Will falling bids lead to tweaking of GLS?

August 12, 2008
COMMENTARY
Will falling bids lead to tweaking of GLS?
Rising costs leave many developers with hands tied but govt retains
options
By KALPANA RASHIWALA

WILL the Government Land Sales (GLS) Programme fizzle out because
developers are offering low land bids in the face of rising
construction costs?

Two suburban condo sites - at Woodleigh Close and Choa Chu Kang
Drive - were sold at state tenders over the past few months at land
prices below construction costs. The question is: Will the government
still keep awarding Confirmed List sites if land bids continue to
fall?

The problem with the Confirmed List system is that the government
doesn't reveal the minimum or reserve price for sites in this list,
which are released according to a pre-stated schedule regardless of
demand. Reserve List sites, on the other hand, are launched for
tender only if a developer undertakes to bid at a minimum price that
is acceptable to the state. Since this minimum price is publicised by
the government when the sites are triggered for release, developers
that take part in the ensuing tender will know the minimum price they
need to bid.

Given the uncertain environment, it was a good move on the part of
the authorities to have leaned more towards the Reserve List for the
current H2 2008 GLS Programme.

As for sites on the Confirmed List (where the minimum price is not
made public), these too have by and large been awarded. But there has
been the odd case here and there where the government could not award
a site because the top bid was too low. Some market watchers are
wondering if that could become more commonplace.

A BT story last month highlighted that land bids for 99-year suburban
condo sites have fallen below construction costs. This is the first
time in at least two decades this has happened. Examples include
Confirmed List sites at Woodleigh Close and Choa Chu Kang Drive,
which fetched top bids of $270 psf of potential gross floor area
(GFA) and $203 psf of GFA respectively at state tenders that closed
in June and May respectively this year. In both instances, the top
bids were below construction costs. According to construction cost
consultancy Rider Levett Bucknall (RLB), construction prices for
medium-quality condominiums indicatively ranged from $280 to $350 psf
of GFA for Q2 2008, up from the Q1 2008 figure of $260 to $320 psf of
GFA.

The government awarded the two sites. But things may change in
future.

Developers will have to allow a larger sum for contingencies for
their projects because of the way prices of construction materials
have been escalating. So there's not much else they can do but bid
lower for land - especially since the outlook for home prices remains
weak.

A recent Jones Lang LaSalle study pointed out that 'the unceasing
escalation in building tender prices will definitely impact the
profitability of residential developments'.

'This will affect developers' sentiments, which will be evidenced in
their future land-bidding strategies,' it added.

'Rising construction costs, coupled with a ceiling selling price,
will put downward pressure on land tender prices,' the study
predicted.

But will it reach a point where the bids are too low for the state to
award Confirmed List sites?

A lot will depend on the Chief Valuer's assessment of reserve price,
which might be adjusted lower if construction costs keep escalating.

So state land awards should still be possible as long as bids are
reasonable, and not seen as opportunistic attempts by developers to
get land on the cheap. After all, keeping land prices up has never
been the objective of the GLS Programme. Rather, it has aimed to
ensure a steady state of supply for the property market.

However, one could argue that land is a strategic resource of
Singapore and should not be sold on the cheap, even if market
conditions warrant it.

There are other dimensions to this discussion. Construction costs
will not keep rising forever. Once oil prices are tamed and/or
economic growth slows all over the world, construction material
prices should also ease.

Meanwhile, if land bids slip further, perhaps one should be prepared
for even fewer sites being released on the Confirmed List - unless
they serve a strategic purpose.

Fortunately, there is still the Reserve List - which is not only a
more market-driven approach but also takes guesswork out of
developers' equation.