In the foreseeable future, we anticipate a potential decline in land bid prices during Government Land Sales (GLS). A recent noteworthy example is the successful bid by Sim Lian Group for a land site at Jalan Tembusu, securing it at a rate of $1,069 per square foot per plot ratio (psf ppr). This is approximately $300 psf ppr cheaper than neighbouring projects in the Dakota area, such as Tembusu Grand and Grand Dunman, which were previously transacted at around $1,300 psf ppr.
This raises eyebrows as it marks a nearly 30% reduction in the bid price for the Jalan Tembusu project which is an uncommon occurrence. The industry is left pondering whether this signals a dip in developer confidence, leading to lower-than-expected bids. This trend could also potentially influence a downward shift in future private property prices within the Dakota area.
To explain this remarkably low bid price, it is essential to delve into the recent harmonisation of floor area definitions across various agencies. These changes have significantly influenced the dynamics of bidding processes.
Harmonisation of Floor Area Definitions of URA, SLA, BCA, and SCDF
The announcement of the new floor area definitions last year 1st September has just taken effect recently on 1st June 2023.
The primary catalyst behind the decline in land prices can be attributed to a pivotal shift preceding the adjustments to Gross Floor Area (GFA) calculation. Previously, developers had the liberty to construct “free” aircon ledges and curtain walls that are excluded from GFA calculations. Such aircon ledges make up 4 per cent to 5 per cent of the total saleable area in private condo developments while curtain wall systems account for 1 per cent to 2 per cent, according to industry players. However, these elements could be incorporated into the saleable area presented to potential homebuyers. Refer to the images below showcasing examples of the aircon ledge and curtain walls.
In order to further explore the effect of harmonisation of GFA, let us first take a look at the example of Tembusu Grand and calculate its profit margin.
Estimation of Profit Margin for Tembusu Grand
The land parcel designated for Tembusu Grand spans 210,621 sqft with a Gross Plot Ratio (GPR) of 2.8. Developers traditionally capitalised on a 5-7% “free space” sold to homebuyers before the harmonisation of GFA definitions. Assuming full utilisation of this space and factoring in existing balcony areas (7% of total area according to URA), the total saleable area would be 672,305 sqft.
210,621 ✕ 2.8 ✕ 1.14 =672,305
City Developments Limited (CDL) and MCL Land successfully bid $768 million ($1,302 psf ppr) and was awarded the Tembusu Grand land parcel. Calculating the total cost involves factoring in Additional Buyer Stamp Duty (ABSD), construction costs, legal expenses, marketing, and developer’s team costs, totaling approximately $1,198 million.
($768,000,000 ✕ 1.05 +$350 ✕ 672,305) ✕ 1.15 = $1,197,962,600
With a launch price of $2,475 psf, the projected revenue stands at around $1,664 million, resulting in a gross profit of approximately $466 million and a profit margin of 28%. This may not be the actual profit margin for Tembusu Grand but we would assume this profit margin for illustration purposes.
$2,475 ✕ 672,305 = $1,663,953,876
$1,663,953,876 – $1,197,962,600 = $465,991,276
$465,991,276 ÷ $1,663,953,876 = 0.2801 = 28.01%
Following the implementation of harmonisation changes, developers face tighter profit margins due to the absence of previously available “free” areas for homebuyers. Strata areas, including air con ledges and curtain walls, once excluded from GFA calculations, are now integrated into these calculations.
To counterbalance reduced profit margins, developers explore different strategies. One approach involves increasing the new launch price for homebuyers. However, this tactic might pose challenges, potentially limiting the pool of prospective buyers and rendering the property’s price unaffordable for most buyers.
An alternative strategy is for developers to secure land at a lower price during Government Land Sales (GLS), exemplified by the Sim Lian Group’s approach to the Jalan Tembusu land parcel.
To provide a concrete illustration, let’s apply the previously determined profit margin to the Jalan Tembusu project.
Estimation of Land Price for the Jalan Tembusu Project
Using the same profit margin, we apply it to the Jalan Tembusu project, factoring in the changes post-GFA harmonisation. Without the previous 7% “free area,” the total saleable area becomes 829,279 sqft.
221,436 ✕ 3,5 ✕ 1.07 =829,279
Assuming that the launch price of the Jalan Tembusu project is the same at $2,475 psf, with a saleable area of 829,279 sqft, the total revenue would be around $2,052 million.
$2,475 ✕ 829,279 = $2,052,464,843
To maintain a consistent profit margin of 28%, the total cost for the Jalan Tembusu project is estimated at approximately $1,477 million. After deducting construction costs, legal fees, marketing expenses, developer’s team costs, and ABSD, the calculated land price stands at around $947 million, equivalent to $1,222 per square foot per plot ratio (psf ppr).
$2,052,464,842-28% ✕ $2,052,464,842= $1,477,569,440
($1,477,569,440 ÷ 1.15 – $350 ✕ 829,729) ÷ 1.05 = $947,233,751
Comparing this to the actual land price of $1,069 psf ppr, factoring in GFA harmonisation, the drop is only 14%, not the assumed 30%. Furthermore, with this land price, developers could still launch units at a minimum price of $2,271, representing only an 8% drop from $2,475.
However, this assumes a worst-case scenario with low market demand. Considering the robust demand for nearby projects like Waterbank at Dakota, as shown below, where transactions are close to $2000 psf, such a scenario seems unlikely.
Will land prices drop in the future?
One significant factor influencing changes in the real estate landscape is the harmonisation of GFA definitions. As a consequence, we can anticipate a downward trend in the quantum of land bid prices during GLS post-June 2023.
However, under the assumption that developers aim to maintain their current profit margins, the future launch prices are less likely to undergo a substantial decline. Consequently, it is improbable that the resale prices of neighbouring projects in the Dakota area will experience a significant drop.
This analysis sheds light on the interconnected dynamics between GFA harmonisation, land bid prices, and property values, shaping the future trajectory of the real estate market.