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.
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  1. Love your posting. Very well argued and informative. Wish more are like you and logical in their property investments. Keep more postings coming.

  2. Much thanks for your diligent research and your "stepping up to the podium" to educate the home-buyer.

  3. The reports we're reading in the newspapers are that, since units are snapped up so fast during property launches, developers need to replenish their land banks and hence they bid aggressively to secure the land.

    Not sure whose fault is this.. Govt for always taking the highest bid? Buyers who still snap up properties despite high prices, thus making developers greedy for more profits, and subsequently bidding aggressively for land?


  4. YS

    The root causes in my own opinion :-
    (a) China D&B developers join in with high execssive bids.
    (b) Most developers bid ahead to build but Just-In-time to clear developemnt plans. Only estab ones have small land banks. But for 99 yr few will dare hold land bank, so matter lies with Supply released by Govt.
    (c) Costs finally forced on buyers - Singaporeans in a way, not a thinking lot when compared to China Mainlanders. Here long mortgage ... there they buy in "cash"...speculation there is buy a few units and hold for appreciation. S'pore buy with long mortgage and hope for appreciation while paying interest. So once bought, they expect Govt to help push up property value, esp private ones. PAP capitalise on this weakness for both HDB & Pte Properties.

    In a total collapse we are closer to US's sub-prime bust. ADB said banks here > 50% loans stuck with properties (I am verifying). China like what Jim Roger's take - pty mkt would burst but economy will survive. I tend to agree. They can throw away 2nd and 3rd property but at least keep 1 even if highly leveraged. S'poreans trying 1-to-1 swap to upgrade will be caught with "no pants" not empty pockets. Many cannot visualise ... buy within means.

  5. Yak, so to summarize your comments, I think what you're saying is that Singaporeans are more risk-taking, perhaps taking on more mortgage than they should. And this feeds back into the cycle.

    Regarding what you're saying on China mainlanders buying in cash and holding a few units, while singaporeans take up heavy mortgages and do 1-for-1 swap upgrades... why would China mainlanders be able to do this (e.g. buy in cash)?

    As you seem to have your yearly retreat at Nanjing, let's talk about this place. I remember a few years ago, one could buy a mass-market condo unit in the northern part of Nanjing at around 600-700K RMB. To put things in perspective, I reckon the salary of a fresh grad to be around 3K RMB per month. If you picture in terms of SGD, the condo unit costs vs salary seems to be similar to Singapore here (a few years ago). So I don't think most mainlanders would be able to buy in cash.

    That said, there's something that I can think of. Up till some years back, for some jobs in China (e.g. if you're working as a Govt official); they actually assign a house to you, and you could purchase this house at a very low price if you wish. Most would take up this offer. Fast forward perhaps 10-20 years until present and you'll find that these houses are often near the inner city-area of Nanjing, e.g. near fu-zi-miao. So you enjoy lots of capital appreciation and you could sell them, and then buy a new home with cash.

    The current situation in Nanjing now, in my opinion, is even more terrible than in Singapore (in terms of the condo unit price to salary ratio).


  6. Hi YS

    A complex topic. Not 2 properties can be evaluated on an apple-to-apple basis. Same with 2 countries with differnt socio-economic background and cultures. Even a mainlander may not be able to answer you completely.

    Without going into great details, I will be putting up a post on the China Bubble. I may comment on certain points you made. Ican see certain similarities and I like to interpret what is different in the context of US & Japan market.

    Main objective is to see the risks the China Bubble is posing for us here. Not to present the mechanics of investing there although I am understanding more of it now. The majority of the readers may not be keen or appreciate from the wider context of the external business environment. Some average purchasers don't even understand ours.

  7. Hi Yak,

    Looking forward to your post on China. Btw, and you probably already realized this of course, it seems interesting that the property cycle in US, China, and Singapore, are in slightly different stages. US is still recovering, China might be on the verge about to go downhill, while Singapore is still happily marching up.

    I think the China property market is not as transparent as SG's. Information such as past transaction prices (similar to propertyguru style, or zillow) is certainly much harder to find! (I can't find any yet).