Tuesday, 28 September 2010

The Property Bubble & Investment Trap Part IX - Land Bid for Punggol 99 Yr LH EC Condo Site

A PUNGGOL executive condominium site tender closed last Thursday with four developers putting in bids below industry expectations, the latest for an EC site since the control measures were announced. The 99 LH site sits on 15,500 sq m and has a maximum allowable GFA of 570,000 sf. The site is situated at Punggol Drive / Punggol East, on the eastern boundary of Punggol New Town, is a short walk from Kandaloor LRT station.
It is a good sign that cooling measures are starting to have impact on the land bidding process for both mass market private condo and now EC sites, despite an inherent fault in the bidding process which I had pointed out in my earlier blog posting. The bidding price was 23% lower than that paid by ChoiceHomes Investments and CEL Development for another EC site in Punggol Field earlier in June.

The highest bid for the Punggol Drive plot was $136.2 million, from a China Contractor, Qingdao Construction (Singapore), and worked out to be $237 psf ppr - below the anticipated $250 to $290 psf ppr predicted by analysts.

The bid was only 2.2 per cent higher than the second-highest offer of $133.2 million from Hoi Hup Realty, Sunway Developments and SC Wong Holdings or about $231.8 psf ppr.

An analyst predicted units for this project to sell at about $600 psf which I would consider to be near fair but its location may not be very good. A price of $550 ~ $570 would be more equitable. In the resale market, units in Park Green, The Rivervale and The Florida were sold at $550-$650 psf between June and August 2010.

You may recall in my last posting, I said there is little difference between DBSS and mass condo sites and the lowest bid of the Hougang Ave 7 condo site @ $225 psf ppr seemed more logical for a DBSS site. Hence, you can see this consolidation in land price dropping to a low banding of $231.8 ~ $237 psf ppr for EC, closing in on DBSS land pricing as I predicted. The low pricing of the bids was expected for a location lacking in amenities and far from the Central Core.

The likely implication of this low pricing of the bids for EC Condo site will force future bids for DBSS sites to consolidate much lower to about $200~210 psf ppr. As I mentioned in my last post, I would expect future land bids for private mass condo (99 LH) sites to close between the band $280~$310 psf ppr.

Ultimately, the whole consolidation of the market and re-banding of sale prices may be shaken and work out to something as below, or even lower, with a premium of $30~$50 psf payable as premium payable for locational or other positive factors :-

Price Banding
(a) DBSS $450~$480 psf
(b) EC $550~$600 psf
(c) Mass Market Private 99 Yr LH Cond $680~$720 psf
(d) Mid Range Private 999 / FH Condo  $850~$1,000 psf
(e) Mid Upper Range Private 999 Yr / FH Condo $1,000 - $1,200 psf
(f) Low Range Luxury Condo 99 Yr LH / 999 Yr  / FH $1,200 ~ 2,000 psf
(g)Top Range Luxury Condo Private 999  / FH Above $2,000 psf

In the re-sale market, sales volume is expected to be lower as sellers continue to maintain their asking prices while potential buyers hold out for lower prices. The pace of increase has generally continued to slow this quarter. Future asking price for condo on these plots with cheaper land bids will certainly not be as high as the $830 psf that NV Residences at Pasir Ris is asking.

An analyst's report said resale prices of suburban leasehold homes increased by 2 per cent to $660 psf in this third quarter. This compares with a 4 per cent rise in the second quarter, which took prices to $648 psf. The 2007 peak for these homes was $615 psf. Re-sale prices tend to be lower than new launch prices with a premium of $30~$50 psf payable for age, location and other positive factors. If new condo launches continue to ask for ridiculous prices, it would make better sense to look for resale LH condos with hidden future values.

Reference # 1 :-
TODAY Sep 24, 2010

The tender for an executive condominium site at Punggol Drive and Punggol East has attracted four bids, with the highest from Qingdao Construction at $136 million.

The 99-year leasehold site sits on more than 15,500 sq m and has a maximum allowable gross floor area of more than 570,000 sq feet. The top bid translates to about $237 per square foot per plot ratio. The next highest bid is at $133 million, coming from joint bidders Hoi Hup Realty, Sunway Developments and SC Wong Holdings.

Mr Li Hiaw Ho, executive director of CBRE Research, said the low pricing of the bids was expected for a location lacking in amenities and further away from Punggol Central. Units in this new project will possibly sell around $600 per sq ft, he added.

The HDB will award the tender within the next two weeks.

Reference # 2

Reference # 3

Wednesday, 22 September 2010

The Property Bubble & Investment Trap Part VIII - Land Bid Analysis for Hougang 99 Yr LH Condo Site

I shall deviate from my previous posting plan, which was to give you a short review and comments on the higher end condominiums market, due to the  announcement of tender bids for this 99 Yr LH condo plot at Hougang Ave 7 last Saturday. It would be timely do a quick short review to see how the mass condo market is reacting to the recent anti-speculative measures.

I was very keen earlier to look at previous DBSS launch prices because my personal opinion is that how much the mass condo market will correct will take bearing from here. Before the control mesaures, this part of the price spectrum "DBSS ~ EC ~ Private 99 Yr LH Mass Market Condo" was rather stretched. The ridiculous "land bids" had or will distort what is fair pricing for this market segment.

Hougang Ave 7 ( 99 Yr LH for Condo )

The following are the "land" bids by Developers or "Develop and Build" Contractors. Information are added by me based on my own knowledge for greater clarity.

(a) Bid 1 - S$160 M @ $339.6 psf ppr - Local D and B Contractor

(b) Bid 2 - S$156.08 M @ $331.3 psf ppr - Local Developer and Contractor JV

(c) Bid 3 - S$146.8 M @ $311.6 psf ppr - Local Reputable Developers JV
(d) Bid 4 - S$145.8 M @ $309.5 psf ppr - Local Reputable Developer
(e) Bid 5 - S$132.11 M @ $280.4 psf ppr - Local Reputable Developer
(d) Bid 6 (Lowest) - S$106 M @ $225 psf ppr - Local Developer

Analysts had expected bids between $320 and $370 psf ppr. "They are no longer putting in aggressive bids that will lead to runaway prices". This plot is targetted at HDB upgraders. An analyst predicted a breakeven cost at $640 psf and the final selling price at $770 psf.

Bid 1 @ $339.6 psf ppr was 2.5 % higher than the next lower bid @ $331.3 psf ppr. The gap with the lowest bid was 50.9 %.

My Comments :-

Comparison of Gross Plot Area & Approved GFA with another Hougang Ave 2 site awarded in May 2010.

                            (A) Hougang Ave 7            (B) Hougang Ave 2
                                           (99 Year LH)                         (99 Year LH)
(a) Land Use                    - Condo                                - Condo
(b) Gross Plot Area         - 15,630 sq. m.                     - 30,195.5 sq. m.
(c) Approved GFA         - 43,765 sq. m.                      - 42,274 sq.m.
(d) Plot ratio                    - 2.80                                     - 1.40 (5sty)
(e) Land Bid                    - $160M                                 - S$207.5 M
(f) Land Cost                  - $339.6 psf prr                     -  $456 psf ppr

What is the expected construction cost (psf GFA) if the units are sold at target price ?

Analysts said the top bid could reflect a break-even cost of about $640-$680 psf should a low-rise condo be developed. And condo units in this new project could possibly sell between $770~$800 psf.

By comparison, units at the recently launched The Minton at Lorong Ah Soo sold at about $860 psf from June ~ August 2010. The Kovan Residences, adjacent to Kovan MRT, were selling at around $900 psf over the same period.

