DEVELOPERS here are becoming more cautious with how much money they are willing to pay for private home sites.
They seem to be getting more worried that private home prices could fall, perhaps by up to 8 per cent this year, according to a new research report.
So they have to factor the potentially lower prices of the homes into their sums when deciding how much to offer for a plot on sale.
The BNP Paribas research report analysed about 100 government land sale bids since 2007 up until last month.
When developers look at how much to bid for a site, they consider the likely ‘break-even’ figure. That is, how much they would have to pay for the project, taking into account the cost of building the condo and various other finance, marketing and administration costs. (Investors should take note of this. Developers will not sell the properties at a loss!)
Then, of course, they add a bit on top to make it worth their while, in terms of profits – which means they would offer less for the land than break-even.
The report said developers were lowering the figure they are willing to pay for land, as they can no longer feel sure that prevailing home prices will hold up by the time they are likely to sell the project.
Starting in mid-2011, the difference between the expected break-even price and current selling prices started to widen to 19.8 per cent, well above the mean of 12.1 per cent, the report said.
The mean of 12.1 per cent would tend to represent the profit margin developers have been achieving, on average.
This difference of about 8 percentage points is likely to represent developers’ efforts to guard against the possibility of future average selling prices heading south.
A similar pattern was also observed in the second quarter of 2008, right before home prices tanked, when margin buffers widened in similar fashion, BNP Paribas property analyst Chong Kang Ho noted.
The wider spread of bids for each site, which indicates differing views among developers, and the shorter turnaround of launches also reflect concerns of an uncertain outlook in the market, he added.
Developers’ nervousness is reflected not just in their bid prices, but also in their haste in pushing out new launches.
The average turnaround time between securing a site and launching a project has been cut to just eight months for sites awarded in the past two years – down from more than 10 months, generally, for sites awarded in 2009.
‘This is despite the trend of bigger land sites being offered, typically associated with longer preparation andapproval times for launch,’ BNP’s Mr Chong said. ‘Shorter turnaround launches reflect developers’ expectations of a narrower window of opportunity to sell their new launches at higher prices. This is especially true in the light of upcoming supply.’
Another likely trend is even more enthusiasm for sites right near MRT stations and retail malls, the report said.
Developers feel buyers will go for homes built on these plum sites even if times get a little rough.
The Government has ramped up its twice-yearly land sales programme since the second half of 2010 as it sought to stem rising home prices.
This led to a record number of 77,089 uncompleted private homes in the pipeline as at the fourth quarter of last year – the highest figure since data was first available in 1999 – according to the Urban Redevelopment Authority.
But while recent new sales data has been encouraging, longer-term fundamental concerns remain.
The rising number of unsold homes, tighter immigration rules set to dampen demand and more sites on the way have all taken the rosy hue out of the market.
BNP’s Mr Chong expects it to correct by 5 to 7 per cent. He says the ample loans on offer at low mortgage rates help.
But other experts note that lower land prices do not necessarily mean lower home prices as selling prices often depend on market conditions at the time of launch rather than just developers’ costs.
Developers, not surprisingly, price projects based on market values at the time they go on sale.
While developers might price a new project lower than a nearby project to ensure good take-up at its initial launch, prices will not sway far from general market prices even if the land cost was lower.
Source: The Straits Times – 13 March 2012