Published November 12, 2009


Don't give up confirmed list card again

Maintaining land supply will help alleviate volatilities in property prices and rents when cycles change suddenly


LAST week, the Ministry of National Development (MND) revealed a slate of eight residential sites that it would sell on the confirmed list starting January 2010. This came after a break of about a year on the sale of such sites.

Should confirmed list land sales have been suspended for such a long period? When markets suddenly pick up and land prices shoot up - as they have this year - it translates to less affordable homes in the mass-market segment.

For the Government Land Sales Programme to be effective, both the confirmed and reserve lists need to operate side by side. By restricting state land sales to the reserve list system - where sites are triggered for launch only upon successful application by developers - the state may effectively be giving all the cards to developers, who have their own self-interest at heart, first and foremost.

For instance, it would not be in a major office landlord's interest to make an application seeking the release of an office site from the reserve list if it is trying to fill a major office development and hopes that office rents will increase. However, if there is suddenly a pick-up in office demand - for example, if major financial institutions and funds resume their strategy of expanding in Asia and setting up hubs in Singapore - office rents could suddenly spike. Having sales of sites on the confirmed list would help to mitigate this.

Mass-market condo sites

Another drawback of selling land only through the reserve list has emerged of late, with prices of mass-market condo sites soaring at state tenders.

In October last year, MND suspended confirmed list land sales. That made sense at the time, during the dark days of the global financial crash. However, it continued the suspension for the first-half 2009 Government Land Sales programme and later, for the H2 2009 programme, even though developers' home sales had shown clear signs of revival by the time the H2 2009 slate was announced in early June.

After several months of strong home sales, especially in the mass-market segment, developers found that they had started to run out of entry-level private residential land. However, it was only in July that they began triggering residential sites for release through the reserve list. To date, six sites have been released, of which tenders for five have closed and been awarded - amid rising land prices.

Many of the sites are well located - near MRT stations, or near reservoirs. These are naturally the type of sites that developers would want released in the reserve list during a mass-market housing boom. However, such prime sites, because they are worth more, also lead to rising land values when there is a shortage of such plots in developers' landbanks. A rapid hike in land prices is not compatible with the national goal of keeping mass-market private home prices affordable.

Had the confirmed list not been suspended for the current half, the government could have used it to introduce some less-choice sites further away from MRT stations and not so near the city, just as it has now done for the H1 2010 confirmed list.

One can't blame developers for not wanting land released too early in the cycle from the reserve list. Frankly, it's not in their interest. Their motivation is to increase the value of their landbanks and existing properties; and having less land supply is generally better than having more supply.

There are also other factors at play. Developers don't have the best information - such as the size of new investments flowing into Singapore in the near future, how many permanent residents and new citizens Singapore will take in each year, and how much monies high net worth foreigners are parking in Singapore. The government has a much better idea.

Always maintaining at least a minimum supply in the confirmed list - in both good times and bad - will help alleviate the volatilities in land values, property prices and rents that come when cycles change suddenly, as they have in the mass-market private housing sector this year.

Booms and busts

While the government has, in the past, suspended the confirmed list midstream of its half-yearly programme when the market turns south, it has never restarted the confirmed list midstream when things suddenly picked up. Instead, it has waited for the prevailing half-year period to end before restarting the confirmed list. The argument for this would be that the authorities want to play by the rules and give more notice to market participants.

However, the substantial time-lag in resuming the confirmed list exaggerates the booms and busts in the property market.

That is why both lists need to operate side by side.

The government does not sell confirmed list sites if bids come in too low. Its usual policy is to award sites only if the top bids are at least 85 per cent of the Chief Valuer's assessed market value. This reserve-price formula - if rigorously applied - acts as a safety mechanism that would create a price floor for state land sites so that land prices don't crash and further erode market confidence in a downturn.

As the Singapore property market matures, it will be able to absorb news of confirmed list sites attracting no bids or low bids - and the sites subsequently not being sold by government. Over time, they will come to be seen as part of natural market cyclical fluctuations. The government should hold some of the cards by maintaining a confirmed list throughout instead of leaving everything in the hands of developers.