Prospects for profitability

May 22, 2023

Michelle Low

A continual supply of land is crucial to the revenue stream of housing developers. Yet from recent activity - or the lack of it - in the land sales market, developers seem to be holding back. Collective sale offers came and went with no takers. The latest government land sale tender drew only one bid. The demand picture from homebuyers has turned unclear, while higher interest rates crimp both the buying power of households and also hurt developers with large project loans.

Against a background of uncertainty, Leslie Yee examines why developers that continue to replenish their land banks have an advantage over rivals in hibernation, in The Level Ground.

GuocoLand is one that has been speedily filling its land bank. It has bagged three state land sites (two with partners in the Hong Leong group) in the Lentor Hills area in under two years. Its first launch in the area got off to a positive start, with about 530 units sold to date at an average of S$2,103 per square foot (psf) since the project was first marketed seven months ago.

GuocoLand undoubtedly has the first-mover advantage here. Still, with two more projects to come in an estate where up to 3,400 new units will be built, can GuocoLand defend its exposure? Kalpana Rashiwala looks at the potential risks in her Hock Lock Siew column.

From data on resale transactions in non-landed homes in Q1, it would appear that residential property remains a profitable proposition for the vast majority of sellers. Only 5 per cent of non-landed resale deals transacted in the first quarter of 2023 made a loss.

The percentage of deals that lost money now stands at its lowest level in five years, as owners rode rising prices to net gains. Looking at data from the last five years, loss-making exits peaked in Q2 2020, at 21.8 per cent of resale deals, during the “circuit-breaker” period of the pandemic. However, profitability may be reduced in the near future, with prices set to flatten and squash gains and mortgage financing costs still inching up.

Two executive condominium transactions were among the top five most profitable deals in percentage terms in Q1. These owners pocketed gains of over 80 per cent and close to S$1 million in quantum. The quarter’s biggest losers were deals involving condos that were bought during the 2012-2013 peak, before sentiment turned after the government intervened to tame the market with hikes in Additional Buyer’s Stamp Duty (ABSD) and tighter loan limits.

The latest numbers from put the overall median capital gain for resale condos at S$311,000 for March, some S$13,000 more than February’s median gain. The resale market firmed last month, with both prices and volume rising, as the price gap between new and resale properties widened. Watch out for rental market data this week for more signals on market health.

Much of private property demand derives from higher incomes and profits from selling HDB flats. While a rising market is good news for asset owners, the statistics paint a sobering picture of mobility. Tay Peck Gek took a deep dive into the data and found that fewer owners of Housing and Development Board flats are able to afford an upgrade. HDB resale prices have gone on a tear in the last few years but they have not kept pace with the surge in prices of new suburban condos.

The industrial sector is stirring with deals, with big players shedding non-essential assets for tidy gains as they take advantage of a wave of interest. Indeed, a Q1 survey of investment managers in the Asia Pacific found that among vehicles with a single-sector strategy, industrial/logistics was the sector most preferred. Dry powder is piling up - US$13 billion was raised, mainly under non-listed funds and joint ventures and club deals, for industrial and logistics investments in Q1.

CapitaLand Ascendas Reit sold an industrial property in MacPherson for S$35.4 million, at a 219 per cent premium to its original purchase price of S$11.1 million in March 2005. The sale price is also 55 per cent over a valuation of S$22.8 million as at Dec 31, 2022. Net proceeds after divestment costs are estimated at S$30.7 million.

CDL put its 62 freehold strata units at Citilink up for sale, at a guide price of S$103 million. CDL had previously divested a freehold warehouse in Tagore Lane, reaping a gain of S$27.3 million, which it recorded in its 2022 interim results for the half-year ended Jun 30, 2022.

CapitaLand Investment announced ambitious targets for its Ascott lodging business, saying it’s banking on fee revenue of more than S$500 million over the next five years - about double its FY2022 revenue of S$258 million.

Not quite so successful was the Link Hotel, a budget hotel property in the hip Tiong Bahru neighbourhood. The Hong Kong group that owns the 274-room hotel missed a S$31 million payment on a S$50 million loan granted by DBS, which then demanded repayment of the entire loan. Unable to raise funds due to an injunction slapped on by another creditor, the group has surrendered the hotel to receivers, who have put it on the market. A recent valuation pegged the property at S$140 million.

At auctions conducted in the first quarter of the year, mortgagee listings across all sectors spiked up. While the absolute numbers are small, the trend is likely to continue. Government data shows the number of bankruptcy applications rose quarter on quarter by 5.6 per cent to 959 in Q1 2023, and is some 20 per cent higher year on year.