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Realty check

Cecilia Chow, Goola Warden & Sharanya Pillai
Cecilia Chow, Goola Warden & Sharanya Pillai  • 13 min read
Realty check
SINGAPORE (Dec 4): Michael Tan has been working hard over the last few weeks to get a collective sale of Leonie Gardens off the ground. He is part of the collective sale committee formed at end-September that is in the midst of preparing for the next extr
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SINGAPORE (Dec 4): Michael Tan has been working hard over the last few weeks to get a collective sale of Leonie Gardens off the ground. He is part of the collective sale committee formed at end-September that is in the midst of preparing for the next extraordinary general meeting to announce the reserve price and facilitate the collection of signatures. “We already have quite a lot of supporters,” he says, referring to his fellow unit owners at Leonie Gardens.

Like owners of a string of other residential properties that have gone up for collective sale this year, Tan is hoping to get a price that is higher than what is achievable in the secondary market. Meanwhile, a developer that agrees to buy the site en bloc and redevelop it could make a nice profit if the property market continues its recovery.

Leonie Gardens has twin 23-storey red towers and an eight-storey block with 138 units in total. It sits on a 145,791 sq ft site with a 99-year lease that began in 1990. The site has a plot ratio of 2.8, which means it can be redeveloped into a 36-storey project. Assuming an average unit size of 700 sq ft, the new development could have about 580 units.

Including Leonie Gardens, property consultants’ latest estimate is that there are 80 to 90 projects that are attempting a collective sale. There is just one problem. The Monetary Authority of Singapore warned this past week that banks, developers and potential property buyers should tread carefully amid a rapidly growing supply of new residential properties, soft rents, rising interest rates and slower population growth.

Private residential property prices have fallen a cumulative 11% since 3Q2013. They increased 0.7% in 3Q2017, but this came after 15 consecutive quarters of declines. Yet, property developers are anticipating a strong recovery in demand in the years ahead, and they have sought to replenish their landbanks through collective sale deals. MAS says in its latest Financial Stability Review that 20 residential projects totalling about 2,900 units have been sold this year through en bloc transactions. There were only six such deals last year and just one in 2015.

“The redevelopment of these en bloc sites (coupled with supply from Government Land Sales sites) could potentially add another 20,000 new private housing units. This will more than double the number of unsold units currently in the pipeline within the next one to two years,” MAS says in the Financial Stability Review, which was released on Nov 30.

MAS also points out that there were more than 30,000 vacant private housing units in 3Q2017. “Even though vacancy rates have declined from the peak of 8.9% in 2Q2016, they remain elevated at 8.4% in 3Q2017 compared with 5.2% in 1Q2013 and the historical average of around 6.5% over the past decade,” MAS says. And, rents have stayed unchanged from 2Q2017, after falling by a cumulative 12.5% since 3Q2013. “With slower population growth and relatgively high vacancy rates, there is considerable uncertainty as to whether the new supply coming on stream can be fully absorbed by the market,” says MAS.

No oversupply, analysts say
Many analysts and property consultants who spoke to The Edge Singapore say MAS is right to sound the alarm about surging en bloc deals pushing up land prices. In fact, some developers are likely to have to reach for record prices in order to just break even on some of these en bloc deals. (See “As MAS sounds warning, will property stocks get hit?” below). Yet, the raw supply numbers do not appear to be excessive.

Tay Huey Ying, head of research and consultancy at JLL Singapore, says the unsold stock of residential property is not all that high by historical standards. “Unsold residential stock has fallen by more than half, from more than 44,000 units in 2008 to 17,421 units as at 3Q2017,” Tay notes, citing statistics from URA. “Developer sales volume reached 8,702 units in the first three quarters of 2017 and could end the year at the 10,500-to-11,000-unit level. If this buying momentum is sustained into 2018 and 2019, the unsold stock of 17,421 units would be depleted in less than two years,” she adds.

Wilson Ng, property analyst at Morgan Stanley, has a similar view. “Unsold inventory levels of 17,000 units are near 18-year lows, and we agree they could rise as more units — 20,000 by MAS estimates — are launched in the next one to two years. We think the pace of increase will be partially offset by home purchases, which are tracking at 12,000 units in the past 12 months,” he says. By his calculations, if home purchase volumes hold steady, unsold inventory levels could rise to 25,000 by next year. But that would still be 1.5 standard standard deviations below the historical 18-year average of 35,000.