A sale price of $770~$800 psf would translate into a construction costs of about $250 psf if I allow $60 psf for consultancy and common facilities and a mark-up of 15~20%. You may recall from my previous posting that construction costs was $280 ~ $350 psf of GFA during the 2008 peak for medium range condo.

I would expect a more reasonable selling price to hover between $680~$720 psf for this category of mass market condominums targetted at HDB upgraders. In my own opinion, a D and B contractor still has much leeway to cut the construction costs of $250 psf, without compromising on quality of fnishes, while considering a reasonable profit margin for D and B. Otherwise, why should the Govt award them to a joint entity if land and construction costs are still high separately and chasing each other up the price spectrum, like it used to be in 2008, which ultimately would cause property price to spiral by more than another $200 psf. The fact that pure developers can bid at lower land price attest to this. Moreover, the driver of the high construction costs in the 2008 was primarily due to high steel price. But currently, the high pricing is due to costly land; notwithstanding that construction costs had fallen. Since the MND Minister claimed that by releasing more land supply will solve the problem, it had better be so for the market to be sustainable.

Comparison of land bids with Yishun Condo Site and other Hougang Ave 2 and other implications

(a) The winning bid for Hougang Ave 7 ($340 psf ppr) has fallen by 16% vs Yishun site ($405 psf). This is almost 10% if we factor out $30 psf for locational factor for Yishun site due to proximity to Orchard Country Club and better view. This is consistent with my expectation of a 10%~15% general fall in prices.

Gap analysis between top and 2nd lower bids : Hougang 2.5% ; Yishun 31%
Gap analysis between highest and lowest bids : Hougang 50.9%; Yishun 68.5%

(b) The winning bid for Hougang Ave 7 ($340 psf ppr) has fallen by 25.4% vs Hougang Ave 2 site ($456 psf). This % is very indicative of the extent of fall in low range mass market condomium in lower range condo. It should be noted that the Ave 2 bid was submitted by a pure Developer.

(c) Bid 2 was submitted by the same D and B Contractor who won the Yishun condo site bid and his bid now is very close to Bid 1.

(d) Bid 3 was again submitted by a pair of established developers in JV @ $311.6 psf ppr. Their bid for the Yishun site was $308 psf ppr.  A new base price at $310 psf seems to be the new reference point tenderers are adding on their premium for a bid. The established developers seem to be taking "price leadership" position from here.

(e) Bid 4 and 5 was interesting and submitted by a pair of "related" established developers. Bid 4 was very close to Bid 3. They are bidding slightly lower than Bid 3 by about $30 psf. Hence, I expect the future bidding price band to be between $280~$310, with the higher band being the premium price, either to pay more or to cover factor in locational factors.

(f) Bid 6 seems to attempt at an impossible historical low price of about $225 psf ppr. This seems to be a logical price to bid for a DBSS site. Essentially, there is little difference between DBSS and mass condo sites.

To re-cap what I said in the previous posting for Yishun site, pricing anything above $680 ~ $720 psf for new condo  in this mass market segment is quite ridiculous and certainly look "bullish" to me and foolish for you to commit. So be careful to "landmark" these expensive sites and stay cautious in your property hunt. I would advise sites with high land cost to be avoided totally. I do hope price can consolidate further $650 psf.


(1) Comparing between a mass market condo site at a less popular location with another at a location offering better view, before and after the control measures were announced,  we note land cost alone has consolidated by about 10~15%.

(2) Comparing between two mass market condo sites both at about the same less popular location, we note land cost alone has consolidated by about 25% after the control measures were taken. {Note: Buyers should note this only takes them down from the ridiculous high point to a more reasonable price base. It does not necessarily bring price back to the historical base price of 1996 or 2007 price for a similar category of property.}

(3) The "land cost" component makes up about 60% of the total costs.
(a) 10% of 60% land cost = 6% of total price
(b) 15% of 60% land cost = 9% of total price
(c) 25% of 60% land cost = 15% of total price

This is quite consistent with my speculation of a fall in price of between 5~15% of the market price for mass market condo depending on unit types and locational factors.

(3) Finally, whether or not we will see a further consolidation will depend on "construction costs" and "economic factors". If demand falls, construction costs tend to fall, unless there is a sudden hike in say steel prices. Interest rate and yield will also be closing watched.

(4) The cost which may seem a little obscured to you is your "interest" costs for the mortgage. The general outlook is a potential rising trend soon all over Asia. I suggest you read this article in TODAY (22 Sep 2010) about the HK property market bubble. Our property market is almost a mirror. "In a world of zero interest rates, some things are bound to go wrong.....In a sense, zero rates bail out the wrong end of the market" as commented by the Bloomberg News columnist.

(5) My comments are generally applicable for new properties only. For older properties, current prices and the degree of consolidation may be very different and complex, which I may review in a separate posting.

Reference#1 :-
TODAY  Sep 18, 2010

The tender for a 99-year leasehold residential site at Hougang Ave 7 has attracted six bids, with the highest at $160 million.

The land parcel of 15,630 sq m has a maximum permissible gross floor area of 43,765 sq m, or about 470,910 sq ft.

The top bid from Sim Lian Land translates to about $340 per sq ft per plot ratio. The tender is expected to be awarded in about two weeks.

Mr Nicholas Mak, the executive director of research at SLP International, said the site would likely be developed into mass market condominiums.

The property will probably yield about 400 to 450 units in a 30-storey project, with a breakeven price of $650 to $680 per sq ft.

Reference#2 :-
ST Online, May 25, 2010
MCL Land gets Hougang site


Reference#3 :-
TODAY, Sep 22, 2010
Beware the property bubble in HK

by William Pesek

Friday, 17 September 2010

Government Land Sales (GLS), Bidding System & DBSS Pricing

In my postings "The Property Bubble and Investment Trap Part VI  and VII", I have demonstrated generically why purchasers of HDB DBSS and EC purchasers are made to bear high land cost arising from an inherent weakness of the land bidding system and also construction costs which is non- transparent to the buyers.

Analyses of the land bids showed that there was always a ridiculously high bid (about 30% higher) which won. I had highlighted that land cost was chasing after the high contruction costs till a peak was reached in 2008 due to high steel prices. Although steel prices had consolidated substantially since 2008, and fallen from US$1,150/ton to about US$700/ton,  some 35~40%, we have not seen construction costs falling to give us lower property pricing. Quality finishes such as Italian marble and designer tiles should also have fallen with the shrinking Euro$. Averaging it out, real costs should have gone back to just its historical base., but why do we still have to pay ridiculous prices for DBSS, EC and mass market condo at between $550 psf ~ $830psf ?

I was curious that no question was reported as raised by our MPs to the MND Minister in the Parliament sitting on 15 September 2010 on the land bidding system, and more specifically; its implications on DBSS pricing, in the light of the anti-speculation measures taken recently.

To answer my own curiosity, I searched the Parliamentary Q and A link in the MND website, and I was proven wrong. There you are, Question 549 by Mdm Ho Geok Choo (See Reference # 2 below) and we have another "Missing the point Minister" who had earlier been "Caught-Off-Guard"  :-

Part (b) and (c) reads :-

(b) whether there will be an increase in the prices of DBSS flats; and

(c) how will the Ministry ensure that there will be enough DBSS flats and their prices are within the means of all those who are eligible.

And see how the MND Minister skirted the issue in his oral answer before the House :-

"The large supply will help ensure that DBSS developers set their prices at reasonable levels. They have to bear in mind that DBSS flat buyers have alternative options such as resale flats, ECs and private condominiums, and even Build-to-Order (BTO) flats for households earning under $8,000. If prices are set too high such that the flats are not affordable to the target group, the developers face the risk of not being able to sell their flats."

