Private home prices in Singapore have finally started to soften, but some developers don't seem to get the message.
Tender offers for state land have been rising steeply and are still strong, creating fears that land costs could be in danger of overshooting fundamentals.
The most recent residential land tender - for a site at Mount Sophia in September - drew a top bid of $1,157 per sq ft (psf) per plot ratio (ppr) in a nine-way fight. This meant a future selling price of at least $1,900 psf - far above the $1,650 psf average at a nearby project from January to August.
Part of the reason is stiff competition from hungrier players who may have access to foreign capital.
Foreign developers with deep pockets have come in to bid aggressively, even if they do not always win. For instance, the winning bid at Mount Sophia only very narrowly edged out an offer of $1,156 psf ppr from a tie-up helmed by Hong Kong-listed Fantasia Holdings.
Keen foreign interest comes even as the Government's cooling measures start to bite, dampening prices for both resale and new residential launches.
Resale prices have fallen for the past three months and volumes plunged by a sharp 57 per cent last month. Some developers have also begun to cut prices at new launches, though official quarterly figures are not out yet.
This double whammy spells trouble for many developers who cannot replenish their depleted land banks because land costs are outpacing home sales. As one established local developer put it: "The flour costs more than the bread."
Developers who can go overseas have already done so, while those left behind have to band together in consortiums or face the prospect of being muscled out.
However, market watchers say the situation cannot be solved by simply releasing more land to meet the overwhelming demand and lower land bids, because this could cause a potential supply glut. Instead, they say, the Government could consider further adjustments to its land sales programme to moderate bids.
Costs outpacing sales
THE danger in land costs rising as home prices are coming down is that developers could be stuck with overly pricey land that they are unable to develop into homes they can sell for a viable profit.
Sites bought at "optimistic" prices before the Government imposed a debt-to-income ratio cap in late June could be under pressure, said Jones Lang Lasalle Singapore research director Ong Teck Hui. "It's a tough call on pricing - trying to set prices to achieve satisfactory sales progress without over-sacrificing margin."
Buyer demand has tailed off to the point where developers have begun cutting prices of existing and new residential projects to move units. City Developments executive chairman Kwek Leng Beng said in a statement last week, as the firm reported a drop in quarterly earnings, that developers are now "willing to take in lower profit margins" to boost sales.
CapitaLand, for instance, sold units at its Sky Vue launch in September at lower than the average selling price of its Sky Habitat project next door, and for a thinner profit. Sky Vue's median selling price of $1,401 psf was only 4 per cent higher than the break-even cost of $1,350 psf calculated by consultants.
SingLand also slashed prices for Alex Residences, launched last week. The project's average price was up to $150 psf cheaper than at the adjacent Echelon.
While home sales are weakening, costs are relentlessly rising. "Land prices continue to escalate," Mr Kwek said, citing limited land banks as one factor.
ONE reason for the rise is that non-traditional developers, especially foreign construction companies, are joining the contest for land. These include MCC Land, whose parent company has been doing construction work in Singapore for over a decade, and Qingjian Group, which started off as a Housing Board contractor.
Non-traditional players bid aggressively to secure land while sacrificing profit margins on construction, Mr Kwek said. "As a result, many developers have formed joint ventures to bid for land."
One example is a Jurong executive condominium site tender in July. The winning bid - which also smashed price records - was from a consortium of four developers.
There is another category of bullish developers: those flush with cash from foreign investors.
Frasers Centrepoint, for instance, won a mixed-use site in Yishun in September with a stunning top bid of $1,077 psf ppr. It is a wholly owned unit of conglomerate Fraser & Neave which was bought by a Thai tycoon in January.
Its bid was an eyewatering 47 per cent more than the second- highest offer from a consortium, and miles ahead of the $750 to $850 psf ppr that consultants had expected the site to fetch.
But Chesterton Singapore managing director Donald Han said feverish land bids are generally limited to a small group of developers. "There are some developers who are a bit more aggressive and tend to bid higher. There's a two-tier market at work."
Too little land? Too much?
THIS means that those developers unable or unwilling to bid handsomely for sites are beginning to run out of land, especially the smaller players.
Boutique developer EL Development, for instance, is completely out of residential plots even after bidding for nearly every residential land tender this year.
"I'm very concerned," said managing director Lim Yew Soon. "If land costs continue to be so high it may not make sense for us to develop anything at all. We may have to scale down operations." He said he was exploring opportunities in Malaysia and Dubai but development overseas can be riskier and less transparent than in Singapore.
Other developers including Oxley Holdings, Hwa Hong and City Developments recently made their maiden forays into markets such as London.
Oxley paid £200 million (S$402 million) for a huge prime riverfront site in London earlier this month. A week later, Hwa Hong bought a stake in the British capital's posh Kensington area. CDL bought a site in the upscale Knightsbridge area in September.
With demand clearly outpacing supply, a knee-jerk reaction may be to suggest the Government release more land into the market.
However, the solution is not as simple as dialling up the volume. Where some see too little land supply, others see potentially too much.
The head of the developers' industry association recently called on the Government to "ensure land supply at a pace that will contribute to the overall health of the market", adding that developers are concerned about a bumper crop of new supply.
There will be 204,500 homes ready by 2016, sharply up from the previous forecast of about 197,500, according to a Facebook post by Minister for National Development Khaw Boon Wan last month.
Savills Singapore research head Alan Cheong noted that if the pace of public and private home supply remains unabated, "we could easily tip from equilibrium to gross oversupply by the second half of this decade".
A strong Singapore dollar and elevated inflation could deter immigrants, he said, adding: "It may be better to err on the side of caution."
Easing land bids
AN UPCOMING tender of state land will be closely watched to see if the bidding fever has started to cool. The Government is to sell two adjacent residential plots in Upper Serangoon View on the same day later this month.
"A good gauge of the direction of land prices would be the tender closing for the two parcels," Mr Ong said. He expects bids for the Serangoon sites to start showing signs of moderating.
Otherwise, the Government is likely to roll out even more sites in its next half-year land sales programme, which will be announced towards the end of the year.
The land-starved developers who bought plots at the market's peak may still be able to hang on. For them, the best scenario could be a gradual moderation of home prices - in other words, less land supply, rather than more.
But for smaller developers running on empty, it could be too late.
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