Leng Beng Lays Down Marker With Chestnut Bid

Source : The Business Times, August 26, 2009

Toppish price may send inadvertent signal to restart confirmed list sales

EVEN as the dust settles on Hong Leong Group's top bid at last week's tender for a 99-year condo site at Chestnut Avenue, a discussion in some circles now centres on whether Hong Leong overpaid for the site.

As expected, Housing & Development Board said yesterday evening it has awarded the site to Sunny Vista Developments (a subsidiary of City Developments) and Hong Realty.

The two companies are part of the Hong Leong Group and teamed up to place the top bid of $143.68 million, which works out to a much-higher-than-expected land cost of $280 psf per plot ratio (psf ppr).

Some rival developers believe Hong Leong's breakeven cost may be around the $600 psf mark and its projected average selling price near the $700 psf level. Sources, however, suggest the group may have been eyeing a much higher average price, in the high-$800 psf range, when it cast its bid.

That would set a benchmark for a 99-year leasehold condo in the area.

Hong Leong Group executive chairman Kwek Leng Beng said in a written reply to BT: 'We can see potential in an area where some others may not... We are very familiar with this locality... There is now a lack of good and affordable residential developments in the vicinity. We are confident that there is a vibrant market there.'

The tender attracted 13 bids and marked the first time in about a year that the government had sold land for private residential development. Clearly, developers are famished for land after a stretch of strong housing sales over the past six months. The Chestnut Avenue plot in the Bukit Panjang area was on the government's reserve list when it was triggered for release after a successful application by a developer that undertook to bid at least $62 million or about $121 psf ppr.

Here are some indicators of Hong Leong's bullishness. Its bid was 2.3 times the minimum price. Seven of the 13 bids were bunched in the $169-182 psf ppr range; the winning bid was 54 to 66 per cent above this.

Hong Leong's bid was 11.3 per cent higher than the next highest offer of $251.60 psf ppr placed by rival Far East Organization. The site is not near an MRT station but one advantage of its location is that units on the upper floors of a condo on the site will enjoy views of the nature reserve next to Upper Peirce Reservoir. Hong Leong's new project on the site is expected to be profitable, but it remains to be seen just how high a price it will be able to achieve.

The aggressive winning bid has set the stage for toppish bids at next month's tender for a 'hotter' site at Dakota Crescent next to an MRT station, fronting Geylang River and much closer to the city. It will also raise pressure on other reserve list sites that are triggered. In other words, land prices are set to escalate. Ditto for the prices at which developers later market new projects on these sites.

Mr Kwek insists that the outcome of the Chestnut Avenue tender shows the reserve list system - where the government launches a site for tender only upon successful application by a developer - is working well. 'The property market has still not fully recovered yet and although the economy is improving, it has not recovered too,' he added.

Last October, the government suspended sales of sites on the confirmed list, where sites are launched for tender according to scheduled dates. Instead, it has offered sites solely through the reserve list; this market-led approach was thought to be suitable amid the housing sales slump at the time.

However, in the first seven months of this year, developers sold a stunning 10,017 private homes - more than double the 4,264 units they sold in the whole of 2008. This has enabled developers to flex their muscles. Prices of mass-market condos today are about 10-15 per cent higher than the lows of Jan-Feb 2009, according to one developer's estimate.

One reading of last week's tender result is that some developers do not believe the pace of land sales from the reserve list will be fast enough for them to replenish their mass-market housing landbanks - despite the fact that three such sites had already been triggered in the one month preceding last week's tender close. And the likes of Mr Kwek thus need to bid aggressively to get their hands quickly on some much-needed land.

Here's a possible signal he may have inadvertently sent to the authorities, who are keen to assure the home buying public there is enough supply of private homes and land: please expedite the release of more land.

There may be a case now for government to transfer a few of the nicer sites from the current reserve list to the confirmed list, and start launching them soon. It could also replenish the reserve list.

But selling land only through the reserve list - where government waits for a developer to apply for a site and undertake to bid at a minimum price acceptable to the state before it launches the site - can take some time.

It may be opportune for government to take the unprecedented step of restarting confirmed list land sales midway through the current suspension for H2 2009.

Time is of the essence now as developers run out of land to build entry-level private condos on. And keeping the dream of upgrading to a private condo within reach of HDB upgraders is an important part of the Singapore housing story.