Give developers leeway to adjust prices and pay fat commissions at new home launches

They have to adhere to strict building guidelines, marketing standards and development timelines along with having plenty of money at risk

Jan 11, 2022

LAST year was a good year for the Singapore residential property market. Based on the flash estimate of private home prices for the fourth quarter of 2021 by the Urban Redevelopment Authority (URA), prices rose 10.6 per cent year-on-year and 5.0 per cent quarter-on-quarter. Compared with the fourth quarter of 2019, private home prices are up 13.0 per cent.

But the party may soon be over amid increasing supply of homes and property cooling measures that kicked in on Dec 16, 2021, which included higher additional buyer's stamp duty (ABSD) rates for all individuals and entities except Singapore citizens and permanent residents buying their first home.

Still, is there a need to turn the screws on how developers set prices of homes at new launches and the commission rates that developers pay sales agents so as to bolster the stability of the private home market?

A new launch that sizzled in 2021 was that of Pasir Ris 8, a leasehold integrated project in the suburbs, with 487 residential units. There were six upward price revisions in a day for this project at its launch weekend in July.

Some market watchers wondered whether there is a need for more transparency around pricing to ensure that buyers make well-informed decisions.

For new private home launches here, prospective buyers are often given indicative prices during the preview of a project. Actual prices are revealed at or just prior to launch of sales, with developers typically free to tweak prices whenever.

Should developers register a price list of units being released for sale with the URA and stick to the pricing instead?

At initial public offerings (IPO) of shares on the Singapore Exchange, retail investors are typically given a few days to apply for the shares on offer at a fixed price. Where shares on offer are oversubscribed, balloting may be conducted and successful applicants may receive pared down allotments.

Referencing the IPO process for retail investors, prospective new home buyers may prefer to work on a fixed price list, which can be valid for bookings made within say a period of one or two weeks.

Generally, developers start selling a new home project at around the time when construction starts and use a time frame of around three years as the project gets built to try to sell out all the units.

If there are several hundred different homes or more to be sold, it can make sense to launch units for sale in batches and to adjust pricing along the way.

Where response to an initial launch is strong, raising prices several times within a day may put undue pressure on and leave a bad taste with some prospective buyers. Still, prospective buyers can walk away with no penalty if they do not like the offer price.

Making quick upward price revisions, when demand is clearly strong, can be a fair way of allocating the new homes as persons who are willing to pay more get to secure the said units.

Moreover, one can argue that the board and management of listed developers should ensure that prices are hiked, when the market can absorb price hikes, for the benefit of shareholders.

Private homes here house just over a fifth of resident households, with the majority living in public housing where the government works to provide quality affordable homes.

Private home developers pay large sums to buy sites to build homes whether from government land sales or collective sales typically by being the top bidder.

Amid competition for sites, net margins for private housing projects can be relatively thin, possibly in the single digits. Should market sentiment cool, costs overrun or the project concept be wrong, a project can make losses.

Due to the pandemic, developers have had to cope with delays to timelines and rising costs arising from manpower shortages and supply chain disruptions. Being agile in revising sales prices can help mitigate the adverse impacts on cash flows and profit.

Amid the recent property cooling measures, some developers may want to nimbly adjust prices by strategically lowering prices of some units so as to help clear inventory or inject sales momentum into their projects. Alternatively, developers may throw in more freebies while maintaining their prices.

Another gripe that some observers have is whether there should be greater transparency around the commissions that developers pay agents for selling new homes.

Paying an agent a sales commission of say 4 per cent or more of the sales price rather than 2 per cent could help inflate the reported sales price and add to the costs borne by a buyer.

But the logic of developers, who tend to monitor costs stringently, of paying fat success-based commissions to incentivise faster sales of a project and/or achievement of higher headline selling prices cannot really be faulted.

If there are various competing new projects, a developer may need to incentivise agents to push a particular project by paying a high sales commission rate.

Moreover, when only a limited number of sales agencies have a wide reach, developers may lack bargaining power when it comes to dealing with such agencies.

Suitably incentivising agents to move inventory may be needed as any project will invariably have units, which are harder to sell, perhaps because the facing or the configuration is unpopular. Also, as market sentiment can quickly change, developers may need to motivate agents to be adept and resilient via paying fat commissions.

Developers here face tight timelines to sell their residential inventory. Failure to sell all the homes within a period - typically of five years from the date of acquisition of a site - will result in developers paying hefty sums of ABSD. Thus, it makes sense to err on the side of caution by paying higher sales commissions so inventory can hopefully be sold in a timely manner.

Home developers here have to adhere to strict building guidelines, marketing standards and development timelines. They also have plenty of money at risk and need to contend with a government that is preemptive in keeping home prices in check.

Giving developers leeway to manage and mitigate risks seems fair. Perhaps there is no need to tie the hands of developers further so long as they deliver dream homes that are built to high standards with strong quality control.

Hard numbers and emotion drive home buying decisions. Would-be buyers of private homes need to do their homework in advance. One can then act in a decisive and disciplined manner, hopefully without regret, when opportunities at launches of new homes are presented.