Ng also points out that current vacancy rates, while higher than in 2013, will probably be reduced as the properties recently sold in en bloc transactions are demolished next year. “Longer term, from 2021, the reasons driving the near-term vacancy improvement are likely to reverse. This, together with effective existing and potential housing policies, will probably limit the length of this property up-cycle to within the next four years,” he adds.

Some market watchers suggest that developers have chosen to replenish their landbanks by aggressively bidding for en bloc sites because there has been a reduction in the number of sites released under the Government Land Sales programme in recent years. “Given the simpler and faster sale process for GLS compared with collective sales, GLS is typically the preferred mode of land acquisition. Hence, releasing more GLS sites could result in diverting some demand away from the collective sale market,” says Tay of JLL. But that will not necessarily stop land prices from getting pushed up, she adds.

Ismail Gafoor, CEO of PropNex Realty, says the surge in en bloc deals is simply a reflection of the market working as property developers sense a coming upturn in demand. “Why is there suddenly such a huge increase in the number of collective sales? It’s because of the reading of the market by the developers, that there is demand. And, that has been because of the strong pickup in sales this year,” he tells The Edge Singapore.

The authorities may be concerned that the market could become overly exuberant, leading eventually to an oversupply situation. “I think [the market] is not oversupplied right now. But if we continue with a huge number of en bloc sales, that can [result in] a mismatch,” says Ismail. Trying to boost supply through GLS poses the same risk of developers bidding too aggressively, he adds.

“That’s why the government is monitoring the market closely and cautioning developers who are bidding for en bloc [sites] and buyers about the long-term impact.” On Nov 30, URA announced the launch of four sites for sale. Two sites, on Holland Road and Handy Road, were launched for sale under the Confirmed List. Another two sites, on Mattar Road and Canberra Drive, were made available for application under the Reserve List. Together, these four sites can yield about 1,720 residential units, URA said.

What’s next?
So, what impact will the warning from MAS have on the property market? “I think the developers will be cautious moving forward,” says Ismail. Apart from the chilling effect of the comments made by MAS, there are now many more en bloc opportunities for developers. “So, I think at the end of the day, demand and supply will dictate and sensibility will prevail. We don’t need to worry. Market forces will prevail at the end of the day,” Ismail adds.

Karamjit Singh, CEO of Showsuite and senior consultant at JLL, also sees market forces as the key driver of everything that has been happening recently. According to him, the surge in land prices was not just the result of developers needing to replenish their landbanks but also the big stock market rally. “For the past year, the stock market has done well, not just in Singapore but also regionally. The property market takes its cue from the stock market, and the residential market is very sentiment-driven,” he tells The Edge Singapore.

Now, he sees some normalcy returning to the market. “MAS’ warning won’t stop people from launching their sites for collective sale, or from collecting signatures for those who have already started the collective sale process,” he says. “However, owners who’re trying to achieve high benchmark prices for their collective sale sites will see resistance. Those who are realistic in their pricing, developers will still consider.” But he adds, “I can see that the pace of en bloc sales is cooling off somewhat, based on the number of bids in tenders that closed in recent weeks. The market will naturally find its equilibrium.”

On the other hand, some analysts fear that there will be some casualties before a new equilibrium is achieved. “Sometimes, when there is too much money and too few sites available, given the pressure to get into the market, there is actually no distinction between the behaviour of sophisticated and unsophisticated investors. They may not necessarily heed warnings on the impending supply, slow population growth, interest rate increases or other factors,” says Alan Cheong, head of research and consultancy at Savills Singapore. “Only those developers who have been through crises will have the discipline to either restrain themselves from overbidding or manage risk by bidding high but apportioning only a fraction of their funds just to stay relevant in the game.”

As for Tan and his collective sale committee at Leonie Gardens, the warnings from MAS matter little. He points out that the recent slew of en bloc deals was dominated by large privatised HUDC estates in the suburbs such as Eunosville, Serangoon Ville, Normanton Park, Tampines Court and Florence Regency. “High-end projects in the prime districts, on the other hand, have been in the doldrums for the past 10 years,” he adds. Still, with the hot property market having drawn the attention of MAS, Tan thinks other homeowners trying to launch a collective sale deal had better act fast. “You never quite know what the government is going to do next.”

