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


  1. In comparing Hougang Ave 2 ($456psf) with Hougang Ave 7 ($339.6psf), this seems like a drop in the land price. However, it seems as if this is not really a fair comparison? since the fact that the Ave 2 plot size is much bigger, should account for something? e.g., each condo resident being able to enjoy a bigger common space... and this should make the psf higher?

    I'm not questioning here; I'm merely seeking clarification and trying to learn.


  2. YS

    You mistaken. Comparison is based on psf ppr. Not just psf cost. No. of storeys is different. One is only 5 storey high.

    Hence is is apple-to-apple.

  3. You're right. Thanks for high-lighting the 5 storey, that help me clear my misunderstanding.