Mismatch in price expectations breaks sales

IN 2017, the market was astonished by the upswing in residential en bloc and private land sales when deals worth S$9.1 billion were sealed, second only to the record S$12.3 billion fetched in 2007.

A lack of sites under the government land sales (GLS) programme, coupled with developers' acute need to replenish land inventory and a recovering residential property market, were the main driving forces behind the en bloc sales boom in 2017.

The year 2018 has begun with 19 sales realising S$5.7 billion in value as at March 21, 2018, although several sites had tenders closed with the sales outcome still pending.

This review seeks to understand the factors that will impact the en bloc sales market in 2018 and its outlook.

Launch pipeline low; restocking still in progress

The launch pipeline comprising unsold completed and uncompleted units was at a high of 40,430 units in Q4 2011, but strong take-up in 2012 and 2013 and a cutback in GLS from 2014 resulted in the supply of units for sale shrinking significantly.

Between 2010 and 2013, the GLS supply, based on the Confirmed List, averaged about 9,000 units per annum. However, oversupply concerns led to GLS supply being reduced to about 4,000 units per annum on average under the Confirmed List, between 2014 and 2017.

Consequently, by mid-2017, the launch pipeline had plunged to 16,929 units, the lowest level since the data series commenced in Q3 2006. Compared to the new sales take-up of 10,566 units in 2017, it is a rather narrow buffer, providing only a year-plus of supply.

As at Q4 2017, the launch pipeline increased to 20,794 units, due mainly to the pick-up in en bloc sales. With new sales take-up estimated at 11,000 to 12,000 units in 2018, and possibly continuing at healthy levels for the next year or two, the launch pipeline will have to be sustained to ensure adequate supply.

This has contributed to developers continuing to restock their land banks.

Demand spurred by positive medium-term outlook

The residential market has been on a down-cycle for about four years, as reflected by the Urban Redevelopment Authority's (URA) residential property price index, declining from Q3 2013 to Q2 2017.

But with its turnaround since mid-2017, the market is recovering and in the early stages of an up-cycle. Perhaps the duration of the past two recovery cycles may give some indication of how long an up-cycle can last.

The most recent recovery cycle started in 2009 - after the global financial crisis - and peaked in 2013, interrupted by the effects of the cooling measures including the total debt servicing ratio (TDSR) framework.

Another recovery cycle started in 2004 and ended in 2008 when an economic downturn struck with the onset of the global financial crisis.

Each of these recovery cycles lasted about four years and ended due to market or regulatory events. The current market play can be influenced by an optimistic market outlook for the next two to three years.

During this period, transaction volumes are expected to increase due to pent-up demand, presenting potentially attractive revenue opportunities for developers.

Rising land prices raise sellers' expectations

It may not have been apparent earlier but residential land prices had been slowly creeping up since 2015, reaching a crescendo in recent months.

The increase was across all sub-markets, exacerbated by the reduction of residential land supply under the GLS programme, resulting in more intense competition and bidding for sites among developers.

An example in the suburban sub-market is in the West Coast Vale area where the Parc Riviera site was clinched in August 2015 for S$551 per sq ft per plot ratio (psf ppr), only to be surpassed by the S$592 psf ppr paid for the adjacent Twin Vew parcel in February 2017.

The Twin Vew land price was further overshadowed by the S$800 psf ppr winning bid in January 2018 for another site in the same location.

In the prime sub-market, the Martin Modern parcel fetched S$1,239 psf ppr in June 2016 but keen demand saw the Jiak Kim Street site command S$1,733 psf ppr - a more optimistic bid, notwithstanding the commercial use allowed on the first storey.

The successful en bloc sales in 2017 at mostly optimistic prices bolstered the confidence of sellers and raised their price expectations. This has led to reserve prices of en bloc sites not being met and the sales process becoming protracted, with sellers exploring follow-up options such as securing a buyer by private treaty.

In 2018, we expect a trend of more protracted or failed collective sales due to a mismatch in pricing expectations by en bloc sellers and buyers.

Strong en bloc pipeline

While more en bloc sales could end up being protracted in 2018, a strong pipeline of these sites is likely to maintain or increase the momentum of launches.

The launch and sales momentum in the en bloc sales market has been rising on a quarterly basis since 2017. There are currently about 140 developments in varying stages of sales preparation, although some of these might be non-starters while others may not secure the required minimum 80 or 90 per cent consensus.

Currently, around 10 en bloc sites are waiting for their tenders to close, while another 14 sites are under private treaty negotiations following non-conclusive offers after their tender closing.

Some of these - Cairnhill Mansions, Riviera Point, Pearl Bank Apartments and Brookvale Park - were sold recently. Since a sustained supply of sites is expected, bids are likely to stabilise and the volume of successful collective sales could possibly increase.

The recent increase in the top marginal rate of the buyer's stamp duty (BSD), from 3 per cent to 4 per cent for amounts exceeding S$1 million of the property value, is unlikely to dampen demand for residential sites.

Although developers might trim their bids for sites slightly, taking into account the BSD increase, there are other factors that might have a preponderant effect.

In reality, any computational reduction in bid assessment will be subject to how attractive the site is, its reserve price, the competition involved, the current rising market outlook or other factors.

In 2017, investments in GLS residential sites amounted to S$5.97 billion while collective/en bloc/private land sales fetched S$9.1 billion.

Investments in GLS residential sites in H1 2018 is estimated at S$4-4.4 billion and is expected to be moderate for the full year as the H2 2018 GLS programme is unlikely to be aggressive. Therefore, en bloc sale sites will continue to be a major source of residential land supply for developers in 2018.

As the medium-term outlook is positive, developers are likely to continue restocking their land inventory. Coupled with a firm pipeline of potential en bloc sites, the sales momentum witnessed in 2017 is expected to be sustained.