Pedestrians cross a road in a public housing estate in Tampines district. Singapore’s land prices are climbing at three times the pace of apartment costs, with plot values rising by an average 30% per year since early 2011.
Bloomberg/Singapore
Billionaire developer Kwek Leng Beng said last year that skyrocketing prices and restrictive rules made buying residential land in Singapore “suicidal.” That hasn’t stopped international developers from rushing in.
Land prices in some parts of the island-state are climbing at three times the pace of apartment costs, with plot values rising by an average 30% per year since early 2011, according to property broker Chesterton Singapore Pte, which used government auction data. Singapore’s fourth-quarter home prices slid for the first time in almost two years, as property curbs cooled values in the Southeast Asian city.
“The increase in land prices has had a tremendous impact on developers’ profit margins,” said Donald Han, managing director of Chesterton’s Singapore unit. “Developers that used to enjoy margins in excess of 20% will now have to contend with narrower returns.”
Builders with international backing such as Kingsford Development Pte and MCC Land (Singapore) Pte have driven the gains as they sought to benefit from home prices that have jumped 61% since mid-2009. Land prices are squeezing their profits, while the city, ranked by Knight Frank LLP as the most expensive to buy a luxury home in Asia after Hong Kong, has introduced measures that limit mortgages, require higher down payments and impose new taxes to tamp housing inflation.
Profit margins have narrowed to 10% from as much as 20% as recently as three years ago, according to broker CBRE Group Inc. That’s hammered property stocks in Singapore, which have declined 1.3% this year, extending their 9.7% drop in 2013, based on the performance of the FTSE Strait Times Real Estate Index.
While developers are expecting prices to fall due to the measures, that isn’t stopping them from buying more land.
CapitaLand, Southeast Asia’s biggest developer, said yesterday that it will “continue to replenish landbank” in Singapore through government auctions and private sales.
Home prices are expected to moderate this year because of the government’s property measures, said Chief Executive Officer Lim Ming Yan, adding that some of the curbs may be eased if housing values fall as much as 10%.
CapitaLand’s operating profit totalled S$527.7mn ($417.6mn) in the year ended December 31, missing the UOB Kay Hian’s full-year expectations. It had 3.4mn square feet of buildable area as of June, according to a July 25 presentation.
“Recent bids are indicative of high competition for land amongst developers as they continue to bid aggressively to replenish their declining inventories despite a bleak outlook for the property prices,” said Vikrant Pandey, an analyst at UOB Kay Hian Pte in Singapore.
City Developments, run by Kwek, has declined 18% in the past year. The island-state’s second-biggest developer reported in November that third-quarter income fell 10%, adding that builders are beginning to cut prices for existing and new projects and accept lower profit margins.
Kwek, who has a net worth of $3.9bn, according to the Bloomberg billionaires Index, said in August it would be “suicidal” to buy land given the government’s requirement that new homes must be sold within two years of completion.
“Non-traditional property developers, especially foreign construction companies, also are entering the real estate development field, bidding aggressively to secure land for development, while sacrificing their profit margins in construction,” the company said in the earnings statement in November. “This is a very potent trend that may affect the industry in the medium-to-long run.”
City Developments declined to comment further before its earnings on February 27. The company’s landbank in Singapore as of June was 1.2mn square feet on which it can build 3.5mn square feet, according to a presentation on August 6. A plot in Bukit Merah, a residential area carved out of a hill about 5 kilometers (3.1 miles) from the central business district, sold for S$1,162 per square foot of maximum buildable floor area in April 2013, according to data from the Urban Redevelopment Authority. That’s a 20% increase from an auction in the same area four months earlier and almost double the price recorded in 2007.
Some of the biggest land price increases have been for plots in Upper Serangoon in the east and Tampines, near Singapore’s Changi Airport, as well as in Bukit Merah and Alexandra. These former industrial areas now host car dealerships and residential apartment buildings close to the city’s centre. Bidding at auctions, especially those in which foreign developers took part, drove prices up in the areas by 32% and 39% annually respectively in the three years since early 2011.
