Space out tender closings of state land sales to maximise proceeds, manage risk

Leslie Yee

Nov 13, 2023

SINGAPOREíS housing market is showing resilience in the face of higher interest rates over a prolonged period, sluggish economic growth and geopolitical tensions.

Three 99-year leasehold private housing sites put up for tender by the Urban Redevelopment Authority drew healthy participation among developers and strong top bids.

Singaporeans can be happy that state coffers stand to be enriched by a total of S$2.29 billion from the top bids for the three sites, whose tender closed on Nov 7.

The top bids at the state land tender were S$968 million for a site at Lorong 1 Toa Payoh, S$692.4 million for Pine Grove (Parcel B) and S$633.45 million for a Clementi Avenue 1 site, which translate into price per square foot (psf) per plot ratio (ppr) of S$1,360, S$1,223 and S$1,250, respectively.

However, I wonder if it makes sense to group the tender closing of multiple Government Land Sales (GLS) sites at the same time.

There are 15 Confirmed List sites for the GLS Programme for 2023, comprising 13 residential sites and two white sites.

Each site put up for sale could have its own distinct tender closing date. For example, the government could spread out tender closing dates of Confirmed List sites such that tenders close for one or two sites every month. In this way, there will be more frequent data points available on the appetite of developers for land.

Grouping of tender closing of multiple sites at the same time may not benefit developers, the government or potential home buyers.

Housing developers in Singapore are constantly hungry for land as a developer of a project with five homes or more has to complete the development and sell all new homes within five years of site acquisition to avoid paying hefty taxes.

A developer interested in securing a housing site can be caught in a pickle when multiple housing sites are offered for tender with the same tender closing date. The developer may have to submit strong bids for multiple sites because it is unsure if bids that it deems competitive will succeed.

A problem could arise if the developer targeting to secure a site ends up being successful with two or three sites. Manpower and financial resources may become overly-stretched in such a scenario. With high interest rates, there is even greater strain on the balance sheet from taking on too many property development projects concurrently.

Spreading out the tender closing dates for different GLS sites on the other hand helps developers in their planning and risk management. A developer can focus all its resources on particular sites at various points in time as well as better calibrate its bid for a specific site.

Land sales proceeds

From the governmentís perspective, having multiple state land tenders close at the same time may not optimise land sales proceeds.

Think about it: developers with resources stretched across bidding for multiple sites, could end up being conservative with bids across all sites. Lower proceeds from state land sales may in turn mean less money goes into the reserves.

Revenue from state land sales accrue fully to past reserves. Spending of the returns generated by reserves is done through the Net Investment Returns Contribution, which is a major contributor to the annual budget.

However, tempering of land sales bids via having tenders for multiple sites close at the same time may arguably help ensure private housing prices grow in a more stable manner.

After all, if private housing land sales sites achieve bullish prices, potential home buyers could have expectations that prices of new homes in future launches will be much higher.

New home prices

Land cost is typically the single largest component of gross development cost (GDC) of housing projects Ė possibly 60 per cent of GDC of a suburban condominium development.

A developer whose land cost is high can reasonably be expected to try to sell new homes at high prices to generate some profit.

If land costs less, might potential homebuyers be able to buy new homes at more affordable prices? Not necessarily.

Many housing developers work hard to build homes that are well-designed and strong on sustainability elements. Developers who have an eye on the long term are keen to build a good reputation by delivering high quality products to buyers.

However, expect developers to be aggressive in pricing new homes. They may try to price each unit in a condominium development as high as the market can absorb.

Take the site at Lorong 1 Toa Payoh, whose top bidder is the consortium comprising City Developments Ltd : C09 -0.94%, Frasers Property : TQ5 -1.21% and Sekisui House. It could be that the feasibility of the S$1,360 psf ppr land bid assumes an average selling price (ASP) for the new homes of S$2,500 psf.

At the time of launch of new homes for sale at the Toa Payoh project, the selling prices will depend largely on prevailing market sentiment. If the market can absorb ASP of S$2,700 psf, the developer may not hold back from pricing the new homes as such.

On the other hand, if market sentiment is poor, a developer could price new homes at or below its breakeven price because it needs to generate cash flow and avoid penalties for failing to sell housing inventory within a stipulated time frame.

Housing needs for many Singapore residents are met through the public housing market. Still, it matters that young local talent can aspire to and possibly realise private home ownership goals.

The objectives of ensuring a stable private housing market and keeping private home ownership within reach of some young local households are arguably best served by having a tax regime which favours Singaporeans buying their first home for owner occupation and ensuring adequate housing supply.

Moderating land prices may not matter much when it comes to determining selling prices of new private homes, as developers will price their products based on prevailing demand.

Ultimately, there could be little harm in spreading out the tender closing dates for GLS sites to help maximise sales proceeds.