The Minister assumed that by increasing supply of lands for DBSS and EC, the price of DBSS flats will automatically be lowered and made affordable. The HDB does not set the prices of DBSS flats. The developers and contractors who won the lands will set the price. When the land bid is high, developers and contractors still has to recover all land and construction costs. High land cost constrains the budget for construction costs and in total, they will manifest in higher sale prices for DBSS flats or EC. Managing land supply alone will not solve the problem by itself. This explains why certain analysts thought it will be "wishful thinking on anyone's part to think prices will correct anytime soon".

With the raising of monthly household income cap to $10,000, there will be more demand for DBSS flats, although some may opt to wait for mass condo market prices to consolidate. The effective thing to do is review the land bidding system. However, this shrinks and hurts the GOVT's pockets and so the MND Minister would certainly skirt the issue and left it for the market mechanism to "fight-it-out" and cure its own woes. The Transport Ministry could come up with complex formulas to calculate "distance-based" fares for SMRT and Transit Link, so why is the GOVT (HDB and URA) not doing anything to cure this inherent ill of the land bidding proces?

The Minister seemed more concerned about his "eco-farming" projects in China" rather than to watch over our property "homeland security" industry and affordability issue while keeping the Govt's purse fat. Point that the Govt. has no obligations to help HDB dwellers upgrade to private properties is noted. But if property prices spiral, the Govt. has a certain responsibility to ensure that it is not indirectly supporting "speculation".

Straits Times Online
Sep 16, 2010
By Amanda Lee

TWO new residential sites were released for sale on Thursday by the Urban Redevelopment Authority (URA).

The sites at Sembawang Greenvale (Phase 3) and Stirling Road can potentially yield about 560 housing units, offering home-buyers with more housing choices.

Located along Sembawang Road, Sembawang Greenvale is a new housing estate planned by URA and is close to Sembawang Park and Beach.
Phase 1 and phase 2 of Sembawang Greenvale were sold in October 2007 and April 2008 respectively, the remaining 14 land parcels will be for sale under Phase 3 and is launched for sale under the confirmed list.

The site at Stirling Road is made available for application for sale under the Reserve list of the second half of 2010 Government Land Sales (GLS).

Centrally located, it is close to Queensway and Alexandra Road as well as Queenstown MRT station. It will be released for sale if the criteria for triggering of the site are met.


Oral Answer by Ministry of National Development on the supply of Design, Build and Sell Scheme flats and Executive Condominiums


Question No. 549
Question by: Mdm Ho Geok Choo

Mdm Ho Geok Choo: To ask the Minister for National Development (a) whether there will be enough Executive Condominiums and flats under the Design, Build and Sell Scheme (DBSS) to cater to the needs of those with a monthly income of $8,000 to $10,000; (b) whether there will be an increase in the prices of DBSS flats; and (c) how will the Ministry ensure that there will be enough DBSS flats and their prices are within the means of all those who are eligible.


1    We have widened the housing options of first-timer households with monthly incomes between $8,000 and $10,000. In addition to Executive Condominiums (EC), they can also buy new flats under the Design, Build and Sell Scheme (DBSS) with a CPF Housing Grant of $30,000.

2    To cater to the demand from these households, HDB is ramping up the supply of land sites for DBSS and EC development. In 2010 and 2011, HDB plans to release land sites for about 7,000 DBSS flats and 8,000 ECs. These numbers are significant. In two years, we will almost triple the current stock of 4,000 DBSS flats and double the current stock of 10,000 ECs that have been launched for public sale since the inception of these schemes.

3    The large supply will help ensure that DBSS developers set their prices at reasonable levels. They have to bear in mind that DBSS flat buyers have alternative options such as resale flats, ECs and private condominiums, and even Build-to-Order (BTO) flats for households earning under $8,000. If prices are set too high such that the flats are not affordable to the target group, the developers face the risk of not being able to sell their flats.
Date: 15 September 2010

TODAY  Sep 16, 2010
Instead, says Mah Bow Tan, Govt making things more equitable for both them and HDB flat owners, alike

