Developers have generally been cautious in bidding for housing sites thus far this year. Interest in residential en bloc sites is low and bidding at state land tenders of housing sites is subdued.
The four bids for an executive condominium (EC) plot in Jalan Loyang Besar in Pasir Ris at the tender that closed on Aug 1 was far fewer than in other EC land tenders. The tender for a private housing site at Margaret Drive in the Queenstown area, which is popular with homebuyers, that closed at the same time drew two bids and a top bid that was at the lower end of analysts’ expectations.
While housing developers face higher financing and construction costs, perhaps what really bugs developers is uncertain sales take-up.
As it stands, the number of new private homes sold excluding ECs has been declining with the number sold in H1 being 44 per cent less than the corresponding period last year.
In the popular suburban condo market, Jurong Lake District’s 99-year leasehold Sora sold 102 – or 23 per cent – of its total units as at 6 pm on Jul 7, during its launch weekend.
Arguably, selling over 20 per cent of a project ’s housing inventory at launch is respectable. Also, some developers can live with slow initial sales as they are lowly-geared and benefited from strong private home sales back in 2021.
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Still, a condo’s launch represents the culmination of much preparation. Marketing agents, advertisements and social media campaigns help build product awareness. Money is spent building and fitting out a fancy show flat. Well-trained and highly-motivated agents work to generate buzz around a launch.
Crucially, modest take-up rates at new home launches spell trouble for developers. And developers will temper housing land bids when they are unsure of sales.
Effects of slow sales
1. Financing
How well a new condo sells at its launch impacts a project’s financing costs.
Under the progressive payment scheme, a developer collects fairly quickly 20 per cent of a unit’s purchase price when a buyer buys an uncompleted new condo unit. The buyer gradually pays the remainder of the purchase price as various construction milestones are met
When an uncompleted condo project sells well, a developer can largely finance construction costs through funds collected from buyers. Conversely, a developer needs to factor in using more bank financing to fund construction and higher financing costs when slower sales are assumed. This in turn limits the amount a developer might pay for a housing site.
2. The ABSD factor
When a project’s initial sales are modest, a developer faces pressure to sell all the homes, typically within five years of the purchase of a site, or be hit with clawback in Additional Buyer’s Stamp Duty (ABSD), which was remitted upfront. For a developer who enjoyed upfront 35 per cent remission, the clawback is 35 per cent for a sales rate of below 90 per cent within the prescribed time line.
Factoring in higher sales commissions for agents to move housing inventory in a timely manner will dampen a developer’s land bid price.
3. Risk
A developer quickly de-risks a housing project when the pace of sales is fast.
There is much visibility and certainty on future cash flow when a project sells quickly. The developer then has greater flexibility to take on new development projects even before completing existing ones.
On the other hand, brakes might be pulled on acquiring new sites, regardless of a site’s attributes, if a developer holds many unsold homes.
4. Profit margins
Profit margins in private housing projects here are generally skinny.
When projects sell well at launch, developers may feel emboldened to submit bullish residential land bids as they think they can exceed average selling prices assumed in feasibility studies. After all, developers have room to up prices on unsold stock when projects achieve robust initial sales.
If housing developers expect lukewarm sales take-up, they will worry over achieving targeted selling prices and be more prudent with land bids so as to protect margins.
Drawing healthy participation
The Government Land Sales (GLS) programme’s confirmed list for H2 includes sites that can collectively yield about 5,050 private homes, including 560 EC units.
Drawing healthy participation from developers at housing land tenders matters. If developers snap up sites, more new private homes will be built to cater to higher demand from rising household formation and population increase.
Should any confirmed list GLS housing site not be awarded, the risk rises of a shortage of private homes in a few years time, which could cause prices to spike, thereby making it harder for young Singaporeans to achieve their private housing aspirations.
Moreover, Singapore gains from drawing strong bids for GLS sites as proceeds from selling state land goes into past reserves. Additionally, stamp duties and other taxes are collected from housing developers and home buyers.
Going forward, the possible easing of interest rates may boost participation at housing land tenders. Still, the impact of lower rates could be offset by slower global economic growth. Moreover, the suburban condo segment may be hit by the possible softening of demand from Housing and Development Board (HDB) homeowners, should the HDB resale market weaken due to the recent tightening of loan-to-value on HDB loans.
New condo launches have taken a hiatus as the Chinese Hungry Ghost month, which runs from early August to early September, is viewed as inauspicious for new home launches. However, expect a flurry of possible new condo launches soon. Major launches could include Emerald of Katong, Meyer Blue and The Chuan Park.
Will the hard work of developers and marketing agents pay off? Or might sales rates at upcoming new home launches generally hover in the 20 per cent plus range?
Should take-up be tepid, developers may get even more nervous with housing land bids. Policy makers will then need to decide whether participation by developers at tenders for private housing sites needs revving up. Might property cooling measures be relaxed to boost private housing demand?
While there may be good reasons to relax some measures, the challenge is to get the messaging correct as housing is a highly sensitive topic.
