosa either: 'In the near term, we do not foresee any risks.'

Based on estimated construction costs and building efficiency, Ho Bee's project could have a profit margin of between 35 and 40 per cent. Indeed, BT estimates the margins for the previous two developments were also in this region while The Berth enjoyed a margin of around 25 per cent.

Ho Bee is said to have been outbid by Lippo for the latest Marina Collection site by 7 per cent but Lippo will not be expected to take a haircut.

Colin Tan, head of research and consultancy at Chesterton International, said: 'Given the way the market is moving, I would not even rule out prices hitting the $2,000 psf mark.

'Developers would normally factor at least a 25 per cent profit margin in their planning but depending on how the market pans out or takes off, returns of 50 per cent or more would not be surprising.'

This could explain Lippo's bullish bid for the Marina Collection site.

'In the case of Sentosa, developers probably see this site as being less risky - although the price is many times higher - than say a suburban site in an off-location, given the lukewarm conditions in that segment of the market presently,' he added.

A property consultant who did not want to be named agreed. 'Sentosa has not reached its full potential yet. Even in the prime districts, you don't see this potential because it has already been capitalised,' she said. Outside Sentosa, developers generally work with a 10-15 per cent margin, she said.

There are several more residential sites at Sentosa Cove to be released at strategically timed intervals in the future, and two developments are unlikely to ever be launched together.

'Who will Lippo's competitor be?' asks Nicholas Mak, director of research and consultancy at Knight Frank, highlighting that it is very much a sellers' market. Still, buyers will be gambling too. Says Mr Mak: 'The higher the purchase price, the higher the risks for investors.'