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Wednesday, March 14, 2012

S’pore developers bids for sites signal likely dip in home prices

SINGAPORE: Developers on the island-state are becoming more cautious about how much money they are willing to pay for private home sites.

They seem to be getting more worried that private home prices could fall, perhaps by up to 8% this year, according to a research report.

So they have to factor the potentially lower prices of the homes into their sums when deciding how much to offer for a plot on sale.

The BNP Paribas research report analysed about 100 government land sale bids since 2007 up until last month.

When developers look at how much to bid for a site, they consider the likely “break-even” figure. That is, how much they would have to pay for the project, taking into account the cost of building the condo and various other finance, marketing and administration costs.

Then, of course, they add a bit on top to make it worth their while, in terms of profits which means they would offer less for the land than break-even.

The report said developers were lowering the figure they were willing to pay for land, as they could no longer feel sure that prevailing home prices would hold up by the time they were likely to sell the project.

Starting in mid-2011, the difference between the expected break-even price and current selling prices started to widen to 19.8%, well above the mean of 12.1%, the report said.

The mean of 12.1% would tend to represent the profit margin developers have been achieving, on average.

This difference of about 8 percentage points is likely to represent developers' efforts to guard against the possibility of future average selling prices heading south.

A similar pattern was also observed in the second quarter of 2008, right before home prices tanked, when margin buffers widened in similar fashion, BNP Paribas property analyst Chong Kang Ho noted.

The wider spread of bids for each site, which indicates differing views among developers, and the shorter turnaround of launches also reflected concerns of an uncertain outlook in the market, he added.

Developers' nervousness is reflected not just in their bid prices but also in their haste in pushing out new launches.

The average turnaround time between securing a site and launching a project has been cut to just eight months for sites awarded in the past two years down from more than 10 months, generally, for sites awarded in 2009.

Another likely trend was even more enthusiasm for sites right near MRT stations and retail malls, the report said.

Developers feel that buyers will go for homes built on these plum sites even if times get a little rough.

By The Straits Times