By Esther Ng
Part abstract
~~~~~~~~~~ As for MP for West Coast GRC Ho Geok Choo's question on whether there would be enough executive condominiums (ECs) and flats under the Design, Build and Sell Scheme (DBSS) to cater to the needs of those with a monthly income of $8,000 to $10,000, Mr Mah said HDB was ramping up the supply of land sites for DBSS and ECs.

HDB plans to release land sites for about 7,000 DBSS flats and 8,000 ECs in 2010 and 2011.
In two years, HDB will triple the current stock of 4,000 DBSS flats and double the current stock of 10,000 ECs that have been launched for public sale since the start of the scheme. ~~~~~~~~~~

Wednesday, 15 September 2010

The Property Bubble & Investment Trap Part VII - Land Bid Analysis for Yishun 99 Yr LH Condo Site

There have been numerous analyses recently on how the property market is reacting to the Government's cooling measures announced more than 2 weeks ago. TODAY (10 Sep 2010) published an article by Colin Tan which aptly described the reality facing both the property market and "investors" at this moment. The Straits Times (11 Sep 2010) also carried a good report last Saturday about the Singapore Dream, with a good chronology of the policy changes and price movements (PPI) for the Singapore property market against the various economic crisis from 1996 ~ 2010.

There have been an unusually high number of complaints about the unfairness of the measures. Many are still not getting it. You should note that property prices in the HK market have reached new heights, and nearer home; Malaysia is also implementing cooling measures. The recent measures are not meant to penalise any group of buyers but to protect the financial system. It is to weed out risky buying - be it from speculators, investors or even genuine upgraders. What has fairness got to do with it?

If risky buying is allowed to continue, the bubble will become bigger as prices and fundamentals grow further apart. If it bursts, the system may collapse. Nobody benefits - everyone is a loser. For the genuine "owners-occupier", it is also the time to watch the price consolidation of the property market and time his entry for the class of property he is aiming to own.

It is somewhat too early to assess how much the market has changed. While some developers have held back their projects, taking time to re-assess the market and to come up with new pricing strategies, others had gone ahead with their launches or land bids. The strongest buying interest has always been for new launches. Without new launches, we are never going to be sure of the effectiveness of the measures. The most recent and closely watched being the 99-year leasehold NV Residences at Pasir Ris. It was reported in TODAY that a total of 160 of the 200 units (Total : 642) released were snapped up during the property's private preview last week at an average price of $830 psf. Before I comment on this price in the mass condo market, let me first analyse the Yishun site land bid as mentioned in my last posting, to let you have a clear understanding of the land cost for 99 / 103 year LH mass-market condominiums.

(1) Yishun site @ Milton Close Next to Orchid Country Club ( 99 Leasehold for Landed or Condominium Housing ) 
The following are the "land" bids by Developers or "Develop and Build" Contractors [D and B Contractors]. Information are added by me based on my own knowledge for greater clarity.

(a) Bid 1 - S$165 M @ $405 psf ppr - Local Developer and Contractor JV

(b) Bid 2 - S$126 M @ $309.68 psf ppr - Local Contractor

(c) Bid 3 - S$125.32 M @ $308 psf ppr - Local Reputable Developers JV

(d) Bid 7 (Lowest) - S$97.88 M @ $240.56 psf ppr - Local Reputable Developers JV

Analysts had expected the bids to fall between $270 ~ $350 psf ppr. An industry expert said the tender response shows that, apart from the top bidder, the other developers are now more cautious in bidding for sites given the record upcoming supply. Bid 1 @ $405 psf ppr was 31% higher than the next lower bid @ $309.68 psf ppr.

My Comments :-

Comparison of Gross Plot Area & Approved GFA with Tampines DBSS Site
                                    (A) Yishun Site            (B) Tampines Site 
                                           (99 Year LH)                (103 Year LH)
(a) Land Use               - Condo                         - DBSS HDB Flats
(b) Gross Plot Area   - 27,000 sq. m.             - 32,000 sq. m.
(c) Approved GFA      - 37,900 sq. m.            - 63,395 sq.m.
(d) Plot ratio               - 1.40                            - 1.98
(e) Land Bid               - $165M                        - S$178.13 M
(f) Land Cost              - $405.5 psf prr           - $261 psf ppr

Actual land cost per sq.m. GFA
In the Tampines DBSS site, the land for social and communal facilities use was 1.67% of GFA. Since this is a condo facilities, I will allow say 3% of GFA to cater for clubhouse, swimming pool and other game courts.

(a) Permissible GFA - 37,900 sq.m. less 3%(sq. m) for social and communal facilities = 36,763 sq. m.

(b) Estimated land cost per sq. m. nett GFA = $165 M / 36,763 = $4,488.20 psm = $417.12 psf GFA, say $420 psf GFA.

What is the expected construction cost (psf GFA) if the units are sold at target price ?

An analyst said the top bid could reflect a break-even cost of about $700-$750 psf should a low-rise condo be developed. And condo units in this new project could possibly sell above $800 psf, he said.

By comparison, units at The Estuary, which was launched in April, transacted at $650-$850 psf from April to August.

The target price of $800 psf will translate into the following sale price and construction costs (including consultancy cost) at equivalent floor areas to DBSS flats.

(a) 3 Rm - 70 sq. m. - $602,560 = $800 psf - $420 psf = $380 psf

(b) 4 Rm - 91~94 or avg 92.5 sq. m. - $796,240 = $800 psf - $420 = $380 psf

(c) 5 Rm - 105~114 or avg 109.5 sq. m. - $942,576  = $800 psf - $420 = $380 psf.

A sale price of $800 psf would translate into a construction costs of about $340 psf if I allow 5% ($40 psf) for consultancy and other charges. You may recall from my last posting that construction costs had risen to $280 ~ $350 psf of GFA for Q2 2008 for for medium-quality condominiums and peak soon after, primarily due to high steel prices. However, steel prices had fallen drastically and so has the Euro$ which affects expensive materials such as marbles and designer tiles from Italy.

You may recall that I mentioned a construction cost of $260 psf for DBSS HDB flats is already too high. I expect mass market (low range) condominium including EC to be just slightly above (if not the same) DBSS quality with cost not exceeding another $30 psf. I expect a more reasonable selling price to hover between $680~$720 psf, notwithstanding the high land cost and reasonable profit markup for the JV developer.

Hence, I would speculate that price will consolidate at least by some 10~15% generally for mass market condominiums. If economic conditions deteriorate, a further consolidation of another 10~15% is not impossible.

Comparison between DBSS and 99 Yr LH Condo prices due to impact of high land bids

In paying for the mass market 99 (or 103) Yr LH condominiums, what a buyer enjoys is the additional MCST common facilities. The DBSS buyers benefit from a HDB grant, which was why I expected DBSS prices to consolidate by a lesser percentage. Impact of choice of finishes for condo pricing is quite marginal but I had assumed a $30 psf difference which is more than sufficient. The only real great advantage of mass market condominium over HDB DBSS or EC is its flexibility for free market transaction.

However, comparing land costs, you will note the big difference in price that a purchaser of mass market condominium is paying (including EC). This difference is about, $417.12 minus $266 psf GFA = $151.00 psf GFA. This is the major difference in costs, considering that difference due to construction costs should be quite marginal, or say just $30 psf different.

Now you may also recall that the land bid for the Tampines DBSS site was about 22% higher than the next lower bid or nearly 30% above market or analyst's expectation. For BTO purchasers, you may find it hard to swallow because the MND Minister is using this difference in land costs to justify his "market subsidy" for your flats while also using HDB resale market prices to formulate your purchase price.

And if construction cost is at $340 psf, it is also about 20~30% higher than the low range of construction costs for "medium-quality condominium" from Q1 ~ Q2 2008 when it peaked due to steel prices.

Comparison between Yishun Site @ Milton Close vs Another Yishun EC Site

Now let me compare the land bid of this Yishun condo site which is next to the Orchid Country Club with another EC site at Yishun, which was won by a major China-based (Beijing HQ) public listed construction firm.

In this other EC land tender at Yishun, the China-based (Beijing) contractor won the bid at $127.8 M or $281.31 of GFA in Mid Mar 2010 tender. Hence, for a good view over the Lower Seletar Reservoir and the Orchid Country Club, potential buyers will have to pay an additional ($420 - $281.31 psf GFA) = $139 psf GFA at current high land prices. This is extremely high, as I would only expect a price difference of about $30~$50 psf GFA for some value adding due location factors such as proximity to MRT station or scenery view, considering it is just a 99 / 103 year LH property.

