Land prices at equilibrium

  March 16, 2012

A few days ago, a Hong Kong businessman told me he felt that a lot of supposedly “independent” property analysts were bent on pouring cold water on the private housing market in Singapore.

Well, not all, but he is right to an extent. The rhetoric may have cooled somewhat but the negativity remains. I can understand where they are coming from. A number have made judgement calls that housing prices will most certainly head south after the latest cooling measures – in particular the additional buyer’s stamp duty – were introduced in early December.

In any case, it is too early for them to admit that they were wrong or else they would end up looking like they did not do their homework and dished out wishy-washy analyses.

Over the past few days, a more matter-of-fact report emerged. This study analysed about 100 bids for government land sales from 2007 until last month. It concluded that developers have been trimming down their bids as they can no longer feel sure that prevailing home prices will hold up until the time they are likely to sell the project.

If this downward trend in land prices can be sustained, it would be welcome news as developers might be encouraged to price their units more realistically or even slightly lower to move their sales as a priority, rather than go for the highest price that the market can bear. This could be the soft landing that I am sure our policy-makers would like.

But is this too good a silver lining to hope for? I am saying this because a sharp and sudden correction does no one any good. Then again, two recent events appear to suggest that the downward trend in land prices may not be as straightforward as we hope.

The first was the “overly-optimistic” top bid for a 99-year residential site along Hillview Avenue 10 days ago.

A little-known company, Kingsford Development – owned by three Chinese nationals, put in the highest bid of S$243.2 million or S$638 per sq ft per plot ratio (psf ppr) for the 136,147 sq ft site. This was a whopping 18.6 per cent higher than the next best bid.

What some of us may not know is that this company had also put in a bid for a previous government land tender for a residential site at Bedok South Avenue 3 last month.

Its bid of S$301.1 million was the third highest, about 13 per cent behind the winning one of S$345.9 million or S$534.22 psf ppr from joint bidders, Far East Organization’s FE Lakeside, Frasers Centrepoint’s FCL Topaz and Sekisui House Singapore.

I am not sure if these same investors had participated in even more tenders under a different company name or had joined forces with others in joint venture bids. Whatever it is, they seem impatient to secure a site and this could explain the aggressive bid.

The second event was the successful collective sale last week of Seletar Garden for S$96.2 million, well above market expectations and the asking price of between S$80 million and S$85 million. The sale of the freehold mixed development of walk-up flats and shops was concluded after a hotly contested five-cornered fight.

The sale was a surprise for two reasons: One, the selling price far exceeded expectations and two, many of us had thought that the collective sale market was dead and buried. We later learned that there were two other successful en bloc sales which together with Seletar Garden totalled S$145 million since the start of the year.

These two events illustrate the simple fact that there are more developers seeking sites than there are sites for sale.

Simple economics tells you that when demand exceeds supply, prices rise. Of course, I am not saying that prices would trend upwards for sure. The uncertain future will act to cap prices but it is difficult to see them trending downwards under present conditions. Instead, we will likely see land prices fluctuating around a stable price equilibrium.

The Seletar Garden sale also shows us that developers will compete hard for good sites when they feel that these would be a good hedge against the uncertain future. As for Kingsford Development, it is definitely not the first nor will it be the last party to submit an over-the-top bid for a development site.

By Colin Tan – head of research and consultancy at Chesterton Suntec International.