Higher land bids may fuel market recovery

THE bidding of the land parcels in the H1 2017 government land sales (GLS) programme witnessed a record number of bids and historic high price quantums for land parcels zoned for residential use in the suburban areas.

In April 2017, the state tender for the land parcel at Toh Tuck Road set a new benchmark by attracting 24 bids, eclipsing the earlier 23 bids received for the Jalan Jurong Kechil land parcel in 2012, which has a 60-year lease and is slated for residential (and an option for retirement homes). Quantum-wise, the state tender for the land parcel at Stirling Road crossed the S$1 billion mark, hitherto the highest for a GLS site that is purely for residential use.

The higher land bids come on the back of higher sales volumes in 2016 and 2017. By the end of 2016, the number of private residential property sales reached 16,378 units, increasing by 16 per cent year on year. The private residential transaction volume continues to climb this year, reaching 12,107 units by the end of H1 2017, which is 64 per cent higher than that recorded in H1 2016.

While some observers attribute the improvement in sales to the fine-tuning of the cooling measures in February 2017, the relaxation of the sellers' stamp duties should only have a marginal impact on sales. However, the change in measure acts as a signal, and it becomes a catalyst to elevate sentiments. The higher sales and bullish bids reinforce the overall bullish outlook.

Notwithstanding, there are concerns that the optimism in land bids and residential market seems to be disconnected from Singapore's economic growth. The Singapore economy grew by a modest 2 per cent in 2016, and the Ministry of Trade and Industry (MTI) expects 2017's economic growth to come in between one and 3 per cent.

Many sectors are facing restructuring due to digital disruption, and there is much uncertainty if the recent export surge led by electronics can hold up. Geopolitical risks, highlighted by North Korea's recent missile launch over Japan and sporadic terrorist attacks, continue to weigh on the global and Singapore economic outlook.

The construction and the oil and gas sectors continue to remain subdued. While the surge in electronics exports at end-2016 and this year gives a boost to the manufacturing sector, total employment fell in Q2 2017 by 8,400 workers, excluding foreign domestic workers. This was the second consecutive quarterly decline.

However, like the proverbial half-filled glass of water, the perception of uncertain economic growth can either be half-full or half-empty. According to MTI, economic growth seems to be trending upwards, although it may seem premature to conclude a sustained upward trajectory. The Straits Times Index generated a total return of 17.6 per cent from January to July 2017, with information-technology stocks leading the surge with an indicative return reaching 47.7 per cent.

Digital disruption and the corresponding restructuring of the economy catalysed new growth areas and generated new wealth, and Singapore is likely to be one of the leaders of digital revolution in South-east Asia.

According to Inland Revenue Authority of Singapore (Iras), the number of taxpayers that have annual income higher than S$100,000 continues to trend upwards, rising to 399,825 in FY2016 from 372,273 in FY2015. For the majority of Singaporeans, the bulk of their wealth is locked in their HDB flats, and prices of HDB flats have been holding up well. All these signal rising affluence on the whole.

The declining inventory of unsold homes in the market also helps drive optimism. The number of unsold uncompleted units during the last peak was 39,184 units in Q4 2011, and it has steadily fallen to 15,085 units. Even if more supply is forthcoming via the Government Land Sales Programme (GLS) or collective sales, most of the new projects will only be launched in 2019 at the earliest.

While the high land bids may be symptomatic of optimism in the market, they also reflect the value of the locations. Most of the land parcels in the H1 and H2 GLS were at choice locations.

For example, the Toh Tuck land parcel is at a strategic location. It is very convenient to get to the Woodlands Checkpoint, Jurong Gateway, Orchard Road and the Central Business District (CBD). The site is also close to established schools, shopping amenities, Beauty World MRT station along the Downtown Line and nature reserves in the Bukit Timah area.

The land parcel at Stirling Road is close to the Commonwealth MRT station, and a short car ride to the CBD. Moreover, the proposed project is likely to have little competition when launched as most of the existing projects in the area are likely to have sold most of their units by then.

The land parcels at Serangoon, which are part of the upcoming Bidadari housing estate, are extremely good sites, being well connected to the CBD. The proposed projects in the area are likely to enjoy high demand, as validated by the over-subscribed Build-To-Order flats and the selling out of the Hundred Palms executive condominium at Hougang.

Another explanation that was frequently invoked to explain the higher land bids was the entry of foreign developers. While there are more foreign developers, the sample of bids may be too small to conclude that foreign developers are overbidding. Moreover, counter-examples weaken this hypothesis: China Construction won the state tender for the land parcel at West Coast Value by only 0.72 per cent and SP Setia edged out the second bidder by a slender 1.86 per cent. Extending the sample across time may not be justifiable as market conditions are different.

PRICE SIGNALS

Logically, land bids act as a signal for future pricing because the developers peg their bids based on their judgement of prices nine to 15 months later. However, much research has established that property buyers tend to look in hindsight, using past price trends as a guide. Hence, bids are usually correlated to existing sales and prevailing prices. For instance, when the market crashed in 2008/2009 due to the global financial crisis (GFC), land bids dropped significantly.

In 2006, a land parcel with the maximum GFA of 61,255 sq m at Tanah Merah Kechil Avenue was awarded at S$318.56 per sq ft per plot ratio (psf ppr). Coinciding with the GFC, the land rate of another site with a maximum GFA of 27,652 sq m at the same location was awarded for much less at S$282.22 psf ppr . That was despite the fact that the latter site is smaller. Separately, when the market rebounded in Q3 2009, the winning land rate for the site at Upper Changi Road North/Flora Drive rebounded to S$320.79 psf ppr.

Another case in point was the land rates of four land parcels at Tampines Avenue 10. The first land parcel at Tampines Avenue 10 was awarded July 2013, just after the Total Debt Servicing Ratio was announced in June 2013. The land price was S$561.97 psf ppr, which was even higher than the land rate of S$417.79 psf ppr for another Tampines site in May 2012. After the market corrected, the land price of an adjacent site went down to S$482.59 psf ppr in May 2015, reflecting the fall in sales and price. When sales started to trend upwards in 2017, the bid of the adjoining land parcel at Tampines Ave 10 rebounded to S$565.43 psf ppr.

IMPACT OF HIGHER LAND BIDS

Higher land bids create a domino effect, fuelling further optimism in the residential market. Areas where land bids were high and competitive recorded greater transactional activity, both in the primary and secondary markets.

For instance, the sale of the Stirling land parcel generated more buzz and sales activity in the area. Commonwealth Towers, for example, received more queries and higher sales as more buyers became aware of the potential of the area. Higher land bids also triggered the collective sale fever, with more homeowners seeking to capitalise on the window of opportunity for capital gains.

RISKS

Higher residential property sales tend to be a precursor of higher home prices. The increase in transactional volumes would thus suggest that residential property prices are likely to increase in 2018.

However, the external environment remains uncertain and the cooling measures are still in place. First, adverse geopolitical conditions continue to linger. North Korea's missile launch over Japan, the Rohingya crisis and sporadic terrorist attacks serve as a reminder of the fragility of economic growth. Second, there is growing pressure for interest rates to normalise and the increase will create a correction in prices of assets, including real estate. To counter the risks, it may be wise for buyers to remain vigilant and mindful of their capacity to service mortgage payments in the event that interest rates rise.