BT : Is demand for GLS sites outstripping supply?

Business Times - 13 May 2010

COMMENTARY
Is demand for GLS sites outstripping supply?

Going by recent state tenders, new records likely to be set in residential property prices

By ARTHUR SIM
CORRESPONDENT

RECORD property prices are being set for new developments even before a single unit is sold.

While this may seem ludicrous to some, high prices that developers have been paying for recent Government Land Sales (GLS) sites already presupposes this, suggesting that demand for GLS sites is outstripping supply.

A site at Simei Street 3 has just sold for $152.69 million after receiving 18 bids. Analysts at CBRE believe a new project on this site would have a breakeven cost of $860-$900 psf and would fetch an average price of around $1,000 psf. Interestingly, CBRE also noted that units of a new development in the same area went for $660-750 psf this year.

Last month, a site at Boon Lay Way sold for $303 million after receiving 14 bids. CBRE said then that this means the development would have a breakeven cost in the $800-870 psf range with the developer selling the units for at least $1,000 psf. This would similarly set a new benchmark for the area, as subsale units of The Caspian in the vicinity transacted at $650-800 psf while resale units at The Lakeshore nearby have been trading at $680-900 psf over the previous four months.

Also likely to set a new benchmark for Upper Thomson Road will be the development built on a site that sold for $251.3 million in November 2009. With an estimated breakeven cost of about $850-900 psf, units will sell for over $1,000 psf. The developer who bought the site also recently helped set a new benchmark price for the West Coast with its development that sold for between $1,000 psf and $1,200 psf.

Operating in the free market, developers can pay anything they want for GLS sites. Some of the bigger developers might even find the current prices affordable, especially with the current low interest rates.

In this light, the government might want to consider if the rate at which it conducts land sales is an effective enough strategy to maintain the supply/demand balance.

But going by some of the recent tender prices for government land sales, efforts to keep property prices in check by releasing more sites do not seem to be working, with tender prices on the GLS reserve list at least, much higher than what the government is actually prepared to accept.

The tender process for reserve list sites is unique in that the site is only released for public tender after one developer has committed to make a minimum bid that is acceptable by the government. This in effect 'triggers' the site for public tender and sets a 'reserve price' for the site.

While it is not defined as such, the 'trigger price', which is made public, translates as the minimum price the government is prepared to accept for the land.

Looking at the four GLS reserve list sites that were awarded in the second half of 2009, what is interesting to note is that all sold for 150-200 per cent more than the trigger price.

The one reserve list site sold in 2010 so far has gone for 80 per cent more than the trigger price.

In comparison, the two sites on the reserve list that sold in the second half of 2007 during the previous peak sold for just between 25-30 per cent more than the trigger price.

The one reserve list site that sold in the first half of 2008 went for 70 per cent more than the trigger price, but it should be pointed out that the trigger price for that site was just $30 million.

The dynamics of the property market were different during the recent peak in 2007, with most land sales derived from collective sale sites. Property prices were also largely driven by the high-end market. So it is difficult to make a like-for-like comparison.

What is easier to say for certain, however, is that the government clearly wants to keep property prices in check and the GLS is one strategy it employs to do this, largely by making what it believes is a reasonable number of sites available for development with supply of new sites solely in its hands.

But one negative consequence of this was played out in 2006 and 2007, when there were fewer GLS sites available and developers turned instead to the collective sales market that resulted in the 'en bloc fever' which to some degree, destabilised the property market by creating significant supply and demand imbalances - the repercussions of which are still being felt today.

By controlling the supply of development sites again, the government has released a record number of sites for sale through the GLS. For the 1H10, residential sites with a total potential of over 10,000 units have been made available through the GLS, the highest number of potential units in recent years.

Need for faster response

Still, the high bids received by developers suggest that the market can absorb even more units.

Certainly if 20,000 potential units were made available through the GLS, the current bidding would not be as aggressive.

While the government has acted to cool the market recently, it seems it will have to respond much faster to market movements.

It is true that the already large number of residential sites on the current GLS programme (H110) was considered by some to have been too many. But judging by developers' appetites in recent tenders, it may need to release many more in H210 or prices will keep going up.

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