Developers show restraint in latest GLS tender, despite shrinking unsold inventory

Jan 26, 2022

AT last week's Government Land Sales (GLS) tender - for two 99-year leasehold private housing sites - the top bids broke an optimistic streak of rising land prices at state tenders last year.

Among the key factors at play was uncertainty about construction costs - which have been pushed up by a labour shortage as well as supply-chain disruptions affecting building materials. This would have led developers to factor a wider safety margin in arriving at their land bids. Also on the minds of developers are expectations of a rise in interest rates, and the latest property cooling measures unveiled in mid December.

On the other hand, developers' land banks are dwindling and the inventory of unsold private housing units continues to shrink. Owner-occupier demand for private homes remains stable particularly in the mass-market segment, buttressed by HDB upgraders.

All things considered, developers were quite restrained.

The more attractive of the 2 plots, at the corner of Jalan Tembusu and Tanjong Katong Road in District 15, fetched a top bid of S$1,302 per square foot per plot ratio (psf ppr) from Singapore residential property bellwether City Developments (CDL). This is 12.5 per cent lower than the S$1,488 psf ppr fetched in November for 2 freehold residential sites along nearby Thiam Siew Avenue. Some analysts deem this a reasonable spread between freehold and 99-year land prices, noting that in a bull market the gap could have been much smaller.

For the other plot, near Lentor MRT station in the Ang Mo Kio planning area, GuocoLand partnered 2 privately held entities under Hong Leong Group Singapore to place the top bid of S$1,060 psf ppr. This was 12 per cent below the S$1,204 psf ppr that GuocoLand paid last July for the Lentor Central plot closer to the MRT station.

"Developers need to replenish landbank and yet they did not chase prices, which means a lot of developers were disciplined at the tender," said Savills Singapore executive director Alan Cheong.

The Lentor plot drew 4 bids and the Jalan Tembusu site, 8 bids. The tender had closed on Jan 18, after the latest cooling measures.

One developer said that if the tender had closed before, he would have expected the Lentor plot to fetch 8 bids; and the Jalan Tembusu site, 12 bids. Now, however, some developers are choosing to watch from the sidelines instead of jumping into the ring so soon.

Said JLL's senior director of research and consultancy Ong Teck Hui: "Many developers are trying to come to grips with the market and size it up. They want to see where end-unit demand is going before resuming land purchases."

Ong also predicts a pullback in private home sales in the short term.

But when the dust settles and home buyers return with gusto, more developers can be expected to resume land buying. After all, they are running low on this key raw material.

The inventory of unsold private housing units in projects with planning approvals (including yet-to-be launched projects) has shrunk from a high of 37,799 units as at end-Q1 2019 to 17,165 units as at end-Q3 2021 - of which only 4,389 units were in the suburbs.

This is sharply different from the situation in early July 2018, when the authorities rolled out the previous round of cooling measures. Back then, developers had already gorged on land - principally via the collective sales boom from 2016 to H1 2018.

As at end-Q3 2018, the unsold inventory stood at 31,912 private housing units - nearly 1.9 times the Q3 2021 number.

Says JLL's Ong: "In short, developers' plans to restock land have been disrupted by the cooling measures."

For some developers, the recent cooling measures may necessitate changes in their strategies.

CDL may well decide to persevere in its core Singapore residential property business. But others may find it more lucrative to accelerate their overseas business, or diversify into alternative property segments such as setting up their own coworking business, or tap opportunities in green real estate.

Developers can also be expected to adjust their strategies towards building up their landbanks.

The December cooling measures have heightened risks and reduced developers' appetite for big residential sites, especially in the prime areas traditionally popular among investors and foreign buyers.

Said JLL's Ong: "Developers may not be overly exuberant like in 2017/2018. They have learnt their lesson and will be more guarded."

There will, however, be more competition for plum sites.

Those further away from the city would be in greater demand - as there is less reliance on foreigners and investors to buy the end-units. The additional buyer's stamp duty rates for Singapore citizens and permanent residents buying their first residential property remain at 0 per cent and 5 per cent, respectively.

Plot size matters too, with those yielding 500-600 private housing units being more sought after. For bigger plots, bidders may prefer to form consortiums to cut risks.

If developers are conservative about landbanking this year, this could push up home prices next year.

URA's benchmark overall private home price index climbed 10.6 per cent in 2021, based on the flash estimate for Q4 2021. This year, JLL's Ong expects the index to rise at a slower clip of 2-4 per cent.

But if the unsold inventory of private housing units remains low and there is also pent-up demand, then Ong said there is a "possibility of a more substantial private home price increase in 2023".

Such an increase could spur developers to bid more aggressively again, and may even set the stage for a revival in en-bloc sales.