Singapore is known for its dense urban streetscape and very limited land resources. The majority of the land is state-owned. To ensure sustainable development, the government releases such state land in a planned and tightly scheduled manner through the Government Land Sales (GLS) programme.
The GLS programme is a channel through which developers can acquire new development sites with pre-approved land uses typically on 99-year leasehold tenure. Developers can also purchase freehold development sites from the private market but such supply is becoming increasingly limited.
Over the past three years, the government has gradually reduced the land supply. Based on our basket of GLS site transactions, the total GFA of these GLS sites sold collectively has been decreasing by an average of 18.0% y-o-y since 2011 while the non-landed residential sector witnessed the biggest decline from 2011 to 2013, at 29.1% y-o-y.
A reduction in the total floor area of GLS sites is a pre-emptive measure to stabilise the market, given the large supply of real estate that will be coming on stream. However, this reduction in supply has equally heightened competition among developers as they have submitted more competitive bids in order to secure these GLS sites. For example, GLS sites in 2013 received an average of eight bidders per site, which is marginally lower than the average of about nine bids between 2009 and 2013, but higher than the average of six bids per site between 2004 and 2008. The price gap between the winning and the second highest bid also widened to 12% in 2013. Due to concerns of inadequate land supply, developers have been bidding more aggressively, hence the widened gap. Such a bidding strategy may not be sustainable in the long term. To retain a favourable profit margin, developers may have to increase property prices to compensate for the higher cost of land. We have noticed that the increase in the cost of land has outpaced that in the price of property. Based on the JLL basket of GLS sites sold between 2003 and 2013, the average bid price for industrial land recorded a compound annual growth rate (CAGR) of 20.2%, surpassing the 8.3% CAGR for prices of completed industrial stock as measured by the Industrial Property Price Index. Similarly, in the non-landed residential GLS segment, the average land cost climbed at a CAGR of 9.9%, while the Private Non-Landed Property Price Index edged up 5.7%.
In my opinion, this is not a sustainable trend; developers have to rethink this aggressive bidding strategy going forward as property market conditions, especially in the residential segment, are showing signs of moderation. It would be economically and financially unwise should developers continue to push up land prices the way they have in the past.