You will note that the price of $281.31 psf GFA was just about $20 psf GFA higher than the second bid of $118.89 M or $261.71 psf GFA (12 Mar 2010) from another China (Qingdao based) developer / contractor. The latter is about the same as the highest bid for the DBSS site at Tampines (3 August 2010). [Note: You will obviously note that the DBSS bid for Tampines site by a local JV developer / contractor was chasing after the Qingdao-based China contractors'  bidding price for the Yishun EC site.] The third bid of $117 M or $257.53 psf GFA came from a local contractor and attest to the reasonableness of Bid 1 and 2.

In terms of length of lease for new properties, there is no difference between a BTO, DBSS, EC or private mass market condo. Hence, we are looking for "location" factors to pay a "premium", the obvious being nearness to MRT station.

So paying ridiculously high for a mass market condo (private or EC) due to a high land bid is not advisable. There is a risk that the "develop and build" developer will use poor quality materials or he may adopt the "bay window" trap, other things being equal. Obviously, he must enjoy a clear profit margin for his project. [Note : After 7 Oct 2008, bay windows and planter boxes are no longer exempt from GFA calculations.]

Comparing With Historical prices

The previous high land bid for this area was $387 psf ppr @ Sembawang / Canberra Drive in June 2010.

The same Local Developer and Contractor JV had submitted bids for the following :-
(a) Aug 2008 - $160 psf ppr - Lor 1A Toa Payoh - DBSS flats (Won)
(b) Aug 2010 - $205 psf ppr - Tampines Ave 5 - DBSS (Failed, Rank No  3)
(c) Aug 2010 - $405.5 psf ppr - Yishun Milton Close - 99 LH Condo (This Bid - Won)

For mid-range and high-end condominiums, land value will be above their respective construction costs. It is strange for a land bid to build mass market condo, to exceed the construction costs for medium-quality condominiums (a higher category) at 2008 peak of between $260~$320 psf of GFA, by nearly 27~55 %; although steel price has fallen.

Other considerations and relevance of NV Residences pricing

What was also eye-catching to me is Bid No 3 for the Yishun condo site. Bid 3 @ $308 psf ppr was submitted by a pair of highly reputable local developers in JV. Both of them are established reputable developers who knows the market very well and strong enough to bid on their own right, so why are they submitting it as a JV and at a much lower bid? I take it as their clear signal to the market of what is still sensible pricing for land to build mass market condominiums (both private and EC).

Assuming  a land cost of $308 psf ppr and a construction cost of $260 psf,  the target price after a 20% mark-up would be around $680 psf, and this match the lowest end of my earlier "speculated" reasonable price for mass market condo. Maxim : "Watch what they do, not what they say"

Pricing anything above $680 ~ $720 psf  for the mass market condo segment is quite ridiculous and certainly look "bullish" to me and foolish for you to commit.

Next, let us re-visit the closely watched soft launch of the 99-year LH NV Residences at Pasir Ris.  A total of 160 of the 200 units (Total : 642) released last week during the soft launch was reportedly snapped up at an average price of $830 psf. Notwithstanding that the NV is within walking distance of a MRT station, I feel this price is asking for too high a premium, considering current market conditions and my price analysis above. Anyway, it is a willing market, but subject to risk of interest rate hikes expected all across Asia in the near future.

This average price is higher than the median price for private suburban mass market condo @ $824 psf before the announcement of market cooling measures. It is about $100 psf  higher than the average sale price of mid-range freehold condominiums sold by the same developer in the Upper Bt Timah / Toh Tuck area during the 1996 peak. It is about $100~$150 psf higher than 999 year LH or freehold condominiums sold by the same developer in the Hillview area. This price is about the same with condominiums sold during the 1996 peak along the Bt Timah Condo Belt, such as Maplewoods.

Conclusions on HDB DBSS and Mass Market Condo Segment (Including EC)

So, if you buy mass market condo at current high prices, what are you chasing in this property game?

(a) 2008 high-end construction costs for medium-quality condominiums which are not justifiable today, considering cheaper steel prices and finishing materials. Price is not reasonable. (20~30% higher)

(b) 2010 ridiculous high land cost (value) which far out-stripped construction costs at 2008 peak prices. This is too excessive considering it is a 99 / 103-year leasehold. (20~30% higher)

(c) Overall high property price which is equivalent to the mid-range private freehold  / 999-year LH condominiums at good locations and at 1996 / 2007 high peak prices.

(d) Suburban properties which are far from Central Core Region or priced locations, with limited opportunity for "future" value adding.

(e) At risk of buying a smaller size property and with lower quality finishes.

To recap, I hope to have provided you with an "helicopter vision" and insight perspective of the property market and pricing trends in respect of HDB DBSS flats and the mass market condominium segment, in view of current cooling measures imposed to soften the heated property market. Essentially, Part I, VI and VII should have given you a good profile to understand the market and price trends for DBSS and mass market condominiums.
For speculators and investors, the message is clear: Manage your risks to make your money but do not be so greedy as to put the entire system at risk.

To genuine upgraders: If the timing of your sale and purchase under the new rules is so precarious financing-wise, you should seriously reconsider whether you should be upgrading at all in the current overly bullish market.

Do remember that the Authorities see an overall heightened market risk; hence they have put in place the measures. Insiders and market watchers had predicted the same even before measures were imposed. But what about our Govt. / HDB as landowners and developers who are bidding for land parcels? 

There is an inherent risk within our bidding system to over-bid now, for these stakeholders to become "speculators", with the high cost "buck" ultimately passed on to you as willing buyers.

I had dealt at length for 2 postings on the price-sensitive mass market to give you a generic understanding of land and construction costs and their impact on property prices. Hopefully, this will help to guide your decision-making. My earlier comments were based on current pricing trend of new launches and a generic build-up of costs. In my next 2 postings, I will focus on implications affecting the wider market, such as the prices for mid-range to "luxury" range condominiums and also prices of older condominiums. Any questions for discussion are also welcomed.
Link : http://www.todayonline.com/Business/Property/EDC100910-0000049/Cooling-measures-not-meant-to-punish-but-to-protect
Link :  http://www.todayonline.com/Business/Property/EDC100910-0000152/NV-residences-get-good-response-despite-property-market-curbs

Link : http://www.aboutsingaporeproperty.com/tag/sunway-developments/

Thursday, 9 September 2010

The Property Bubble & Investment Trap Part VI - Land Bid Analysis for DBSS Site & Inherent Weakness of Bidding System

"WAIT-AND-SEE was the order of the day at showflats over the weekend - the first since measures aimed to cool property speculation were introduced by the Government last Monday.

The mass-market segment appeared to be the most affected, with thinner crowds and noticeably fewer sales. At more upmarket properties, there was still some interest among genuine buyers." - Straits Times Online (Sep 6, 2010)

The cautious mood prevails and property sales were lacklustre. This was reported at The Minton, Waterfront Gold, Starlight Suites and Adria. The next weekend may give a better indication of the market, an analyst said - referring to the anticipated launch of NV Residences, a mass-market project in Pasir Ris.

I note certain comments posted in my blog by visitors who could be "speculators". For transparency, I had posted their comments and then responded to test and rebut their intention. They attempted to argue against the cautious current mood of the market by putting up confusing general statements and arguments. This could be very misleading.

The purpose of my postings are to offer an "insight" perspective of the property market to warn would-be genuine "home-occupier" investors about the property investment "trap" and to offer some simple advice in guiding their decisions, especially first time purchasers.

In this and the next posting, let's us take a look at the "land supply" released by the Govt (or SUPPLY side) against bids submitted by Developers and "Develop and Build" Contractors. I will use 2 bids as case studies to illustrate their impact on the final sale price of properties.

These 2 record-high bids involve a HDB DBSS [Tampines Ave 5] and a private 99 Leasehold (LH) condo next to Orchid Country Club at Miltonia Close, on the fringe of Yishun Town Centre. For simplicity, I will just refer to them as Tampines site and Yishun site. [See references in my last posting].

(1) Tampines site (HDB DBSS)

The following are the "land" bids by Developers or "Develop and Build" Contractors [D and B Contractor]. Information are added by me based on my own knowledge for greater clarity.

