Will falling bids lead to tweaking of GLS?

Source : Business Times - 12 Aug 2008

Rising costs leave many developers with hands tied but govt retains options

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.