Apr 30, 2014

    'Once red-hot' land market at turning point

    WITH home prices slipping, sales volumes waning and more supply coming on stream, land bidding is starting to reflect developers' cautious mood.

    Singapore land prices are expected to soften this year, as developers restock their land bank in a conservative fashion with an eye on net margins - which analysts are expecting to hover around 10 per cent this year, based on residential launch prices.

    "This could present a turning point in the once red-hot land market," BNP Paribas analyst Chong Kang Ho said.

    "Our view is that the land market could soften further in the second half of 2014, with developers turning more cautious, especially if home prices fall further and new launches continue to stagnate."

    DBS Research analyst Lock Mun Yee expects land bidding prices to "reflect where selling prices will trend towards".

    New home prices could fall by 5 per cent this year while sale transactions may shrink by 20 per cent, compared to last year, Ms Lock predicted.

    It is not only the new launches that are facing downward pressures. Last month, prices of completed condos fell 1.1 per cent month on month, going by the Singapore Residential Price Index released by the National University of Singapore on Monday. The index is based on a basket that tracks the month-on-month price movements of private homes.

    Developers which have already purchased land under the Government Land Sales programme could see their net margins staying at 9-10 per cent, down from 24 per cent in 2012, Mr Chong said.

    Margin compression is holding developers back from aggressive land bidding now.

    An analysis of winning bids by BNP Paribas shows that the margin buffers - the difference between the prevailing price of launches in the vicinity and the development costs of the land - have widened, suggesting that developers want more cushioning from the risk of lower selling prices.

    A case in point is the recent winning bid for the 99-year leasehold site in Prince Charles Crescent (Parcel B), which has a margin buffer of about 16.7 per cent above the historical mean of 11.9 per cent, BNP Paribas estimated.

    Foreign developers have often been blamed for bidding up land prices.

    BNP Paribas' analysis shows that foreign developers are indeed more aggressive in their bids. They have a smaller margin buffer of 10.6 per cent than the overall market sample of 11.9 per cent on average, and their winning bid premium over the median bid also tends to be higher, at 20.2 per cent, compared to the total sample mean of 17.8 per cent.

    Chinese developer Kingsford, for instance, secured two sites in Upper Serangoon in December at a bid premium of 23-27 per cent over the median bids.

    According to SLP International, foreign players' participation rate increased to 26 per cent last year, from 8 per cent in 2009, bolstered mainly by the entry of Chinese developers that tend to favour executive condominium (EC) sites.

    The average land costs of EC sites rose to $330 per square foot (psf) last year, from $270 psf in 2011, Mr Chong said.

    During this period, EC launch prices also increased to $800 psf, up from $700-$750 psf.

    With the "potential bottoming-out process in the land market", well-capitalised developers such as CapitaLand, Keppel Land and City Developments have the opportunity to restock their depleting land bank at lower prices, Mr Chong said.

    Non-traditional developers - which include niche boutique Singapore developers, construction firms and foreign developers - saw their share of winning land bids rise from 18.3 per cent in 2009 to 71.5 per cent last year.

    This has fallen to 63 per cent year-to-date, reflecting easing competition for land, he said.