Singapore’s property prices may have declined for 14 quarters, but that isn’t deterring developers. According to Cushman & Wakefield, developers have paid premiums of about 29 per cent on land purchases, since tweaks to the cooling measures in March. This means they’re buying land at some of the highest prices we’ve seen in five years. Here’s why they may be so eager:

The theory of land sales and a recovering property market

Here’s the widespread speculation: aggressive buying by developers reflects on a market recovery. If developers think the property market won’t do well, then they wouldn’t buy land. Simple.

Except it’s not; we don’t dispute that developers’ land purchases reflect, to some degree, the state of the property market. However, it’s an over-simplification to say “developers are buying = property market is rebounding”.

There are other considerations as to why developers need to shore up their supply of land, and only some of those are related to market conditions. Here’s why they’re still buying and bidding aggressively, even if the market seems down:

Land purchases are made based on future projections, not current prices

Property developers don’t really make land purchases based on current prices; the decisions are based on how they feel the market will be in a few years.

Remember that, once the land is purchased, it takes some time before units go on sale. Even then, developers may hold off on launches, as a strategy to get better prices (if there are too many concurrent launches near their development, for example, a developer may wait it out to avoid competition).

Developers also take into consideration price movements in the surrounding region. If they see that property markets in Hong Kong and Australia are slowing down, for example, they might chose to bet on foreign investors turning back to Singapore in the near future.

As such, it’s not unusual to see developers aggressively buying land, even if the current property seems weak. Right now in fact, developers may be buying because…

Developers sense the market is bottoming out

Property sales volumes skyrocketed in February and March. In particular, 1,806 private homes (excluding ECs) were sold in March this year, which is the highest number since June 2013. At the same time, prices have not moved significantly, which suggests we’re at an inflection point (see our previous article, that explains this in detail).

If the market hasn’t bottomed out already, developers are confident that it would have by the time 2019 or 2020 rolls around. As such, they’re building up their land banks in preparation for the rebound.

In fact, it might be risky for developers not to start acquiring land now – the last thing any developer wants is to have no projects ready, when the property market recovers.

Land is not something developers can buy as and when they want

Property development is radically different from many business industries, due to the nature of land acquisition.

For example, a furniture manufacturer, or car manufacturer, can just order more raw materials whenever it wants to ramp up production. But developers have a much harder time acquiring land to build on. Processes such as en-bloc sales, or finding land with the right zoning permits, can take months or even years. Pricing is also a major issue, as developers can’t predict land prices in the future (they can try, but the accuracy of such predictions can’t be counted on). Add to this the fact that Singapore is tiny, and the number of government land sales are unpredictable.

Under these conditions, there’s seldom a shortage of willing buyers during land sales. Developers just can’t rely in the land still being there, as and when they need it.*

*To be precise, developers can buy land on demand if they’re willing to pay a ridiculous price for it, such as double the market value. But that’s a moot point; they won’t do that because there’s no profit in it.

Location is not a replicable quality

Land is not a fungible commodity. That is, plots of land are not interchangeably similar, unlike barrels of oil or gold bars. As such, each plot of land creates different levels of demand, and the interest of developers is based more on the plot’s unique location than on general market conditions.

For example, the Toh Tuck land sale attracted 24 bids, a record number for non-landed government land sales. This is because the Toh Tuck land parcel is close to the new Beauty World MRT station, and the prime Bukit Timah housing district. These are not qualities that can be duplicated by other plots of land, and developers thus bid aggressively despite our weak current market.

After all, when the location is good, the developer can still be confident of turning a profit; even if said profit isn’t as high as it would be in a booming market. It sure beats making no money.

All this being said, developer confidence is not totally separate from market trends

The positive sentiment exhibited by developers does bear relation to confidence in the property market (see points 1 and 2). So don’t take this as a claim that the two factors are somehow unrelated; they definitely are.

However, we shouldn’t go so far as to assume a rebound is guaranteed to happen by 2020, just because we see developers buying land. There’s also no guarantee that the confidence of developers will pay off – they’re not fortune tellers, they’re businesses taking acceptable risks.

(Or maybe that does make them fortune tellers!)