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Collective sales poised for recovery?
THE residential collective sales market moves in tandem with the broader residential market cycle, registering stronger activity during the upturns while moderating during downturns. Responding to a rising market between 2005 and 2007, the collective sales market boomed, establishing a record sales volume of S$10.9 billion in 2007. In 2008/09, the global financial crisis resulted in collective sales plummeting to insignificant levels before staging a mild recovery between 2010 and 2013.
However, the imposition of various cooling measures, culminating in the total debt servicing ratio (TDSR), led to residential collective sales flattening again in 2014 and 2015. Developers, faced with oversupply and an increasing unsold stock in their inventories, became more cautious and shied away from collective sales. The chart above shows the trend of the annual residential collective sales value between 2006 and 2016.
Reduction in oversupply and improving home sales
As the residential market eased under the weight of the cooling measures, falling home prices and sales volume and rising oversupply prompted policymakers to cut back supply in the Government Land Sales (GLS) programme. The planned quantum of private homes on the confirmed list in the GLS programme was trimmed by more than 75 per cent in the past five years, from 13,255 units in 2011 to 3,095 units in 2016. The stock of unsold private residential units also nearly halved during the same period, from 40,430 units as at end-2011 to 21,102 units as at end-2016, bringing down the oversupply to a more manageable level.
After the introduction of the TDSR of 60 per cent, transactions plunged, leading to developer sales of private homes registering a low of 7,316 units in 2014. As the market gradually came to terms with the TDSR, new private home sales stabilised in 2015, with 7,440 units sold. In 2016, new private home sales grew 7.2 per cent year-on-year to 7,972 units against a backdrop of improved sentiment and a perception that the market is close to the bottom.
Demand for residential land strengthens
Under these circumstances, developers have been bidding competitively for the limited number of GLS residential sites on the market, driven by the need to replenish land banks and for business continuity.
An apt example of heightened competition for private residential sites is the tender in August 2014 for the two adjacent land parcels along Fernvale Road that are now being developed into High Park Residences vis-à-vis that of the neighbouring site in September 2016.
Parcels A and B of High Park Residences drew four and three bidders, respectively, while the neighbouring site was contested by 14 parties. An almost similar trend was observed for many sitestendered since late 2014. In 2016, we saw an uptick in the collective sales market, with three sites finding buyers – Shunfu Ville (S$638 million), Raintree Gardens (S$334.2 million) and Harbour View Gardens (S$33.25 million), which led to increased optimism and interest among owners of potential collective sale sites.
Market conditions augur well for collective sales
The possibility of the residential property market bottoming and an anticipation of a sustained growth in new private home sales will lead to higher confidence among developers in their quest for sites. Judging by the strong participation in GLS residential land tenders, especially since the second half of 2016 when the number of bidders averaged 12 per site, demand for sites in 2017 is likely to remain robust. With only five sites on the confirmed list in the first half of 2017, many interested parties will still not be able to secure sites and will be compelled to continue bidding for other sites competitively. Although we may expect increased supply in the confirmed list of the GLS programme for the second half of 2017, it is likely to be modest, which will not ease demand pressure for residential land. While the reserve list provides additional sites to augment the confirmed list, only a few have been triggered in the recent past and these are typically the more attractive ones. Under these circumstances, private or collective sale sites would be viable alternatives to GLS offerings.
How different is it this time around?
While sales of new private homes rose in the past two years, the increase has been gradual, due mainly to the dampening effects of the cooling measures. Prices, in general, have not yet turned around, although their declines have been moderating. While these signs are encouraging for the market, the medium-term outlook remains uncertain. With the cooling measures still in force, a V-shaped recovery can almost certainly be ruled out, leaving the more likely possibility of prices trending mildly upwards after they have bottomed out.
The parties involved in collective sales need to understand this and also the fact that home prices are currently 10-20 per cent lower than the peak in 2013 (depending on the sub-market), so land prices would have to be at realistic levels.
While there are signs of improvement in the residential market generally, there are differences among the sub-markets. The Outside Central Region (OCR) or suburban sub-market has a more comfortable level of unsold stock amounting to 8,358 units as at Q416 relative to the annual developer sales of 4,807 units in 2016 or a ratio of 1.7. A ratio of 2.8 is seen in the Rest of Central Region (RCR) or the city fringe sub-market, which has 6,950 unsold units against new sales take-up of 2,483 units last year. The Core Central Region (CCR), which includes the prime districts and Sentosa, has been the hardest hit by the cooling measures. It is saddled with 5,794 unsold units and with only 682 new homes sold in 2016, has the highest ratio of 8.5, which reflects the extent of oversupply in the number of units for sale.
Based on this data, developers would be more forthcoming towards the OCR and RCR sub-markets, where selling prices are more affordable and unsold stock is of less concern than in the CCR. Collective sales in the CCR are likely to be more challenging and would require a rational perspective on pricing among interested parties in order to be successful.
The recent easing of the seller’s stamp duty (SSD) and the total debt servicing ratio (TDSR) is a positive signal that could lead more buyers back into the market. However, the punitive stamp duties that are applicable to the transaction of physical assets are now applicable to transactions involving transfer of shares in entities that primarily hold residential properties. This makes it more difficult for developers to dispose of unsold inventory in order to avoid Qualifying Certificate extension charges, and additional buyer’s stamp duty (ABSD) on the purchase price of the site if they do not fulfil the five-year conditions for upfront remission.
In conclusion, there are prospects for the collective sales market to follow on the momentum of 2016, but it is unlikely to be exuberant. Many developers will be interested in collective sales opportunities but at measured price levels. Owners, on the other hand, would be equally enthusiastic but over-optimism in pricing could prove a challenge for the gap to be bridged.
Tan Hong Boon is regional director, capital markets and Ong Teck Hui is national director, research & consultancy, at JLL