(a) Bid 1 - S$178.13 M @ $261 psf ppr - Local D and B Contractor

(b) Bid 2 - S$145.77 M @ $213 psf ppr - China D and B Contractor

(c) Bid 3 - S$139.90 M @ $205 psf ppr - Local Developer / M'sian Contractor JV

(d) Bid 4 - S$137.10 M @ $201 psf ppr - Local Developer / Contractor

(e) Bid 5 - S$110.00 M @ $161 psf ppr - Local Developer

An academic analyst had expected the bids to fall between $160 ~ $200 psf ppr. The previous high land bid for a DBSS site was $237 psf ppr in 2008 for a site in Bishan, a much better location.

My comments :-

(a) A "pure" Developer who is not a contractor tends to submit a higher bid. Reason : As DBSS units are sold by them, he must re-coup his costs for - (i) Land bid (ii) Development costs (consultants) (iii) Construction Costs. The higher the land bid, the lesser he has for spending on item (ii) and (iii), but he secures the land. Construction and land costs are the major components to establish the final sale price of the property unit cost (psf), after considering the plot ratio (pr). Hence the land bids are expressed as psf prr (per square foot, per plot ratio). The plot ratio determine the intensity of development or Gross Floor Area (GFA) that could be build in relation to the Gross Plot Area of that land. If there is waiver for GFA calculation in respect of Bay Window and Planters, the Developer can build more intensively but the Bay Window area will be generated as "Saleable Area". [Remember the Bay Window Trap I mentioned before?]

(b) Hence, for a Developer he will "squeeze" his consultants and contractor and push up "land cost" as much as possible in order to "win" the land use from the GOVT tender first. But there is a rock bottom that his contractor can build it depending on the specifications although consultancy cost can be a fixed %. Therefore, in the first round, if a very high land bid is submitted, the real winner is the GOVT. This is evident in the Tampines site bid, Bid 1 that won was 22% higher than the next lower. Bid 2 ~ 4 which are more rational bids were clustered within the $205 +/- $ 5 psf ppr band, which was just $5 higher than the highest benchmark predicted by an academic anaylst. But Bid 1 overshot it by 30%. Is this ridiculous?

Market watcher suggest that since Developer for Bid 1 has a construction arm, it is therefore able to better control costs on "construction". But is this really so? I like you to compare Bid 1 with Bid 3 and Bid 4 which are also "local" Developers with construction arms. They are able to bid about $60 psf (30%) lower. Does it means that they would save from the construction costs later on? I don't think so, because I believe all had tendered based on the same specifications.

Ultimately, this 30% ridiculous land cost "buck" has to be borne by the purchasers of these DBSS flats and buyers would have to arrange their own financing though they are entitled to the same HDB housing grant. So the HDB gives you "wider" choice(s) but you have to pay 30% higher for the land under DBSS even if the contractor decides not to make a profit and pass on savings from construction costs to offer a better sale price of the units. But can any firm sustain itself by not earning profit and just covering cost?

Imagine further if this is priced to chase the next class of property, say EC, which in turn is chasing the higher property class and ultimately the $200 psf benchmark I had mentioned before. Worst, imagine the lower BTO flats are also priced to chase these DBSS flats with land costs which are 30% more expensive. The whole property market will just spiral. This is an inherent fault with the land bidding system, the highest bid wins, but could be ridiculously high. The real winner is the Govt / HDB who offered the lands for bidding and the DBSS Developer will certainly recover this from the end purchasers. We just need to look at the pricing of Bid 2~4. Bid 5 may be too low a bid and we can ignore it. But look at Bid 2 by a China D and B Developer who also has a construction arm. They are are also 22% lower.

Let me take you one more step further into the cost analysis to see how this all ends up with a higher price for end purchasers for these DBSS HDB flats ... and in time to come the future HDB resale market ... and the high property price future generations of Singaporeans has to bear.

The floor areas for DBSS flats and expected launch prices are as follows :-

(a) 3 Rm - 70 sq. m. - $380K~$400 K or avg $5,571 psm or $518 psf

(b) 4 Rm - 91~94 or avg 92.5 sq. m. - $530K~$550K or avg $5,838 psm or $543 psf

(c) 5 Rm - 105~114 or avg 109.5 sq. m. - $640KK~$670 or $ avg $5,982 psm or $556 psf

Actual land cost per sq.m. GFA

(a) Permissible G FA - 63,395 sq.m. less 1,060 sq. m. for social and communal facilities = 62,335 sq. m.

(b) Estimated land cost per sq. m. nett GFA = $178.13 M / 62,335 = $2,858 psm = $266 psf GFA

What is the expected breakeven construction cost (psf GFA) if the units are sold at target price ?

(a) 3 Rm - 70 sq. m. - $380K~$400 K = $518 psf - $266 psf = $252 psf

(b) 4 Rm - 91~94 or avg 92.5 sq. m. - $530K~$550K = $543 psf - $266 = $277 psf

(c) 5 Rm - 105~114 or avg 109.5 sq. m. - $640K~$670K = $556 psf - $266 = $290 psf.

Constructions costs - after staying stagnant for several years following the 911 Event and SARs crisis, and economic downturn - were at its at record levels in 2008.

"Construction cost consultancy Rider Levett Bucknall (RLB) said: Construction prices for medium-quality condominiums indicatively range from $260 psf of GFA to $320 psf of GFA in Q1 2008, and prices have risen further to $280 to $350 psf of GFA for Q2 2008," it said. "High demand and competition for limited resources, the lack of tendering capacity among contractors, sub-contractors and suppliers, and volatile commodity prices have contributed significantly to building tender price escalation," the firm added.

"Construction costs are estimated to have risen 20 to 25 per cent for Q4 2007 compared with the corresponding period in 2006 for average medium quality condominiums (for the upgraders' market).

While the trend of construction costs exceeding land costs has drawn more attention since the recent tender closings of Government Land Sales (GLS) sites, some observers say it surfaced as early as December last year[2007], when Chip Eng Seng bought a plot at Elias Rd in Pasir Ris for $228 psf ppr.

In the same month, Frasers Centrepoint picked up a site at Lakeside Drive for $248 psf ppr – which was probably about equal to construction costs at the time.

Construction costs comprise not just the cost of building materials but also include factors such as workers' wages among others."

So you note, when construction costs were extremely high, the lower "land cost" was chasing after the construction costs which reached its peak in mid-2008.

Now, I want you to focus on the the lower end of the construction cost spectrum for medium-quality condominiums for Q1 ~ Q2 2008. The construction costs then was $260 ~ $280 psf of GFA. Now you look at the bid price of land submitted and won by Bid 1 for Tampines DBSS Site - S$178.13 M @ $261 psf ppr. You take a look to appreciate this whole picture of the costs chasing game! Does what I said now make sense to you?

Next, I want you to focus on the targetted breakeven launch price and construction costs I have worked out per sq m GFA for Tampines DBSS Site for 3Rm, 4Rm and ~ 5Rm - $252 psf GFA, $277 psf GFA and $290 psf GFA respectively. It more or less coincides with the lower end of the construction cost spectrum Q1 ~ Q2 2008 ($260 ~ $280 psf GFA), but for medium-quality condominiums. Mind you not the low end mass market condominiums. I consider DBSS flats as equivalent in quality to the lower-end mass market private condominiums and EC. The only difference is in common facilities and MCST management.

And to analyse the price a little deeper :-

Bid 1 Land Cost @ $261 psf ppr + Lowest Construction Cost Q1 2008 @ $260 psf GFA = $521psf. This is about the targetted launch price for 3 Rm @ Tampines DBSS site.

To explain why I consider that the current launch price is too high and not sustainable, we need to look closer at the construction cost. As I mentioned before in an earlier posting, the only component to note is "steel prices". Other materials and construction related costs are relatively stable. With Euro$ at its low, even Italian marble and tiles prices have fallen. If you look at the Steel - World All Products Price Index, steel price rocketted and reach its peak in August 2008. This explains why construction costs reached its peak then. Since then, steel prices had corrected drastically to about US$600~US$700 per ton now or equivalent to the Mid-2006~2007 prices, which coincided with the 2007 property market peak here. Hence, a construction cost of $260 psf GFA for DBSS at current pricing is still too high just considering both quality of finishes and steel price, other things being equal.

If you look at the URA Private Property Price Index (PPPI) below, you will see the PPPI reached reached its peak in 2007/2008 and then fell in 2009 with the Sub-Prime Mortgage and Mini-Bond Crisis, and in 2010 it shot up sky high again to beat the 1996 record high. That was for Private Property Market Index, but you see the DBSS HDB market followed the same price trend. I believe it is the same for the HDB re-sale market. It is quite evident that prices of HDB flats, particularly DBSS flats are chasing after private property price benchmark.

Comparing Target Sale Price With Historical DBSS Prices

