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Disciplined approach to land acquisition amid uncertainties

The outlook for the housing market in Singapore remains positive over the long term, presenting good development opportunities with decent margins on a risk-adjusted basis.

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Above: City Developments' Piermont Grand executive condominium. As at the end of July, CDL and Hong Leong Group collectively have the most robust residential development pipeline (both launched and unlaunched) at 6,377 units, with 2,249 or 35 per cent of them sold as at end-July 2019.

LAND acquisition is subject to the vagaries of the market but come what may, real estate developers will have to acquire development sites at some stage, as replenishing land stock is critical to income sustainability.

Developers bought land with much fervor in recent years, particularly around 2017 up till mid-2018. Naturally, once the thirst for sites had been quenched, the buying slowed - even before the new property cooling measures were imposed in July 2018.

More subdued top bid prices

It is apparent that the measures have tamed residential land bids across the board - collective sales have all but dried up. In the Government Land Sales (GLS) for example, following the curbs, the average number of bidders for residential sites has declined from eight bidders in 2018 (before the measures), to just four for the two site tenders in late 2018.

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In addition, top bid prices were more subdued, and mostly in line with or below expectations; prior to the measures, the top bids had come in 10 to 20 per cent higher than expectation. The average land prices reached S$1,271 per square foot per plot ratio (psf ppr) across seven sites in 2018 before the measures hit, and fell to S$916 psf ppr over two sites post-measures.

What caught developers' eye in 2019?

Thus far in 2019, developers have largely turned to GLS as a key source of development land, perhaps due to the greater certainty of deal completion and pricing discretion, compared to collective sales. Year-to-date, the four private residential sites tendered received an average of seven bids, with the Middle Road site garnering a whopping 10 bids, and a top bid of S$1,458 psf ppr, which was within expectations.

Developers continue to gravitate towards well-located sites - near key transport nodes - which typically enjoy higher end-user demand. They also take greater interest in executive condominiums (ECs) - a hybrid between public and private housing - which has not been dampened by the cooling measures. This is perhaps due to the limited supply of ECs and the buyer-occupier profile which is less affected by the most recent set of curbs.

The number of bids for EC land, tendered by the HDB, remained elevated at an average of eight bids per site over four sites since the measures, albeit down from a whopping 17 bids for the sole site in 2018, and an average of 13 bids for two sites in 2016. Top bid prices also remained stable at S$567-572 psf ppr, compared to the S$583 psf ppr for the sole site in 2018, prior to the measures.

Appetite for development sites

Based on the recent bidding for GLS residential sites, Colliers Research notes that local stalwarts such as Hong Leong Group/City Developments (CDL), GuocoLand, and MCL Land remained keen on public land tenders.

Chinese developers - Qingjian, MCC Land, China Construction (South Pacific), and Logan Property - have also been bidding actively in recent tenders. These developers could be looking to plough back the receipts from their existing projects into new developments.

For example, MCC Land has mostly completed and sold out its projects in Queens Peak, The Poiz Residences, and Northwave. The capital controls in China should have limited impact on these developers as their capital is already in Singapore.

Given the macroeconomic uncertainties, developers are generally more cautious. However, with the cut in land supply via the GLS, developers who have sold down their inventory can be expected to look into the collective sale market for suitable sites to replenish their pipeline. For example, Qingjian bought a collective sale site at Phoenix Road in July 2019.

Data analysed by Colliers Research as at the end of July showed that Hong Leong Group and CDL collectively have the most robust residential development pipeline (both launched and unlaunched) at 6,377 units, with 2,249 or 35 per cent of them sold as at end-July 2019 - though it is important to stress that many of its projects have not been put on the market yet.

This is followed by Oxley Holdings - which has launched many of the projects in its inventory - with a pipeline of 3,814 residential units. Rounding out the top five are Hoi Hup/Sunway, UOL Group and Qingjian which have all been fairly active on the land acquisition front.

Collective sale: Down but not out

The collective sale market will remain an important source of land, complementing the GLS, especially for prime and mature locations as well as freehold sites.

Factors that are supportive of collective sale include the redevelopment and intensification of land use to accommodate population growth in land-scarce Singapore, and urban renewal to put sites to more efficient use. Additionally, it also offers a viable option for private homeowners to "exit" older properties - at a premium - when the buildings become too costly to maintain.

Colliers' capital markets and investment services team has identified factors that will give some collective sale sites an edge.

  • Location: Being near MRT stations (existing or future stations) is key. Accessibility and convenience remain important considerations.
  • Size: Sites with redevelopment potential of about 500 residential units would be the sweet spot.
  • Price: Regardless of market conditions, developments that are realistically priced will stand a better chance.
  • Age of development: Typically, older buildings - at least 30 years old - offer better redevelopment and land use intensification potential.
  • Number of attempts: Very few developments succeed at the first try. A collective sale is a complex process and the more familiar the owners are with the various steps, the better it is to facilitate the process.
  • Collective sale committee: It is helpful to have a committee comprising owners who are knowledgeable, charismatic and display leadership qualities.

Adjusting to market realities

The outlook for the housing market in Singapore remains positive over the long term, presenting good development opportunities with decent margins on a risk-adjusted basis.

On their part, developers will have to play by Singapore's rules. The government has indicated that it will not take a hands-off attitude to the property cycle, sending a clear message that it will continue to intervene when necessary. This will ensure that the property market remains sustainable which ultimately leads to a more manageable risk environment for all stakeholders.

One year on from the roll-out of new curbs, developers and buyers are coming to terms with the new market realities, particularly the stiffer additional buyer's stamp duty. Over time, the market will find an equilibrium and take the measures in its stride.

  • The writer is the head of research for Singapore at Colliers International