Land sales: When flour is costlier than bread

OCT 24, 2017


LAND prices in China and Hong Kong have shot through the roof amid a buying spree by mainland developers, with the cost of buying land in some prime areas even surpassing the cost of buying a nearby apartment on a per square foot basis. This anomaly of "flour being more costly than the bread", to borrow a Chinese saying, is proving to be a major headache for regulators.

Thankfully, Singapore's property market has not reached that level of headiness. But it may be too early to assume that it will not head that way, going by the recent bidding patterns of developers here. It's worth deliberating if their optimism is justified.

One land deal that stood out is the collective sale of Sun Rosier, which was acquired at S$271 million or S$1,325 per square foot per plot ratio (psf ppr) by SingHaiyi Properties and Huajiang International Corporation, both controlled by Chinese tycoon Gordon Tang and wife Chen Huaidan.

Its land rate already exceeded the average transacted price of around S$1,300 psf (from January 2016 till now) in the nearby Bartley Residences, which was completed in 2015, and in Botanique at Bartley, which is still under development; it is also higher than the average transacted price of S$1,237 psf in Vibes @ Upper Serangoon, completed in 2016.

This will hopefully remain an outlier. Most developers are pricing in a 10-20 per cent increase in home prices over the next 24-36 months, according to JLL.

BT's ballpark estimates find that a number of winning bids for collective sale sites from May have priced in 20-60 per cent premium in estimated launch prices compared to transacted prices in comparable projects (completed no more than five years ago), while those winning bids for GLS sites from May have priced in a 20-40 per cent price premium.

Some observers attribute the aggressive land bidding patterns to the increased number of players in the Singapore market than before, as more foreign players and local contractors-turn-developers enter the fray. Local developers with depleting landbank are also actively scouring for land. With more players wanting to buy "flour", the cost of flour invariably goes up.

Recovery in sight

The notion among some is that it is better to overpay than to have no flour to make bread or even cakes that sell for higher prices. The proof of the baking is in the eating and that day of reckoning will come when the higher-priced sites start their project launches. Arguably, developers' ability to price their projects at the projected premiums will still hinge on the prevailing demand-and-supply dynamics at the time of launch.

For now, things are looking up for them. After three years of subdued activity, the strong recovery in transactions has pared unsold units to a historical low and the time for developers to clear this stock to only one-and-a-half years based on their trailing 12-month sales pace. Private home prices also seem to have bottomed out, with the official price index showing its first uptick of 0.5 per cent in the third quarter after 15 straight quarters of decline.

This budding recovery is now augmented by an en bloc sale fever. There is now a widely held belief that this collective sale craze would speed up property price recovery. The replacement needs of those displaced by en bloc sales present a new source of demand, which may offer some relief to the elevated vacancy rate for private homes, while the supply of upcoming launches from these sites may take at least a year to come onstream.

Meanwhile, improved household balance sheets flush with cash and the measured pace of interest rate increase continue to bode well for the residential property market.

Cooling measures

Developers are obviously anticipating a price recovery next year - those that have bought sites before the land price surge from the later part of 2016 onwards are reportedly holding back sales till next year. A few developers have even closed their showflats, with plans to reopen only next year.

But there are other factors that may put a lid on this upside. First, the economy. While Singapore's GDP growth has turned out to be stronger this year, there remains patches of softness. Tepid population growth - which saw its slowest pace in more than a decade in the 12 months to June - continues to have repercussions on the rental market.

Under the government's watchful eye, it may also deem it fit to douse the steam on clearer signs of market over-exuberance. One of the options is probably through further hikes in development charges. The average 13.8 per cent hike in rates as of September alone for non-landed residential use is estimated to pare profitability down by 1-4 per cent for recent en-bloc transactions, based on estimates by DBS Group Research.

Other possibilities include ramping up of land supply in the half-yearly GLS programmes, or the tweaking of certain conditions under existing cooling measures.

Given the government's continued responsiveness to popular concerns around housing affordability, it remains to be seen if developers' projected price premiums for new sites can be met when the projects are finally launched. Though they may "right-size" the units further to keep quantums palatable to buyers, there is still a limit to the number of shoebox units they can build outside the Central Area.

Clearly, the disconnect between how much developers are bidding for land and the prices at which they can sell their projects in the future will only intensify if land bids are not kept in check. Flour price controls, anyone?