Global developers unfazed by price of land in Singapore
Billionaire's warning that buying residential land in Singapore is 'suicidal' has not stopped global developers from sending market higher
Bloomberg in Singapore
Billionaire developer Kwek Leng Beng said last year that skyrocketing prices and restrictive rules made buying residential land in Singapore "suicidal". That has not stopped international developers from rushing in.
Land prices in some parts of the city-state are climbing at three times the pace of apartment costs, with plot values rising by an average 30 per cent per year since early 2011, according to property broker Chesterton Singapore, which used government auction data. Fourth quarter home prices slid for the first time in almost two years, as property curbs cooled values.
"The increase in land prices has had a tremendous impact on developers' profit margins," said Donald Han, managing director of Chesterton's Singapore unit. "Developers that used to enjoy margins in excess of 20 per cent will now have to contend with narrower returns."
Builders with international backing such as Kingsford Development and MCC Land have driven the gains as they sought to benefit from home prices that have jumped 61 per cent since mid-2009.
Land prices are squeezing their profits, while the city, ranked by Knight Frank as the most expensive to buy a luxury home in Asia after Hong Kong, has introduced measures that limit mortgages, require higher down payments and impose new taxes to tamp housing inflation.
Profit margins have narrowed to 10 per cent from up to 20 per cent as recently as three years ago, according to broker CBRE.
While developers are expecting prices to fall due to the measures, that is not stopping them from buying more land.
CapitaLand, Southeast Asia's biggest developer, said yesterday that it would "continue to replenish land bank" in Singapore through government auctions and private sales.
"Recent bids are indicative of high competition for land bank among developers as they continue to bid aggressively to replenish their declining inventories despite a bleak outlook for the property prices," said Vikrant Pandey, an analyst at UOB Kay Hian in Singapore.
Kwek, who has a net worth of US$3.9 billion, said in August it would be suicidal to buy land given the requirement that new homes must be sold within two years of completion.
"Non-traditional property developers, especially foreign construction companies, also are entering the real-estate development field, bidding aggressively to secure land for development, while sacrificing their profit margins in construction," said Kwek's company, City Developments, in its November earnings statement. "This is a very potent trend that may affect the industry in the medium-to-long run."
A plot in Bukit Merah, a residential area carved out of a hill about 5 kilometres from the central business district, sold for S$1,162 (HK$7,123) per square foot of maximum buildable floor area in April 2013, according to data from the Urban Redevelopment Authority. That is a 20 per cent increase from an auction in the same area four months earlier, and almost double the price in 2007.
Some of the biggest land-price increases have been for plots in Upper Serangoon in the east and Tampines, near Singapore's Changi Airport, as well as in Bukit Merah and Alexandra. These former industrial areas now host car dealerships and residential apartment buildings close to the city's centre.
Bidding at auctions, especially those in which foreign developers took part, drove prices up in these areas by up to 39 per cent annually in the three years since early 2011.
Over the same period, prices of homes built on the sites increased only 7 per cent per annum, Chesterton's Han said.
Land prices have almost doubled in the past six years in suburban areas such as Tampines, Clementi and Jurong West.
MCC Land, a unit of Metallurgical Corporation of China, placed the highest offer for a plot in Tampines, an area to the east of the city centre, paying S$562 per square foot. The bid was about 34 per cent higher than what Singapore's largest private developer, Far East Organisation, offered for a plot in the same area in May 2012, Chesterton data showed.
Developers' profit margins have declined 50 per cent over the past six months and could fall further to under 10 per cent over the next 12 months if prices remain flat, Standard Chartered analysts led by Regina Lim said in a note to clients in September.
Singapore Land, Wheelock Properties (Singapore), Wing Tai Holdings and Keppel Land are the most exposed to margin compression based on land purchases made over the past 12 months, according to the note.
Wheelock could make a net profit of less than 5 per cent on a condominium project at Ang Mo Kio, in the northeast of the island-state, Standard Chartered's Lim said in a separate note to clients in January. "Rising land prices are the main culprit for margin compression," Lim had said in the September note.