As MAS sounds warning, will property stocks get hit?
Property stocks have been on a tear this year, lifted by low starting valuations and growing signs that a recovery in the property market was unfolding. And, boosting their landbanks through en bloc deals was viewed positively by the market, even if the sites were being acquired at lofty prices.

Among the more prolific acquirers was Oxley Holdings. In fact, if all its en bloc deals go through, it will have the largest potential landbank of any local developer. Notably, Oxley led a consortium of four developers, including KSH Holdings and Lian Beng Group, to acquire Rio Casa for $575 million. Oxley also acquired Serangoon Ville for $499 million with KSH Holdings and Lian Beng Group. Most recently, in mid-November, Oxley announced that it had won the bid for Mayfair Gardens for $311 million.

Eric Low, deputy CEO of Oxley, said in a recent interview that the developer acquires land based on a “good set of market intelligence and feasibility studies”, and that mitigates “a big chunk of the risk”. Even so, the prices that Oxley would have to achieve for the redeveloped sites in order to turn a profit might give some investors pause.

For instance, the price tag for Mayfair Gardens works out to $1,244 psf per plot ratio (ppr), and Oxley is likely to have to price the new development at $1,700 psf in order to break even, some analysts say. Yet, prices at The Blossomvale, a neighbouring freehold property, were averaging only $1,300 psf until October, when they rose to $1,493 psf.

Elsewhere in the market, SingHaiyi Group acquired a development called Sun Rosier in September through a joint venture (JV) at $271 million. That works out to $1,325 psf ppr for the 146,000 sq ft site located off Bartley Road in District 19. Some market watchers say SingHaiyi will only be able to break even if it prices the redeveloped property at around $2,000 psf, which would be a record for that district.

Correction coming?
Now, with the Monetary Authority of Singapore warning this past week that banks, developers and potential property buyers should tread carefully, is the sector headed for a correction? Havard Chi, head of research at Quarz Capital Asia, thinks the move is more positive than negative. “It provides further confirmation that MAS and the government continue to monitor the residential market closely and will act to stymie any runaway appreciation of housing price that is not in line with market fundamentals. The re-emphasis of its stance will help developers in forecasting the price of future developments and to bid accordingly,” he says.

“We continue to remain optimistic about the Singapore residential market and see stronger growth in transactions and moderate increases in housing price in line with growth in income and population. These are driven by pent-up demand. The transaction volume in the last few years was simply below the normalised rate (population, formation of new households, smaller families) and the continuing growth in the global economy.”

Big developers
One developer that appears to be making en bloc purchases at prices close to the market value is City Developments. In October, CDL acquired the freehold Amber Park for $906.7 million, or $1,515 psf ppr. The break-even price for this project would be close to $2,000 psf. Selling prices of new launches on Amber Road are around $2,000 psf.

“In the light of the exuberant en bloc market and with significant supply looming ahead, it is even more important than ever for developers to carefully select the right sites, with strong attributes such as size, location, accessibility and tenure,” Sherman Kwek, CEO-designate of City Developments, tells The Edge Singapore. “CDL has always been careful and prudent in its landbanking approach and we will continue to do so with cautious optimism. We remain interested in participating in future GLS sites and en bloc tenders and we will be very selective.”

CDL already has a large portfolio of developments that are benefiting from the upturn in the local property market. For the year to Sept 30, CDL and its JV associates sold 1,056 units, including executive condominiums, more than double the units sold during the same period last year. Total sales value amounted to about $1.8 billion, almost triple that for the same period last year.

Another large local developer that appears to be adding to its landbank at reasonable prices is UOL Group. In January, UOL bought 45 Amber Road, a former nursery, for $156 million, or $1,063 psf ppr. The new development is scheduled to be launched next year. Last year, UOL and its subsidiary, United Industrial Corp, also acquired a privatised HUDC estate, Raintree Gardens in Potong Pasir, for $334 million, or $797 psf ppr. The estimated break-even price is $1,250 psf. The development will be launched next year.

Most recently, in October, UOL teamed up with its sister company, Kheng Leong Co, to acquire Nanak Mansions on Meyer Road for $201 million, or $1,429 psf ppr. It plans to launch the new project in 2019. “We maintain our view that UOL is well positioned to benefit from a residential recovery, given its astute landbanking at significant discounts to current tenders, exhibited in the recent en bloc of Nanak Mansions,” says Credit Suisse in a recent report.

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