Now, how does the target sale price of $521 psf compare with historical price for the first DBSS project, also in Tampines (Premiere) and was developed and built by the same developer. Most units in that project were 5Rm and was sold between $280~$370 psf with the land bid awarded in Jan 2006. In 2006 property prices was climbing to its peak in 2007. Despite a consolidation in price due to the "sub-prime" crisis, the price has shot up by more than 40%~80% depending on the unit types. The winning land bid for this first DBSS was $113.67 psf ppr. The current bid for the Tampines site is more than double the land price (nearly 230% in a matter of about 4 yrs 8 mths).

Even if we allow an incremental rise in land cost at 10% annually, the compounded land cost after 5 years would have been just $183 psf, if compounded at 15%; at $227 psf. The current bid is extremely excessive.

Hence, even if the DBSS units for this Tampines site are sold at about $521 psf, I expect the D and B Contractor's to be pretty comfortable with a margin of about 15%~22 % with all costs well covered, despite the high land bid. A more reasonable pricing range would be between $450~$480 psf (depending on unit types) with a reasonable profit margin. If it is located very near to an MRT station, a price closer to, but below $500 psf would be justifiable, considering it is just a 103-year leasehold property.

Hence, I would speculate on a price consolidation of at least 8~14% for this class of property, i.e. DBSS flats.If the economy does not improve as expected and / or more control measures are taken, I will not be surprised to see a bigger consolidation of about 10%~20% eating into part of the developer's profit margin. Generally, buyers should be wary of the high land cost they will be contributing as part of the final purchase price. The Chinese saying is "The sheep's hair (wool) is always found growing from the sheep's body".

Honestly, the trick is to drive down "construction costs" to offer a better pricing, while enhancing profit margin. This explains why a developer with a construction arm is better positioned to compete. However, the reality is construction costs are not too transparent, while land cost is driven upwards ridiculously in a hot property market.

Imagine its impact on new BTO flats if they start to chase after DBSS prices. In comparison, BTO new flat launched in March 2010 at Fernvale (Seng Kang) are priced about :-

(a) 3 Rm - $170~$230 psf

(b) 4 Rm - $220~$279 psf

(c) 5 Rm - $240 ~$300 psf.

Hence, you will note from from the BTO prices above, that you are paying twice as much for DBSS flats as compared with BTO flats, but without condo facilities and not the same mid range condo equivalent quality.

So if you buy HDB DBSS property, what are you chasing in this property game?

(a) 2008 high construction costs for medium range condominium which is not justifiable today considering cheaper steel prices and also cheaper finishing materials. This is not reasonable.

(b) 2010 high land cost. This is too excessive considering it is a 103-year lease.

(c) Overall high property price which is equivalent to the lower range mass market condominium or EC at 1996 / 2007 high peak prices.

In my next posting, I will do a similar evaluation for a 99-year LH condominium site at Yishun. Meanwhile, it was reported in Business Times that the NV Residences at Paisr Ris was soft-launched yesterday. The 200 units released yesterday were reportedly priced between $557,000 for a 506 sq ft one bedder on the second floor (working out to $1,100 psf) to $1.9 million ($761 psf) for a penthouse. Anyway, stay CAUTIOUS and your maxim should be "Watch what they do, not what they say" and press reports included.

References :-


Thursday, 2 September 2010

The Property Bubble & Investment Trap Part V - What now, after the control measures?

By now, all these news reports about the newly announced control measures by the MND Minister to cool the red hot property market must have sank into the minds of all keen buyers and sellers of residential properties, "owner-occupier" and "fully leveraged" investors alike, including the keen readers of my blog. These control measures, their implications and complications are all well covered by the various media. It is not the purpose of this posting to regurgitate them. There is also a good commentary, "Finally, some cooling measures with bite" about these control measures in Today (31 Aug, 2010) by Mr Colin Tan and a few other letters in TODAY's forum page [(1) Three years enough, (2) Nest egg delayed, (3) Minimum Occupation Period doesn't hit the spot] to highlight possible complications during implementation. You may spend some time to read them if you wish. I have also uploaded summaries from both Straits Times and Mypaper for easy reference.

The last two days, I had combed through all these reports, to read and watch from a perspective; as if something could have been missed out or had not been commented yet.

Essentially, these anti-speculation measures are against the "over-leveraged" investors and "speculators" but are good for genuine "home-occupier" investors (unless they are already caught by the trap of high prices). [I do hope more who visit my blog are "home-occupier" investors and not speculators.] As one analyst said, the control measures could have been worst, as compared to the measures taken by the China Authorities. As the 2 rounds of introductory measures within the last year were insufficient, the measures just implemented are just like the "first dose of antibiotics" your doctor had given to deter the "super-bugs". If the this dosage is ineffective, the next dose will be given and may be ultimate to see a major correction in the property market.

The control measures did not come as a surprise to me, including what the PM had announced during the N-Day Rally that the monthly income ceiling would be raised for the "sand-witched" class, from $8,000 to $10,000. The fact that he had spoken so during the Rally, and not left to MBT, must have added weight and meant there should be some political capital to gain. I expect this to impact on the growing EC and mass private condo market, i.e. 99 leasehold ones. [I will elaborate on this later on.]

Now that the control measures had been announced, what now for the property market and those who are keen to "invest"? Those who might have already committed on an expensive purchase recently might have been caught off guard by this "caught-off-guard" MND Minister. "WAIT-AND-SEE" must be the prevailing "herd instinct" or even "strategy" at this current moment. This is RIGHT. I am sure the whole market will consolidate, but by how much and which category(ies) will be more affected?

Just like any previous anti-speculative action plan, this round of control measures is so called "pre-emptive" by the MND Minister (although I consider it a bit too slow). What it does is just like the "re-set button" in your favourite computer game. It brings all buyers and sellers back again to a new "common base" to see where the forces of "demand and supply" will carry them again in the next game. Those who are familiar with Othello or Reversi board game will know that in the early part of the game, it does not matter if the  opponent flip too many chips of his chosen colour in his favour. You can "lose" at the first part of the game, but ultimately when you control the "corners", you can win by flipping back more chips of your opponent to your own chosen colour. This analogy explains the current property market and those who already bought with "high prices" are just the same like the early Othello winner. The problem is that as a "homeowner" investor, you can place only one chip, so when you place your chip, you must aim to "control a corner" and "to flip as many as you can later on to your colour if you do have another chance with another chip".

This brings me to the new "helicopter" vision you must have now to know "how to land" [what price] and "where to land"[what property] in your strategy. You may recall in my first and second postings, [ "The Property Bubble and Investment Trap", and Part II ]; I tried to give you this "helicopter" vision of the property market maze that was before the announced control measures, and way back from the 1996 peaks. I hope this had painted you a profile of the whole property market in Singapore.

The new control measures like a "reset" button will now set in new "push" and "pull" drivers to both the "DEMAND" and "SUPPLY" sides of the PRICE equation until a new equilibrium is reached.

You may recall I had said in an earlier posting, one reason for me to doubt about the sustainability of high prices of the current market is that the HDB and private property sub-markets are all bundled and messed up as one whole with prices getting ridiculous, and accentuated by a benchmark of $200 psf on which developers are asking and driving up their prices, while our GOVT is stuck with the "market subsidy" argument. Hence, the sandwitch class earming $8,000 ~ $10,000 was somehow forced into the mass private condo market (99 leasehold) with corresponding high pricing in HDB re-sale market, DBSS and EC markets working in tandem. It ended up with all sectors chasing a $200 psf higher benchmark which was obvious as compared to the highs of 1996 prices. Considering cost of investment (interest), a $100 psf benchmark could have been more reasonable and perhaps even sustainable in the longer run. With stagnation of income and the younger age group having lesser CPF while cost of living is ever rising and inflationary, it is clearly no more an "investment" but becomes a "re-engineered" enslaving model for the "home-occupier" investors. It is not making sense even as a long-term investment; if I need to liquidate later on for retirement.

