Thursday, July 24, 2008

Condo Land Falling Below Building Costs

Source : The Business Times, July 24, 2008

Developers of entry-level housing squeezed by weak selling prices and surge in construction costs

For the first time in at least two decades, construction costs for some 99-year condo sites are actually higher than their land costs. This is taking place against the backdrop of soaring construction prices and a weak outlook for the prices at which private housing developments can be sold.

Some industry watchers expect this trend for entry-level private housing to continue - which suggests that the government may have to be prepared to accept declining land bids at state tenders.

'Right now, developers can bid up to about $200-250 per square foot of potential gross floor area at most for suburban condo sites, which translates to breakeven costs of $650-700 psf. However, if construction costs continue to go up and selling prices continue to drop, there's not much else you can do except to lower your land bids. The question is what is the government's threshold for pain?' a seasoned developer said.

In May, URA (Urban Redevelopment Authority) awarded a site in Choa Chu Kang for $203 psf per plot ratio (psf ppr). 'So the $200 psf ppr mark has been tested. The next question is: Will the government be prepared to sell sites at even lower prices, say, around $150 psf ppr?' he added. This $203 psf ppr was below the construction cost of a new development on the site.

Last month's winning bid of $270 psf ppr by Frasers Centrepoint at a state tender for a plot at Woodleigh Close was also lower than the construction cost of about $300 psf of gross floor area (GFA) for mass-market condos, industry observers noted.

Meanwhile, constructions costs - after staying stagnant for several years - are now at record levels.

Construction cost consultancy Rider Levett Bucknall (RLB). said: 'Construction prices for medium-quality condominiums indicatively range from $260 psf of GFA to $320 psf of GFA in Q1 2008, and prices have risen further to $280 to $350 psf of GFA for Q2 2008,' it said. 'High demand and competition for limited resources, the lack of tendering capacity among contractors, sub-contractors and suppliers, and volatile commodity prices have contributed significantly to building tender price escalation,' the firm added.

Construction costs are estimated to have risen 20 to 25 per cent for Q4 2007 compared with the corresponding period in 2006 for average medium quality condominiums (for the upgraders' market).

While the trend of construction costs exceeding land costs has drawn more attention since the recent tender closings of Government Land Sales (GLS) sites, some observers say it surfaced as early as December last year, when Chip Eng Seng bought a plot at Elias Rd in Pasir Ris for $228 psf ppr.

In the same month, Frasers Centrepoint picked up a site at Lakeside Drive for $248 psf ppr - which was probably about equal to construction costs at the time.

Construction costs comprise not just the cost of building materials but also include factors such as workers' wages among others.

As for the mid-market and high-end residential sectors, land values would still be above their respective construction costs, although there have hardly been any land deals in these segments in recent months because of weaker homebuying sentiment.

Instead, developers have been focusing more on suburban sites suitable for being developed into mass-market private homes targeted at upgraders, as this is the sector where end-unit demand is relatively more resilient. Still, developers have had to be more prudent with their land bids.

'It's a simple equation, a function of selling price for the end-units against development cost and profit,' a property investor observes.

Buyers of mass-market condos are extremely price sensitive, while construction costs have been escalating. 'At the end of the day, something's got to give - in terms of a lower land bid,' observes Knight Frank managing director Tan Tiong Cheng.

'Developers have to allow a larger sum for contingencies because of the way construction material prices have been going up.

'The trend is likely to continue - until construction costs come down or selling prices of private homes go up again,' Mr Tan added.

For now the pressure on construction costs shows no signs of letting up. 'Given the large existing project commitments on hand, price escalation trends are set to continue for this year and may be in the order of 15 to 20 per cent,' RLB said.

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