New condos can cost up to 13% more than existing neighbours

IN the current market upturn, prices and sales of private residential properties have risen across all market segments in Singapore.

As the mass market condominium segment makes up about 45 per cent of the sales volume in the entire private housing market, it might enjoy its share of the recovery.

As developers acquire private land through en bloc sales, they inject more liquidity into the housing market. This in turn would fuel the growth in prices and sales, which is expected to continue for the rest of this year.

The bullish land prices paid by almost every developer who bought development land in the past 18 months would further encourage them to avoid a price war when they launch their new projects.

As a result, new projects are expected to launch at prices that are 7-13 per cent higher than other comparable condominiums in the vicinity.

In addition, barring any further government intervention, the market dynamics could also increase developers' sales in the Outside Central Region (OCR) by about 30 per cent to 8,000 units.

Market turnaround

Having been weighed down by the series of property market cooling measures in recent years, private residential real estate in Singapore has suffered weak demand and price declines.

However, the market conditions began to brighten from the second half of 2017.

There are some 291,500 private non-landed housing units (excluding executive condominiums or ECs) in Singapore at the end of 2017. About 45.4 per cent of the existing stock is located in the OCR, as opposed to being located in the prime districts and city-fringe areas.

The OCR condominium market, also referred to as the mass-market condominium market, reported a robust showing last year.

Compared with 2016, home-buying demand in 2017 was driven by an improvement in buyer sentiment.

Property developers sold 10,566 private homes islandwide last year in this segment, 32.5 per cent more than their sales in 2016.

To replenish their land banks, developers have actively participated in collective sales and the government land sales tenders, some of which are located in OCR locations.

Rising land prices

Since 2016, the top bids submitted by property developers in the competitive GLS tenders have been increasingly aggressive.

Developers have been willing to pay higher premiums for new residential plots over comparable sites sold in the past few years. This has led to a steady rise in land prices which is evident across different market segments.

For example, the tender for the GLS site in Tampines Avenue 10 (Parcel C) drew a top bid of S$370.1 million, or S$565 psf per plot ratio (ppr), in April 2017 from City Developments (CDL). The successful bid was 17.2 per cent higher than the land price paid by MCC Land in April 2015 for the nearby land parcel across the road on which The Alps Residences is located.

In spite of the government's effort to moderate land prices by batching the land tenders to close on the same day, it has not stopped developers from submitting multiple bids for the sites.

The first batched GLS tenders closed on Dec 5, 2017, while the second batched land tenders closed on Jan 30, 2018 for the Chong Kuo Road, Handy Road, and West Coast Vale land sites.

Even though there were multiple tender closings on that day, top bids submitted by developers were still bullish.

CDL emerged as the top bidder for two out of the three 99-year leasehold private housing sites, namely the Handy Road and West Coast Vale plots.

For the West Coast Vale site, CDL's top bid was 35.3 per cent higher than the successful bid for the site of the yet-to-be-launched Twin Vew project whose land tender closed one year ago in Feb 2017.

Indeed, last year, the land acquisition demand spilled over to the private land sales market with developers paying increasingly higher land rates in en-bloc sale tenders.

For example, in September 2017, SingHaiyi and Huajiang International, both controlled by Chinese tycoon Gordon Tang and his wife, Chen Huaidan, paid S$1,325 psf ppr for Sun Rosier, which is a record land rate for an en-bloc sale in the OCR.

All in the same boat

A higher land price would elevate the total development cost. Hence, developers would have to launch their new projects at higher prices in order to maintain their profit margins.

If all the developers who bought residential land in the past two years paid relatively high land rates, it would be more beneficial for all of them not to enter into a price war.

In other words, they would have to unanimously launch their projects at relatively high prices in the future.

Based on the prices paid for residential sites in the OCR, it is estimated that the prices of new condominiums to be launched in 2018 and 2019 could potentially be 7 per cent to 13 per cent higher than the condominiums that are currently offered for sale in the vicinity of the land parcels sold.

One land deal that stood out was the collective sale of Sun Rosier, which was acquired at S$271 million. Based on the land price paid by the developers, they are projecting an estimated 55 per cent increase in its future selling price in order to maintain a decent profit margin.

However, such a sharp projected increase in future launch price is an exception, rather than the rule.

On the other hand, property prices are subjected to market factors such as demand and supply.

Specifically, to avoid paying the additional buyer's stamp duty (ABSD) which is a hefty 15 per cent of the purchase price paid for the land parcel, developers must build and sell all the dwelling units in a development within five years after the land is acquired.

Hence, developers will have to price their projects reasonably to sell the entire project within five years.

There are potentially more than 20 private residential developments with about 12,000 units in total that could be launched in 2018.

These projects are developed on either GLS land parcels or en-bloc sale sites acquired by developers.

Among these developments, there are about six mass-market condominium projects with an estimated 3,900 units in total that could be launched in 2018.

Rising developers' sales volume

In the past ten years, developers sold a yearly average of 7,000 private homes in the OCR. Approximately 96.3 per cent of the private dwelling units sold were non-landed units.

In 2017, as demand in the real estate market recovered, they sold 6,165 units in the OCR, a 28.3 per cent increase over the 2016 primary market sales volume in the OCR locality.

In the four-year period from 2014 to 2017, developers sold fewer than 7,000 homes in the OCR each year. Hence there could be pent-up demand building up in the OCR.

Developers could be launching more dwelling units this year as some of them have acquired substantial land parcels in the past two years.

At the start of the en bloc sales fever in the second half of 2016 and first half of 2017, some of the larger land parcels acquired were in the OCR, such as those of the privatised HUDC developments. Hence, a significant number of private homes that could be launched in the coming 12 months could be located in the OCR.

There is also a positive correlation between the developers' sales and launch volume (see table). As a result, as developers launch more dwelling units in the coming months, the sales volume would rise correspondingly.

The resale volume of mass-market condos was the highest in five years in 2017. There were 6,347 suburban condominium units transacted in the secondary market last year - an impressive increase in resale volume of more than 80 per cent, as compared to 3,497 units changing hands in 2016.