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Developers flush with liquidity will keep land demand high for now

Developers flush with liquidity will keep land demand high for now.

Given that the Singapore private residential market saw a huge wave of completions over the last four years and that most of these projects were almost or completely sold out, developers are now flush with liquidity and are actively looking to replenish their land bank.

Based on Urban Redevelopment Authority data, a total of 76,164 private residential homes - equivalent to around $90.5 billion worth of residential development projects - received their Temporary Occupation Permit (TOP) between 2014 and last year.

Due to the progressive payment scheme, developers typically receive sales proceeds in tranches, and the last tranches of the proceeds can be accessed only after a project has obtained its TOP: 25 per cent of sales proceeds upon TOP and another 15 per cent when the project receives its Certificate of Statutory Completion (CSC) from the Building and Construction Authority.

Hence, developers receive the huge capital payout only one year after their projects have been completed.

Before projects get their TOPs, they are allowed to withdraw money from the project account only for purposes related to project development, such as paying contractors for work done. This means developers are able to redeploy their capital either upon TOP or sometimes after getting the CSC.

Given that the property market was sluggish in 2015 and the first half of 2016 due to weak sentiment, developers have not been able to redeploy their capital for land acquisitions in the residential market.

Conservatively, we estimate that developers could potentially invest $45.3 billion to shore up their land bank. This is with the assumption that developers take a 15 per cent profit from all past transactions and leverage 70 per cent, since the loan-to-value for land is typically 70 per cent.

In 2016 and last year, developers spent only a total of $22.4 billion on land acquisitions, and so will still have another $22.9 billion to spend in the near-term.

Against this backdrop, it will not be surprising if the subsequent land deals continue to set record prices this year, especially for sites with little competition in the vicinity, either through Government Land Sales (GLS) or the private collective sale market. In fact, the total land acquisition so far this year amounted to $4.88 billion as at March 9.

The total amount of deployable capital by developers could potentially be even higher because we did not take into consideration capital brought in by new entrants to the market, developers' original cash reserve as well as developers' earnings from overseas contracts.

Last year, new players entering the local market for the first time included Logan Property, which acquired two sites - Stirling Road GLS site with Nanshan Group for $1 billion in May and Florence Regency for $629 million in October.

Oxley Holdings, which tops the residential land bank in Singapore, has reportedly bagged $2.3 billion in earnings from unbilled overseas contracts, according to stock analysts last November.

Nevertheless, the Monetary Authority of Singapore has recently put more scrutiny on bank loans for property development, and this could potentially reduce the amount of liquidity in the market.

How long will this land-buying frenzy last? As completions of private homes taper off sharply from this year, developers' incoming cashflow would fall in tandem. This is expected to have an impact on their appetite for land. But for now, we are not even at the halfway mark yet. The music will still go on this year, but don't expect it to last for too long.

Adapted from: The Straits Times, 25 March 2018