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How low can EC prices go?
Since the government raised the income ceiling for eligible HDB flat buyers and EC home buyers in August 2015, the expected surge in buying demand for executive condominiums (ECs) did not materialise. One reason is that the cooling measures and curbs on home loans since 2013 have moderated demand for ECs. Another reason is that the increase in the income ceiling of eligible HDB flat buyers have enlarged the group of potential public flat buyers, which in turn has sapped the demand for ECs. In other words, some of the home buyers who could buy either a HDB flat or an EC have chosen to buy the former.
The government has also increased the supply of ECs by selling more EC development land parcels in 2012 and 2013. In the government land sales (GLS) programmes during these two years, the government sold a total of 21 EC land parcels that yielded 11,173 EC units. The number of EC land parcels is about 1.5 times the total number of EC sites sold in 2010 and 2011.
By curbing the demand and increasing the supply of ECs, the government has put EC developers in a bind. With the implementation of the ABSD, developers must complete their development and sell all the EC units within five years from the date that they acquired the development site. EC developments are usually fairly large. The average size of the 35 EC sites sold in the past five years is 560 units. In comparison, the average size of the 78 private GLS residential land parcels that were sold within the same five-year period was 480 units. This means that developers have a limited time to sell all the units in a relatively large EC project.
With the slowdown in home buying demand, it is assumed that some developers may be forced to lower the prices of their EC projects, which may be the intention behind the government's curbs on the EC market. Hence, some prospective buyers are adopting a wait-and-see approach, hoping for further price reductions from the developers.
For potential EC buyers, the question now is how low EC prices can go, given that the bulk of the development cost for the EC project is already committed by the time the project is launched.
HOW LOW CAN PRICES FALL?
To determine the pricing flexibility of ECs, we need to analyse land costs, development costs and developers' profit margin within the framework of the various government policies regulating EC developments.
One of the cooling measures states that developers which acquire EC development sites after Jan 11, 2013 can only launch the EC project at least 15 months after the site is acquired. Most developers would have locked in a large part of the development costs within the first six months after the EC land is acquired.
The total development costs include the land purchase price, construction cost, taxes and other development costs. The non-construction development costs such as financing cost, professional fees and marketing costs generally make up about 15 to 22 per cent of the sum of total land cost and construction cost.
Total development cost has been rising since 2010 until 2014. It explained why even though the real estate market showed signs of weakness, many developers were still reluctant to cut prices.
However, it may be timely for developers who bought land in 2015 to adjust prices of new ECs as land prices started to drop to less than S$300 per square foot per plot ratio (psf ppr) this year, which leads to lower total development costs for ECs.
In Chart 2, the average new sale prices for the EC projects were based on the year in which the development site was sold, and not the year in which the EC projects were launched. The launch year would typically be a one-year lag after the year of tender award. In other words, if the developers bought the land in 2014, they would realise the profit in the following years.
Developers who purchased land from 2010 to 2012 were able to achieve a profit margin of at least 10 per cent. But those who bought land in 2013 started to accept a lower profit margin to deal with a huge amount of unsold stocks in the market. EC developers who purchased land in 2014 were worst hit as their profit margin shrank to only 4 per cent.
As the total development costs decreased significantly due to declining land prices, EC developers might be able to lower prices and at the same time maintain a decent profit margin. By examining the worst-case and best-case scenarios for projects with land tenders awarded in 2015 and by assuming a worst profit margin of 4 per cent in bad times and a best profit margin of about 13 per cent, the average new sale price for EC projects could be at about S$730 psf on average.
However, there are still unsold units of projects that sit on land parcels that were sold in previous years when development costs were at the peak cycle. Therefore, prices of ECs in the primary market would not be cut by much.
INCOME CEILING HIKE
One of the changes to housing policies which was announced on the SG50 National Day by Prime Minister Lee Hsien Loong is the highly anticipated increase in the eligible buyers' income ceiling for HDB flats and ECs. Specifically, the household income ceiling will go up from S$12,000 to S$14,000 for buyers of new ECs.
The new ceiling has added 80,870 resident households to the pool of EC potential buyers, enlarging the pool by 81 per cent. The increment in potential buyers for ECs accounted for about 6.6 per cent of the total resident household population.
Many tightening measures imposed by the government have made it more difficult for property buyers to buy a home in Singapore, especially an EC, given the mortgage servicing ratio (MSR) and the total debt servicing ratio (TDSR) restrictions. The adverse effect of these measures seems to outweigh the impact of a hike in income ceilings, at least in the short term. Specifically, even though more eligible buyers are added to the pool, the sales for the ECs which were launched after the new household income ceiling came into effect on Aug 24, 2015 were not that fantastic.
Signature at Yishun and The Criterion are the two projects that were launched right after the rule changed. However, the sales in the first month of launch only accounted for 17.7 per cent and 8.1 per cent of the total number of units in Signature at Yishun and The Criterion respectively.
However, an increase in the pool of potential buyers might have a positive impact on demand in the long term when economic conditions improve.
The government has been cutting the supply of ECs through the GLS programme. It released fewer and fewer sites for EC developments over the years since 2013. A limited future supply of ECs might provide the market with more time to absorb the unsold stock. Increasing demand and reducing supply in the long term would bring the market back to equilibrium and facilitate a soft landing for price correction in the EC market.
As the total development costs for ECs have started to decrease, sale prices of ECs would become less sticky. However, in order for developers to achieve a decent profit margin, prices cannot fall too much.
An increase in income ceiling to enlarge the pool of potential buyers as well as a restricted supply of new EC launches in the near future due to fewer sales of EC sites in 2014 and 2015 could also negate the effects of an oversupply of ECs. Some EC developers may wish to incorporate more innovations or unique designs to their developments to entice prospective buyers, instead of just focusing on a re-pricing strategy.
- Nicholas Mak is executive director of SLP International; and Kim Huynh, an analyst at SLP International Research & Consultancy.