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Published May 18, 2010

NEWS ANALYSIS

Bringing bids in govt residential land tenders down to earth

To encourage more rational bids and impose greater discipline on developers, close tenders for several sites at the same time, suggests KALPANA RASHIWALA


GOVERNMENT land tenders for private residential land are seeing an anomaly of sorts. As the state launches more sites, land keeps getting sold at higher prices with each successive tender closing.

Behind this is a short-term supply crunch created by the low volume of suburban housing land released and bought at state tenders over the past few years vis-a-vis strong home buying demand since last year. (Please see supply chart from Credo Real Estate.)

Some market observers suggest the escalation in winning bids is also being caused by the current system of tender closings, with just one site offered per tender. What's happening now is that each time a tender closes for a site and it attracts say 14 bids, only one party clinches the plot and some of the other 13 unsuccessful bidders go back and sharpen their pencils for the next tender, pushing up land bids with each consecutive tender.

Nudging developers to rationality

Perhaps tweaking tender closings could nudge developers to make more rational bids.

Rather than having one tender closing for a single site at a time, the authorities could try reverting to the system we had in 1997, for instance, when tenders for several sites (up to five) closed at the same time. This may impose greater discipline on developers when formulating their bids as there is a danger of them ending up with all the sites on offer if they bid too aggressively for everything. They'll have to narrow down which plot they really want.

'The current system of a tender closing for one site at a time, if it's having the effect of sites being awarded at successively higher prices, does help the state to maximise land revenues. But government then can't complain if the finished product prices are higher,' said a developer.

The current surge in top bids at state tenders, if read by government as a sign of strong demand for land, would prompt it to step up supply. However, if the market suddenly turns, this could potentially create a massive oversupply in the mass-market private housing segment (for which state land sales is the major source of supply).

For now at least, an increase in state land supply for private housing in H2 2010 is a foregone conclusion. Strong housing sales, rising end-unit prices and bullish top bids for state land sales amid high participation rates by developers are all creating the impetus for government to release more land as well as a greater variety of sites to try and contain a housing bubble.

The trick for the government will be in gauging just how much it needs to boost supply. This will entail taking into account a host of factors including intake of new permanent residents/citizens, while managing supply-side risks that could emanate if the market suddenly turns, given that there is increasing danger of this happening as prices continue to surge.

According to one school of thought, there's actually enough supply right now.

As at the end of Q1 this year, there were 34,233 private homes (including exec condos) that had yet to be sold in projects with planning approval.

Land sold by the state so far this year as well as sites whose tenders are scheduled to close in May and June can yield a further 6,270 private homes. Adding this figure to the 34,233 units, the total supply of 40,503 units could be sufficient to last three to four years, depending on demand.

It is notewothy that the 40,503-unit supply number is not far off from the recent peak of 43,414 units in Q4 2008 when sentiment in the property market plummeted following the collapse of Lehman Brothers. The lowest the supply number has been is 29,754 units - in Q4 2005.

Faster turnaround

Another trend these days is the relatively quick turnaround time between a developer clinching a site at a state tender and launching a project on it. UOL Group managed to release its Waterbank at Dakota condo in April, just seven months after it was awarded the plot.

It makes sense for developers to launch projects quickly on pricey sites to recoup their investments quickly. The idea is to catch the market while it's still hot. Such a strategy alleviates risks for developers and also allows them to cater to strong demand from home buyers. However, this may also introduce a surge in launches of mass-market projects that could precipitate a market turn in this segment.

So there's a case for government adopting a measured approach in land sales for H2 2010.

Let's look at the other side of the coin.

While the supply of 40,503 units seems ample for now, this number can be whittled down quite quickly if home sales continue to be strong. Already in the first four months of this year, developers sold 6,587 homes and industry forecasts of full-year sales are at about 10,000 to 14,000 units - supported by low interest rates, improving economic outlook and keen interest by foreign buyers in the local property market.

Developers may also not be willing to release everything in their landbank anytime soon. Those with substantial supply in a single location would want to stagger the launch of projects over several phases to maximise selling prices. There are also many projects on sites acquired at peakish prices and whose developers are banking on further price appreciation before launching them. Most developers have the financial muscle for such a strategy.

With developers tending to hold back some projects in their landbanks, there is a role for the state to inject further supply.

One could ask how strong demand really is. Yes there is a lot of genuine buying, from upgraders and others, driven by low interest rates and other factors. But there is also anecdotal evidence of people who are buying second, third or more 'investment' properties with a view to making quick gains. They may not be bothered if rents come down. Then there are foreign buyers, an important source of demand especially in the high end but who can vaporise overnight when things become uncertain as seen during the recent global financial crisis.

With economic and property cycles shrinking, assessing how much land to release is hardly a cut-and-dried affair. And that's not even counting the political and social dimensions of this issue, such as balancing the needs of younger citizens who lament that property prices are beyond reach with potential negative equity pressures that some home owners could face from banks if the values of their homes drop.