If new condo sales are weak, home site bids will remain low

If new condo sales are weak, home site bids will remain low

Developers have problems with 20% launch sales.

Aug 26, 2024

So far this year, developers have bid cautiously for housing plots. Residential en bloc sites and governmental land tenders for housing sites are underutilised.

Compared to earlier executive condominium (EC) land auctions, the August 1 procurement for an EC plot at Jalan Loyang Besar in Pasir Ris received just four offers. Two offers were submitted for a private dwelling site at Margaret Drive in Queenstown, a popular homebuyer neighbourhood, that closed at the same time. The highest price was below experts' estimates.

Housing developers face greater finance and building expenses, but unclear sales take-up may bother them.

The number of new private dwellings sold excluding ECs fell 44% in H1 compared to previous year.

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As of 6 pm on July 7, Jurong Lake District's 99-year leasehold Sora sold 102 units, or 23%, of its total units over its debut weekend.

Selling 20% or more of a project's housing inventory upon launch is commendable. Some low-geared developers can tolerate poor beginning sales since 2021 saw robust private house sales.

Still, condo launches are the result of tremendous planning. Marketing agents, ads, and social media raise product awareness. Building and furnishing a luxurious display apartment costs money. Highly trained and motivated agents build launch hype.

Importantly, low new home launch take-up rates hurt developers. Developers will lower house land offers if sales are uncertain.

Slow sales effects

1. Funding

How well a new apartment sells at launch affects borrowing costs.

The progressive payment plan allows developers to immediately receive 20% of an unfinished new condo unit's sales price. As construction milestones are reached, the buyer pays the remaining purchase price.

A developer may pay building expenses using buyer monies from a successful condo project. A developer must consider utilising more bank borrowing to support development and greater financing expenses if sales are sluggish. This restricts a developer's housing site price.

2. ABSD factor

When initial sales are low, a developer must sell all the residences within five years after buying a site or risk clawback in upfront Additional Buyer's Stamp Duty (ABSD). For a developer that received upfront 35% remission, the clawback is 35% if sales fall below 90% within the deadline.

A developer's land offer will be lower if agents charge greater sales commissions to shift home inventory quickly.

3. Risk

Fast sales allow developers to de-risk home projects rapidly.

Fast project sales provide cash flow clarity and predictability. The developer has more freedom to start new projects before finishing old ones.

If a developer has many unsold houses, they may stop buying additional sites regardless of their qualities.

4. Profit margins

Private home developments here have small profit margins.

Developers may make optimistic residential land bids when projects sell well at launch because they believe they can surpass feasibility study selling prices. When developments sell well, developers may raise stock prices.

If house developers foresee low sales, they will worry about selling prices and bid land more carefully to safeguard profits.

Getting healthy involvement

In H2, the Government Land Sales (GLS) program has identified sites that may produce 5,050 private residences, including 560 EC units.

Getting developers involved in housing land bids is important. Developers will build more private dwellings to meet growing household formation and population growth if they buy lands.

If no confirmed list GLS housing site is given, there may be a scarcity of private houses in a few years, which might raise costs and make it tougher for young Singaporeans to buy.

Singapore benefits from strong GLS bids since state land sales fund previous reserves. Developers and homebuyers pay stamp duty and other taxes.

Future interest rate cuts may increase house land tender participation. However, weaker global economic growth may counterbalance reduced rates. If the HDB resale market weakens owing to the recent tightening of loan-to-value on HDB loans, suburban condo demand may suffer.

Due to the Chinese Hungry Ghost month (early August to early September), new condo releases have been halted. However, additional condo releases are likely in the horizon. Emerald of Katong, Meyer Blue, and The Chuan Park may debut.

Does developer and marketing agent effort pay off? Or do new house launches often have 20%+ sales rates?

If take-up is low, developers may be apprehensive about housing land bids. Policymakers must then determine whether developers' involvement in private housing bids should be increased. Could property cooling be loosened to encourage private home demand?

While there may be solid reasons to ease certain measures, housing is a sensitive issue, making communications difficult.