The price mechanism and equation is shaped by the market profile on the Supply side and your own personal risk profile on the Demand side.

What shapes the market profile on the SUPPLY side?
(a) Number of units the HDB and/or Developers are releasing into the market
(b) Land supply by GOVT and bidding by Developers and Contractors

What shapes the risk profile of the Buyers and Sellers on the DEMAND side?
(a) Income elasticity ( wage increase, sustainable employment and CPF )
(b) Control measures (anti-speculation or pro-market)
(c) Stock market
(d) Mortgage financing / interest rate
These factors affect the liquidity of the market.

If the property market is purely based on "free market" mechanism, the free market forces of Demand and Supply will rein and an equilibrium price will be reached for each category of property. With inherent economic drivers influencing and shaping the market, now we have the Govt intervening the market with Supply and Control Measures. The market in itself is already not purely free market due to Govt's housing policies on homeownership and "asset enchancement" and other HDB policies.

I maintain the best way to control prices to make HDB flats affordable is to keep two distinct segregated markets, with HDB controlling and managing buy-back at costs plus markup for one market, and leaving the other market for those who believe in "investment on HDB flats" to contend with the private property market and free market forces of Demand and Supply. [Read my post here : How To Ensure Affordable Low Cost Housing?]. But that would probably mean killing the DBSS or EC schemes, which the HDB and the Govt have an interest in these schemes. I will explain why later.

I had commented in the last posting that it is bad to have the HDB and private property market all bundled and messed up as "one whole", like a stack of poker cards propping up one another in a pyramid formation, especially when the prices get ridiculous. My own opinion is that the present set of control measures will "shake up" the whole property market and try to bring the sub-markets back to their distinct classes of property and fair pricing (whether for homeownership or  investment). This is good  where prices were already distorted for the mass market, particularly for EC and 99 LH condo. Capping at $8000 household income for HDB flat eligibility had forced buyers to enter the  99 LH mass condo market willingly or unwilling and to a join a speculation fray chasing a $200 psf higher price benchmark ... but income seems to be stagnant and definitely uncertain, hence unsustainable. Honestly, tell me after listening or following up on the N-Day Rally, do you see any clear directions where and how our own economy would take us even if our leaders can switch it to an auto-pilot mode with 3% productivity gain? If it is so calm and cool as presented by the PM, perhaps we would not even need these control measures first of all. The GOVT could have made a hefty sum just from land sales and argued the market is sustainable.

Raising the household income cap to $10,000 for DBSS flats will consolidate prices for DBSS flats. What to watch is the supply released by the HDB. If the degree of price correction is substantial in the mass private condo (99 LH) market, EC may be even price out of the market since EC carries the same restrictions as HDB flats. So owner-occupiers should buy EC to enjoy accompanying benefits but not fully-leveraged investors. The price of EC will then reach its equilibrium considering its pros of an available "subsidy" but cons of HDB sale "restrictions", but yet it has to differentiate and distinguish itself from the DBSS, the only diffrence being in condo facilities and security. Hence, I would see this posing great pressure on the private condo (99 LH) mass market. With the new control measures, short medium-term investment (3~5 years) seems out until one day when these restrictive measures may be removed. Any investment must therefore be considered in the longer term of 5~10 years. And this ties in with the issue of affordability which in my opinion should be considered as these number of years of combined income less car and maid expenses. My fear is that many are over-levereaged in mortgages, at least 15~20 years long. I will not elaborate here, you may want to search out Mr Tan Kin Lian's Blog, to know why, if you are lost; or if there are specific queries, I may address them in a separate posting later on.

Next, I am going to teach you how to SPECULATE. What ??? SPECULATION? You may think I had gone crazy with these "control measures". Have not these measures killed all the speculators ? No, I have not, I am going to teach you how to SPECULATE on what the price correction might be like and let you see what may not be so visible from the many reports and analyst talks.

If you look at the factors shaping the market profile on the SUPPLY side and risk profile of the Buyers and Sellers on the DEMAND side, you will note what is more visible and what is not.

On List A, the supply of property types is quite clear especially for BTO, DBSS and EC. If you pay attention, data of private condo supply are also available. The GOVT also announced land sales and bids by developers and contractors. These are actually visible to the layman but you may not have paid attention. Therefore, what are not so visible to the layman are perhaps development and construction costs. These are not secret to me and I have watched them for the past 20+ years. On List B, who know best ?Answer - the buyers and sellers themselves.

So for anyone asking me WHAT NOW, AFTER THE CONTROL MEASURES ? Other than telling the above, I must know his "risk profile" and then set him against the other factors influencing the market on the DEMAND side on List B.

Having said that, please leaves me to do some SPECULATION first, on the likely price correction and  where the likely new base price will be. I would like to analyse the data in the two attached articles below, before presenting them in the next posting. Any analyst would probably say the price would correct by at least 5~10%. This is CERTAIN, considering the knee-jerk reaction and fall in property stock counters after the control measures were announced. We also know the mass condo market will see the greatest correction. But if the economy get worse with a "double-dip", a further 5~10% correction is not impossible. Conversely, if the first dosage of control measures doesn't work, such as if there is a sudden flow of foreign funds into our property market, then the GOVT will put in more control measures. Maybe MBT will cut-and-paste measures from China. Do follow up if you are keen.

Reference #1
Straits Times Online Aug 25, 2010
Hoi Hup Realty and Sunway Developments will cite nearby golf course as key selling point
By Joyce Teo

The site, which can be developed into a strata housing community or a condominium project, is on the boundary of the Orchid Country Club golf course. It is not near an MRT station, but it does enjoy an unblocked view of Lower Seletar Reservoir. -- ST PHOTO: ALPHONSUS CHERN

A JOINT venture which has emerged as the top bidder for a condominium site in Yishun is highlighting its location next to a golf course as a key selling point.

The tie-up between Hoi Hup Realty and Sunway Developments put in the best of seven bids for the 99-year leasehold land parcel at Miltonia Close, at the fringe of Yishun Town Centre.

The bid of $165 million, or $405.5 per sq ft per plot ratio (psf ppr), beat market expectations and came in about 31 per cent above the next bid.

Hoi Hup director Wong Sjew Hung told The Straits Times: 'We see the potential of the site. It is really hard to find a site next to the golf course here.

'We plan to build a five-storey condominium with 380 units. It will be mainly two- and three-bedroom units suitable for families.'

A construction firm, Master Contract Services, placed the second-highest bid of $126 million, or $309.68 psf ppr. The third-highest bid from a joint venture between Frasers Centrepoint and Orchard Parade Holdings came very close at $125.32 million, or $308 psf ppr.

Reference #2 :-
Straits Times Online Aug 3, 2010
By Joyce Teo

An artist's impression of the Parc Lumiere development under the Design, Build and Sell Scheme (DBSS). -- PHOTO: SIM LIAN GROUP

SIM Lian Land has topped a tender for a public housing plot in Tampines Avenue 5 released under HDB's design, build and sell scheme (DBSS).

Its higher-than-expected bid of $178.13 million - or $261 per sq ft per plot ratio (psf ppr) - was 22 per cent ahead of the second highest bid from China-based Qingdao Construction (Singapore) of $145.77 million, or $213.6 psf ppr.

In third place came joint venture Hoi Hup Realty and Sunway Developments' bid of $139.9 million, or $205 psf ppr.

The plot attracted five offers, and construction firm Ho Lee Group came last with its $110 million, or $161 psf ppr.

According to Ngee Ann Polytechnic real estate lecturer Nicholas Mak, Sim Lian's offer sets a new land price record for a DBSS site and breaks the previous high of $237 psf ppr set in February 2008 for a Bishan site.

He had expected the tender to draw up to seven bidders with offers of between $160 and $200 psf ppr.