Is Singapore residential development a viable business?
Margins are thinning, but the Singapore market has some stable, reliable strengths that keep long-term players going
Singapore
DEVELOPERS' profit margins from Singapore private housing development projects have thinned with net margins for some private housing projects estimated to be around 10 per cent or less.
While home prices are buoyant, increases in construction costs, land costs and agent commissions have squeezed margins. In the near term, shortage of construction workers will delay project completions and add to costs.
Developers in Singapore also operate under stringent guidelines. For sites bought on or after July 6, 2018, housing developers are subject to 30 per cent Additional Buyer's Stamp Duty (ABSD) of which 25 per cent may be remitted upfront subject to conditions.
Key conditions include commencing development within two years from the date of acquisition as well as completing development and selling all residential units within five years from the acquisition date.
Projects affected by disruptions to construction timelines resulting from the Covid-19 pandemic have been granted extension of time for commencement, completion and sales.
Besides facing hefty taxes for failure to meet tight timelines, developers have to deal with the prospect of the government introducing property cooling measures.
At its recent annual general meeting, Kwek Leng Beng, executive chairman of City Developments (CDL), cautioned that if property prices continue to rise, there may be a time that further cooling measures could be introduced to control the prices.
Government intervention can adversely impact selling prices and sales. As such, developers may be wary of aggressively buying land for development.
One may thus wonder: why bother doing residential development in Singapore? Groups such as Ho Bee Land and Hotel Properties are currently inactive in residential development at home, while building homes abroad.
And perhaps lured by the scale of the projects and potential for higher margins, CapitaLand is more active in residential development in China than locally. For Q1 2021, CapitaLand achieved sales of 4.02 billion yuan (S$834 million) in China versus S$138 million in Singapore.
Still, many groups are keen on the residential development business here.
A tie-up between CDL and MCL Land beat nine others with its bid of S$445.89 million and was awarded the state tender in May for a 0.87-hectare land parcel directly connected to Farrer Park MRT Station, which is zoned "residential with commercial at first storey".
In government tenders for two sites which closed last week, a CDL and MCL tie-up was the top bidder for an executive condominium site at Tengah while emerging second in the tender for a residential site along Ang Mo Kio Avenue 1, opposite the Bishan-Ang Mo Kio Park
Fifteen bids were submitted for the Ang Mo Kio site, with a joint venture between UOL Group, Singapore Land Group and Kheng Leong Group putting in the top bid of S$381.38 million or nearly S$1,118 per square foot per plot ratio.
Other participants in these tenders included Wing Tai, Far East Organization, Sim Lian Land, units of Hong Leong Group Singapore, and GuocoLand.
Doing residential projects at home is something that local developers are very familiar with. Groups like CDL and UOL have established track records in building homes here.
Head honchos do not need to travel to inspect the progress of works, possess deep knowledge of buyer preferences, have a strong feel of the micro market, and have built up relationships with various service providers.
The government can be a "foe" of developers as it actively intervenes to cool prices and restricts land banking. But the government is also a friendly force in the private residential market.
It encourages home ownership. Citizens tying the knot receive help in buying HDB flats. Over time, some sell their HDB flats for a profit and use the proceeds to buy private property.
As the government typically delivers infrastructure projects on time, a buyer purchasing a condominium unit off-plan can be reasonably assured that the upcoming MRT station will materialise as scheduled.
The government provides the stability and the pro-business environment that draws foreigners to buy residential units here.
Efforts in attracting high value business activities to Singapore lead to some foreigners working here and create rental demand for homes.
In Singapore, new private homes here are typically sold off-plan and the progress payment schedule is developer-friendly in nature. Buyers pay up to 60 per cent of the final sale price ahead of a project's completion as opposed to around 10 per cent in the United Kingdom.
Land sites bought from government land sales are clean and ready to be worked on once the developer takes over the site. While there are various permits and consents to be obtained, developers can count on transparency and efficiency from relevant government agencies.
The private residential market here is relatively small as 79 per cent of resident households live in HDB dwellings. However, demand is strong for private housing and unlike some other property types, housing is not being disrupted by digitalisation.
Work from home and online learning for students lead to more time being spent at home and possibly more money going after higher quality space in homes.
The financial returns from residential projects may also look fine in a world of abundant liquidity, which results in lowering return on equity everywhere.
With the strong balance sheets of banks here, good name developers can secure competitive funding for residential projects. Banks may fund 70 per cent of project cost at interest rates of around 2 per cent per annum.
Assume a project makes 8 per cent net margin and achieves good sales when selling off-plan. In this scenario, bank loans need not be fully drawn down and some of the capital put in by developers may come back in less than five years.
Such a project can generate an annualised return on equity of about 7 per cent, which represents a decent return as Singapore 10 year government bond yield is around 1.5 per cent.
Developers may gripe about the fat commissions payable to marketing agents. But these agents work hard, strive creatively and cast their nets wide to get people from near and far educated in the merits of investing in Singapore residential property and specific projects.
Through attending property webinars, some people learn that getting on the private residential property ladder can be a means for long-term wealth preservation and creation.
Many in the residential development business here keep a small team, which means fixed costs are low. Work is outsourced to competent architects, contractors and marketing agents.
Private home buyers can be demanding as these are big ticket items.
Developers have to keep abreast of lifestyle changes and deliver high quality end products. They also need to be nimble to secure sites, find good windows to launch projects and work around government intervention.
But, as long as interest rates remain low, residential buying appetite will be strong and developers will find the thin margins of Singapore private housing projects attractive enough for the risks involved.
