The saleable space available to condo developers, as well as their profit margins, might be reduced if new definitions of floor area are implemented

Sep 22, 2022

The Urban Redevelopment Authority (URA) published a circular on the harmonisation of floor area definitions earlier this month. The circular is intended to be adopted by four government agencies, including the URA, the Singapore Land Authority (SLA), the Building and Construction Authority, and the Singapore Civil Defense Force.

The modifications, which are going to go into effect on June 1, 2023, have the admirable goal of increasing productivity within the built environment profession. However, they will also have repercussions for private home developers, which will lead to a decrease in the amount of space that may be sold within condominium developments.

This is due to the fact that, in accordance with the new standardised definition, all stratum areas will be required to be included as gross floor area (GFA), which is governed by the Master Plan plot ratio for the site.

At the moment, developers of residential property offer air conditioner ledges as a component of the stratum space of condo units. However, as long as the air conditioning ledge is no more than one metre broad, it is not included in the GFA computation and is therefore considered "free area" for developers. According to those who participate in the sector, such air conditioning ledges account for between 4 and 5 percent of the total space that may be sold in private condo complexes.

Another source of free space, that is, territory that is not recorded as part of a building's GFA but that condo developers are able to sell, comes from a mechanism that is referred to as a curtain wall. According to descriptions found on the Internet, a curtain wall is a relatively thin wall that is often made out of an aluminium frame and may have infills of glass, metal panels, or thin stone. The framing is fastened to the framework of the building and is constructed outside the slab's border on the floor.

At the present time, curtain wall systems can make up anywhere from 1% to 2% of the total saleable area of a condominium construction.

Under the harmonised floor area regime, curtain walls and private aircon ledges will be counted as GFA. This is due to the fact that these features are considered stratum area. To put it another way, the use of these areas by developers will no longer be free. According to the opinions of industry analysts, a decrease in living space would be the inevitable consequence of a developer's decision to continue counting some sections as saleable floor area, presuming that the overall GFA of the unit would remain unchanged.

If increasing profits is the primary objective, then there will be less incentive for developers to construct private air conditioning ledges. (However, inhabitants of condos do not need to worry about where to position their air conditioning units because developers who plan to keep aircon ledges as community property (that is, not for sale) can continue to exempt such aircon ledges from GFA.)

Curtain wall systems are not required in each building. In point of fact, the construction of these window walls is more expensive than the construction of standard window walls erected within the slab edge. However, some builders may still believe that it is advantageous to have a curtain wall system installed in their luxury condo developments in order to attain the level of quality and aesthetic appeal that they seek. In situations like these, the higher selling price would justify the greater building cost, despite the fact that the amount of saleable space would be decreased.

Whether or not a condominium development includes curtain walls, on June 1, 2023, there will be a decrease in the total saleable area of the development as a result of the alignment of the stratum area with the gross floor area (GFA).

The efficiency of the project, which is measured as the ratio of total saleable area to gross floor space, may suffer if the total saleable area of a typical condominium is reduced by more than five percent.

Cost necessary to reach breakeven

When determining a developer's breakeven cost, efficiency is one of the most important metrics to consider.

According to Alan Cheong, executive director of research and consultancy at Savills Singapore, the total saleable area for private condo projects is currently between 99 and slightly over 100 percent of the GFA based on the Master Plan plot ratio. This percentage is determined by dividing the GFA by the total buildable area. The total saleable area number takes into account a bonus of gross floor area (GFA) of up to 10%. (under various schemes, including for balconies, indoor recreation spaces and the Built Environment Transformation GFA Incentive Scheme).

The current efficiency ratios are already a significant decrease from the 115% to 125% developers used to enjoy during the heyday around 2007-2008, when they were able to sell bay windows, planter boxes, private enclosed spaces, and private roof terraces without having such spaces counted as their GFA. The current efficiency ratios are already a significant decrease from the 115% to 125% developers used to enjoy during the heyday around 2007-2008.

Bay windows and planter boxes have been counted as gross floor area (GFA) as of January 1, 2009. For all non-landed residential constructions, private enclosed areas and private roof terraces have been counted as part of bonus GFA (and subject to payment of development fee, formerly known as land improvement charge) from the 12th of January, 2013.

Observers of the market predict that by June 1, 2023, the efficiency ratio for typical condo complexes may decline to about 95%.

Another modification that will be implemented as part of the harmonised floor area regime that might result in a reduction of a condo's total saleable space is that voids will no longer be counted as part of the stratum area. This could lead to a further decline in the efficiency ratio. At this time, voids are not considered to be part of GFA. A good example of this would be the creation of a double-volume room by "removing a floor" in order to obtain a ceiling that is twice as high. In luxurious residential buildings, such as penthouses and other duplex apartments, voids are frequently included by the developers. This is often done in places with double the normal volume, such as the living and/or dining areas of a home.

Which would you rather have: lower land bids or higher selling prices?

The cost at which a condo development project will break even increases as its efficiency is reduced, all other things being equal. For the sake of argument, let's say that certain developers argue that they would factor the decreased efficiency into their land pricing, which would mean that they would offer lower bids on land.

In practise, such a result may not always materialise, particularly with regard to desirable locations, for which there will be significant rivalry. How much of the increased breakeven cost can real estate developers pass on to their customers in the form of higher selling prices when faced with such a scenario? It's possible that developers may try to accomplish both of these things at the same time, such as pay less for land while simultaneously driving up the selling price of the projects that are built on the sites.

There is a possibility that some developers are willing to lower their profit margins. However, pretax profit margins for condominium developments have already been reduced to between 9 and 13 percent in today's market (partly by higher commissions to property agents). If the profit margins are cut any further, it's possible that they won't be high enough to warrant taking the risks associated with property development.

Both the mortgage rates and construction expenses have been on the rise recently. There is a lack of certainty regarding the likelihood that the economy of Singapore will continue to expand considerably and that homebuyers' wages will continue to climb at a rate that is sufficient for them to be able to pay even greater private house prices.