Developers' war chest of cash keeps collective sale party going

Estimates from Cushman & Wakefield suggest that developers still have another S$18.9 billion for land acquisitions in the near term

Mon, Feb 26, 2018

Lynette Khoo


ARE developers still on a prowl for land? That question naturally cropped up when the public tenders of 10 or more collective sale sites closed without concluding a sale in recent months.

But four of such sites have since found buyers under private treaty, which market watchers were quick to attribute to developers' sustained interest for land though they are proceeding more cautiously than before.

Keeping this en bloc train going is their war chest of cash reserves built up by massive project completions in recent years. Estimates from Cushman & Wakefield suggest that developers still have another S$18.9 billion for land acquisitions in the near term. This is a conservative estimate since it assumes developers re-invest only profits from completed projects.

"Against this backdrop, it won't be surprising if the subsequent land deals continue to set record prices in 2018, especially for sites, either on government land sales or private en bloc market, with little competition in the vicinity," said its research director Christine Li.

Savills Singapore senior director Alan Cheong said: "For the remainder of this new property cycle, developers will still be keen to bid. This is because for developers who have completed, sold out their projects, and gotten their capital and profit back, they will need to roll onto another or a few other projects."

Apart from this, the liquidity from potential newcomers is "like an afterburner that added further thrust to the collective sales market", he added, referring to overseas developers looking to enter Singapore's residential market for the first time.

But the government is unlikely to raise land supply under the government land sales (GLS) programme in the next few years to prevent an over-supply of completed units further down the road.

"That means that the number of GLS sites that is available for developers to bid will be muted. To deploy so much capital, the only avenue then is for them to go for collective sale sites," Mr Cheong said.

Ms Li explained that many developers were not able to re-deploy their capital through land acquisitions in 2015 and the first half of 2016 due to sluggish market sentiments despite a deluge of capital freed up from project completions between 2014 and 2017.

Before housing projects receive their temporary occupation permits (TOP), developers are only allowed to withdraw money from the respective project account for purposes related to project development, such as paying for construction costs and loans. Such controls mean that developers can re-deploy most of the capital in the project account only upon the project's TOP, after setting aside some money for further expenses.

Some S$90.5 billion of revenue was estimated to be received from projects completed between 2014 and 2017, of which Cushman & Wakefield assumed 15 per cent to be developers' profits. Assuming a 70 per cent leverage, developers have about S$45.3 billion at hand for re-deployment just from the profits only.

Developers had spent S$22.4 billion on land acquisitions in 2016 and 2017, and another S$3.9 billion so far this year.

"I think we are not yet at the half-way mark for collective sales," Ms Li said. "Many developers still have not made major acquisitions over the last two years or so. There are also new players in the market who have probably put Singapore on its radar due to its favourable property cycle."

JLL senior consultant Karamjit Singh said that owners' pricing expectations may be a factor. But some developers were also holding back their purchases ahead of the three GLS tender closings on Jan 30.

For the smaller collective sale sites that have not concluded a sale, it could be due to their site configuration, which limits efficiency in the new project, Mr Singh said, adding: "For the bigger ones, I am optimistic they will be sold eventually by private treaty."

Still, recent regulatory changes affecting collective sales have taken some steam off the collective sales train. Among them is the pre-application feasibility study (PAFS) on traffic impact, which will affect the number of units that can be built on the site and the approach to pricing land. The central bank has also cautioned banks to be prudent when lending for development projects.

Developers have lately shown prudence towards collective sale sites, preferring to try to match owners' asking price under private treaty rather than compete head-on in public tenders - such a trend emerged even before the recent hike in the top marginal rate for buyer's stamp duty.

Consequently, the average price premium for collective sale sites that sold over their reserve or asking prices has fallen to 2.9 per cent this year from 10 per cent last year, according to Cushman & Wakefield's estimates.

"Even if the highest bidding developer has been announced at the close of tender for a collective sale site, more stringent condition precedents (CP) laid down by the developer may still mean that the deal may fall through if these CPs are not met," Mr Cheong said.

There is also the risk of the government introducing other ways to curb developers' land demand, such as raising the development charges or differential premiums that the developers have to pay for intensification of land use or a major curtailing of the number of units to be re-developed on the collective sale sites, he added.

Ms Li noted that as the completions of private homes taper off sharply from 2018 onwards, developers' incoming cashflow would fall in tandem - this will in turn have an impact on their appetite for land.

In sum, the music will still go on this year, but don't expect it to last for too long.