What emboldened GuocoLand in Beach Rd bid

Fri, Oct 27, 2017

Kalpana Rashiwala

EARLIER this month, GuocoLand and its parent Guoco Group were awarded the Beach Road commercial site by the Urban Redevelopment Authority.

Their winning bid of S$1.622 billion works out to S$1,706.30 per square foot per plot ratio (psf ppr) - setting a new benchmark price for a Government Land Sale site in Singapore. This has been deemed bullish by most analysts, who note that it surpassed the S$1,689 psf ppr that IOI Properties paid for a site in Central Boulevard less than a year ago; that plot, which also has 99-year leasehold tenure, is located in the more choice Marina Bay area compared with Beach Road.

The reason analysts have compared the winning bids for these two sites is that some of their tender conditions are similar. These include having a minimum office component of around 70 per cent of gross floor area (GFA) and a ceiling on the project's retail component; the balance may be allocated for additional office, commercial school, hotel, serviced apartments or residential uses.

One factor that has been put forth by some observers for the bullish winning bid for the Beach Road site is the strengthening CBD Grade A office leasing market over the past six months which has resulted in rents turning around in the second quarter of this year after two years of decline, according to JLL's data.

But GuocoLand's aggressive bid for the Beach Road site was also probably due to the fact that the plot is not fettered by rules relating to the additional buyer's stamp duty (ABSD), a residential property cooling measure.

Because the Beach Road plot is zoned "commercial", there is no ABSD payment on the purchase of the site even if the buyer/deve-loper incorporates a residential component. And all signs are that it will, since sales of residential units in the project will come in handy to partly finance the S$2.1 billion to S$2.2 billion estimated development cost of the entire project (including the land price).

Central Boulevard site

On the other hand, the Central Boulevard site, because it is zoned "white", is liable for payment of the 15 per cent ABSD on the entire site's purchase price or value, whichever is higher - even if the residential component is a relatively small portion of the GFA. If its developer wants to build residences in the project, it may seek upfront remission of the ABSD but this will be subject to the developer undertaking to fulfil a few conditions, including selling off all the residential units within five years.

If it failed to do so, the developer would have to cough up the 15 per cent ABSD on the entire site that was remitted, with interest. Based on the nearly S$2.57 billion purchase price for the Central Boulevard plot, the 15 per cent ABSD works out to S$385.3 million, and that's not even counting the interest.

This would have been too big a risk, considering that the residential component of the project would have accounted for less than 30 per cent of the total GFA.

Indeed, IOI Properties and Hongkong Land, which has been roped in as its partner for the Central Boulevard project, have decided not to include a residential component. They announced in June this year that their project will comprise two office towers and a small retail podium.

So for the Beach Road site, the greater ease of incorporating residential units into the project and tapping the cashflow from their sale gave the winning bidder a little more room to bid higher for the land.

Other factors

Other factors were also at play. The eclectic character of the Beach Road locale may be somewhat like Tanjong Pagar, where GuocoLand has drawn a diverse mix of office tenants at Guoco Tower - from tech and media companies to shipping and pharmaceutical firms as well as financial institutions. Marina Bay is a more prestigious office location for banks but some profiles of tenants may be more comfortable in a locale with a wider mix of offerings, like Beach Road. Retail outlets may also fare better in Beach Road as they can count on customers throughout the week, instead of being concentrated during the work week at Marina Bay.

Of course, one could argue that the authorities should neaten their rules relating to ABSD treatment for the various zones.

Some observers find it odd that a developer is not liable for ABSD on the purchase price of a site zoned "commercial" even if it incorporates a residential component, but that the buyers of the residential units in the project will be subject to ABSD.

As to why ABSD is applied on 100 per cent of the value or price of a "white" site, instead of just the residential component, it could be because in theory, the "white" zoning allows for possibly 100 per cent residential usage.

The Urban Redevelopment Authority (URA) minted this zone more than two decades ago to allow developers greater flexibility to change the uses of such sites in response to changing market conditions - without having to pay differential premium charges to the state.

However, analysts observe that in recent years when URA has sold "white" sites, it has not given developers a totally free hand on the mix of uses. Rather it has specified certain minimum components, for example for offices, to achieve desired planning outcomes. So a "white" site offered by the state these days is not quite as white as it used to be in the early days.

Perhaps the authorities could consider selling sites like the Central Boulevard and Beach Road plots with a "commercial & residential" zoning, for which ABSD is payable only on the residential component - which is a more equitable application of the ABSD rules.

In the meantime, we'll have to continue to count on developers to adjust their land bid prices to work around the incongruity that ABSD has created.