http://www.businesstimes.com.sg/spec...-bids-20130117
Published January 17, 2013
Why new rules will tame developers' bids
Lifestyle concepts like roof terraces may be at stake
By Kalpana Rashiwala
LAST Friday's property cooling measures will have serious implications on how much developers will be prepared to pay for residential land, as well as the continued survival of popular lifestyle concepts like private roof terraces with swimming pools or jacuzzis.
First, the various measures to curb investment demand for residential properties - such as higher additional buyer's stamp duty (ABSD) rates, lower loan-to-value (LTV) limits and bigger cash downpayment - will reduce the pool of buyers for developers to sell units in their housing projects to.
Also giving developers reason to trim their land bids is the move to exclude private enclosed spaces (PES) and private roof terraces (PRT) in condo developments from the computation of gross floor area (GFA). Industry players say these features make up roughly 4-8 per cent of strata saleable area in high-rise condo developments and an even higher proportion for low-rise projects.
Under the rule change announced last Friday, PRT and PES now have to be carved out from the 10 per cent bonus gross floor area (GFA) allocation that also includes balconies. Development charges are payable for this bonus GFA. Given a choice between developing balconies and PES/PRT within the 10 per cent bonus GFA allocation, financially it makes more sense to opt for balconies.
Roxy-Pacific Holdings executive chairman Teo Hong Lim explained: "Most buyers and developers will be more receptive to balcony space than private roof terraces and private enclosed spaces. From my experience, you can sell PES and PRT at maybe 35-40 per cent of price charged for internal or built-in space, whereas you can price balcony space at the same rate as internal space."
"So private pools and jacuzzis on penthouse rooftops could become a thing of the past," he reckoned.
Agreeing, Landmark Property Advisers director Lee Hon Kiun said: "Balconies are much more useful to the occupant than a roof terrace." He estimates that a 4-5 per cent reduction in saleable strata area could clip land value by about 5 per cent.
Another factor that is expected to dampen developers' appetite for big residential sites is the increase in the ABSD rate payable on residential land purchases - from 10 per cent to 15 per cent.
To qualify for upfront remission of ABSD, developers have to undertake to finish developing the project on the site and selling all the residential units in it within five years of the date of contract or agreement to buy the site, among other conditions. If they fail to do so, ABSD with interest (at 5 per cent per annum, compounded) becomes payable immediately upon expiry of the five-year deadline.
"Should a developer ever have to pay ABSD after five years, the effective payment would actually be 19.14 per cent assuming the 5 per cent per annum interest is compounded," said Landmark's Mr Lee.
"With the latest package of cooling measures, the risk of having to fork out this ABSD is much higher and most developers would probably shun large housing development sites for the time being," he added.
Agreeing, Savills Singapore deputy managing director Steven Ming said: "In the face of slower home sales, the risk of having unsold units becomes very real. The increase in the ABSD rate on residential land purchases from 10 to 15 per cent will dampen developers' interest in big sites - at both state tenders and collective sales.
"But even when the momentum of home sales recovers, conservative bidding may continue for a while, as this latest round of measures clearly demonstrates the government's resolve to cool the market."
Mr Ming added that regardless of their size, sales of residential en bloc sites overall may cool off. "In addition to a fall in saleable area efficiency, there are now more risks associated with going into development than before and developers will price these in their bids. These lowered bids are unlikely to meet the price aspirations of collective sale owners, who would not be inclined to lower their reserve price expectations if their cost of buying a replacement property is not reduced in the near term. So, one can expect a stalemate in this market for a while."
However, Jones Lang LaSalle's head of investments, Karamjit Singh, suggested that developers may be able to stomach the higher ABSD risk in buying land if they remain confident about overall housing demand and their ability to develop and sell their project within five years.
The reduction in saleable space due to the change in PES and PRT treatment would be felt the most for low-rise sites.
"The most crucial factor is how home buyers react to all the cooling measures - a 5 to 7 percentage point increase across the board in ABSD rate when they buy residential properties, along with lower LTV ratios and bigger cash downpayment for those taking their second or subsequent housing loans. This could be the start of the turning point of the residential property cycle.
"To a large extent, the demand for homes will rest on the shoulders of first-time buyers. Even if their accumulated buying power remains strong, the overall market mood will remain cautious as investors stay on the sidelines or move towards commercial properties - which have so far been spared any cooling measures," said Mr Singh.
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