Collective sales - reuse, renew, recycle

THE number of successful collective sales in the last six months has attracted much media attention. Most analysts focus on the high prices paid by developers or the substantial additional supply that could result as the sites are redeveloped.

We believe collective sales are a successful model for urban rejuvenation and developers' exuberance is indicative of Singapore's competitiveness and prospects. Recent increase in housing grants and policy changes are positive for sentiment. In the first quarter of 2017, two separate policy changes lifted buyer sentiment in the private residential market.

Firstly, the government adjusted the duration and rates for the application of seller's stamp duty. More importantly, the Housing Development Board increased the CPF Grant for qualifying buyers of resale HDB flats to S$40,000-50,000, from S$30,000.

We think the higher grant could allow upgraders to sell each flat for up to S$10,000-20,000 more.

If the proceeds are redeployed into private housing, it could increase their purchasing power by an additional S$50,000-100,000, taking into account the 80 per cent loan-to-value for residential mortgages.

This may imply a 4 to 9 per cent increase in private residential sales, as the average new private home sold in H12017 was S$1.15 million.

New home sales volume in the first half of 2017 rose 64 per cent year-on-year, exceeding the supply of land from Government Land Sales.

We believe these policy changes as well as brighter economic prospects and the increased investor interest in the luxury private residential market drove higher primary market home sales in the first half of the year.

New private home sales in H1 2017 rose 64 per cent year-on-year to 6,039 units, costing an estimated S$7 billion.

Including executive condominiums, a total of 7,917 new units were sold by developers in H1 2017.

Yet, sites for residential development in the Government Land Sales programme in each half of 2017 on average provide for 2,600 in the Confirmed and 5,200 units Reserve List respectively, a 30-50 per cent cut from 2013-2014.

Faster sales reduce risk of paying ABSD

In the last four years, developers have been more cautious about buying land due to the imposition of additional buyer's stamp duty (ABSD) of 15 per cent on land purchases.

Developers can get upfront remission of ABSD if the site is redeveloped and all the new units are sold within five years of land purchase.

As primary market home sale volumes had fallen 36 per cent to 11,971 in 2016 from 18,787 in 2011, the risk of buying large sites and not selling all the units within the five year period was high.

As primary home volumes increased sharply in H1 2017, developers were less concerned with this risk and started to turn to collective land sales to replenish their land bank.

The government had increased the supply of residential units through its Government Land Sales Programme substantially in 2011-2013 to partially compensate for the low supply released in 2001-2010 amid very high population inflow.

The supply of land was appropriately cut back by 30-50 per cent once population growth was curtailed.

However, developers that entered the market or expanded capacity in 2011-2013 now have excess capacity and need to acquire land to increase market share simply to maintain revenues.

Urban rejuvenation

Singapore's well-structured en-bloc redevelopment process has enabled market-led urban rejuvenation, a rare achievement.

The Land Titles (Strata) Act allows collective sales of developments by majority consent of at least 80 per cent for developments 10 years old and above, and at least 90 per cent majority for developments less than 10 years old.

This has allowed owners of older developments to collectively sell their land for redevelopment. Award-winning examples include The Interlace, Gramercy Park and Sculptura Ardmore, which are rebirths of Gillman Heights, Lucky Tower and The Ardmore respectively.

While many cities still require minimum 90 per cent consent for collective sales, New South Wales in Australia introduced new legislation in 2016 for strata properties to be collectively sold or redeveloped in circumstances where at least 75 per cent of owners agree. This will allow for more rejuvenation in Sydney.

The Singapore government sells 99-year leasehold sites and has recently reiterated that extensions of land leases are not guaranteed. This helped to motivate owners of older, leasehold apartments to sell their apartments collectively.

In the last 10 years, the government has granted a lease top-up back to 99 years for almost all collective sale sites acquired for redevelopment. Thus, collective sales are also a transparent, market-led process for land lease rejuvenation.

In addition to urban rejuvenation and lease extensions, collective sales also allow for capital recycling. In the past 15 years, the Singapore government received on average S$10-20 billion annually from land sales.

These are considered part of the past reserves and managed by GIC, which invests the capital largely outside of Singapore.

Half of the annual net interest income from such investments is used to supplement the government's operating budget.

When developers acquire sites through collective sales, the land sale proceeds received by the individual owners are recycled back into the economy. As most of these are typically owner-occupiers, we expect a majority to buy a home from developers or through the resale market.

Year to date, collective sales have reached S$6 billion. If reinvested, the capital would be material compared to the primary market home sales of S$16 billion this year.

This does not account for the probability that some owners could be increasing their leverage in their new purchase.

Perhaps cognizant of the upside from capital recycling, developers have become more bullish in their land price bids for sites both in the Government Land Sales Programme and collective land sales.

We believe most developers are pricing in 10-20 per cent increase in home prices over the next 24-36 months, which may not be unrealistic, in our view.

We do not expect land prices to continue to escalate at the same pace from here. The market is mature and highly transparent, allowing developers to adjust their bids to account for any changes in supply and interest rates.

For areas where several land parcels have already been sold, we expect developers to be more cautious in their price offers.

Marketing agents are likely to also phase out the timing and locations of collective sales to match demand.

The Government Land Sales programme is designed for flexibility with a Confirmed List and a Reserve List.

As supply from the market-led collective sales increases, perhaps even more sites can be placed in the Reserve List where developers can trigger their sale only if there is sufficient demand.

We also do not expect the volume of collective sales to accelerate from here. Collective sales make sense only at prices at a significant premium above the price achievable through individual unit sales.

As overall market sentiment continues to pick up and unit prices increase, the premium will likely narrow. The incentive for owners to vote in favour of a collective sale will decrease.

Strong recovery

JLL Research expects prime home prices in Singapore to rise 24 per cent over the next 4 years. Singapore prime home prices are attractive compared to other global cities.

The average mass condominium price of S$1.1 million is equivalent to five years of yearly income for the 85th-percentile household, the marginal buyer of private housing as 82 per cent of Singapore resident households reside in HDB flats.

Since 2010, home prices globally have increased faster than incomes, impacting affordability levels. Home price to income ratios in global cities including Sydney, San Francisco, New York, London, Hong Kong rose from 7 years on average in 2010 to 10 years in 2016.

For Singapore, due to several policies to cool the residential market, home price to income ratio has fallen to five years in 2016.

Even if prices rose 24 per cent over the next four years amid 2 per cent annual wage increases, the home price to income ratio of 6 years will still be moderate compared to many other global cities.

The responsive regulatory framework should appeal to international investors as it indicates the city state's desire to ensure stable prices that grow with the city.

While Singapore had sought to cool its residential market from 2010 in response to falling interest rates globally, other jurisdictions have followed suit over the last seven years to rein in disproportionate residential price escalations.

The higher buyer and seller stamp duties in Singapore no longer stand out as expensive.

Gateway to Asean

We see strong prospects for Singapore's economy and its housing market as it continues to anchor itself as the gateway to South-east Asia.

Singapore targets to more than double annual employment by focusing on sectors such as healthcare, Infocomm and IT, wholesale trade, financial and professional services which play to its strengths and leverages off the rapid growth of South-east Asia.

As technology permeates every aspect of the economy, Singapore is investing heavily to nurture an innovation and start-up eco-system matching that of San Francisco.

According to Start-Up Genome's Global Startup Ecosystem Report 2017, Singapore overthrew Silicon Valley as the world's No 1 city for start-up talent.