Year of living dangerously

YOU could hear a pin drop in the private homes market at the start of last year. No hype, no launches, no buyers.

Just six months later, it seemed as if all hell had broken loose.

Demand went through the roof, showflats were back on centre stage, buyers were queueing around the block and developers couldn’t believe their luck.

The astonishing surge in interest – it was a recession, after all – sent sales rocketing to 14,725 units last year, just a tad below the 2007 record of 14,811 units.

Turnarounds don’t get much more dramatic than that, but the tumultuous year did more than just get once-fearful buyers rushing back to the market.

It also underlined the huge risks – and rewards – that lie in property development, while igniting an intense Darwinian selection process that sorted out the quick-witted and cashed-up from the slow and complacent.

Property cycles seem shorter nowadays, said property tycoon Kwek Leng Beng.

‘The world moves so fast, you have to adjust your thinking to the new circumstances,’ said the executive chairman of the Hong Leong Group.

Indeed, it was a make-it-up-as-you-go sort of year for developers.

They certainly had no help from conventional wisdom, which dictates that property cycles take about seven years from boom to bust. The Urban Redevelopment Authority’s price index for private homes shows that values were relatively stable from 2000 to the early part of 2007 before a dizzying three-year spell that took the market from boom to bust and back to boom.

In 2007, prices in the high-end sector were largely chased up by foreign demand. Some new prime condominiums sold for more than $4,000 per sq ft – an unprecedented level – but mass-market homes attracted little interest.

But it was the reverse last year, with the mass-market sector under siege as HDB upgraders rushed in, sending prices at some new condos to record levels in their area, while the high-end segment had yet to recover fully.

‘The fluctuations within a cycle are more pronounced these days,’ said the chief executive of the Real Estate Developers Association of Singapore (Redas), Dr Steven Choo.

A CALCULATED GAMBLE

TO MANY of us, property development still seems like a no-brainer: Buy a patch of land, erect posh condo blocks with all the trimmings, sell for vast profits to cashed-up foreigners or starry-eyed locals. How hard can it be?

Well, as last year showed, it can be pretty darn hard. What looks like a licence to print money turns out to be a multi-million-dollar high-wire act of timing, taste, instinct, pluck and luck, according to Dr Choo.

‘It is very challenging. It may seem very glamorous but when you get down to it, it’s actually very tough,’ he said.

‘It does take a lot of experience to stay profitable and ride through the cycles. You must come up with the right product mix, time it right and calculate it right.’

The process starts with the initial land purchase and that is also the most crucial factor: Over-pay, and you can struggle to ever make the deal work, given that the land price can comprise 50 to 70 per cent of total development cost.

Analysts have been warning that developers risk over-paying for land this year as they rush to replenish their land banks.

But even assuming that the plot has been secured at a favourable price, time lag is always an issue, say consultants.

Developers have to work quickly as holding costs – fees, interest charges, taxes and so on – are high.

And once a project gets the green light, there are initial costs for professionals such as consultants, engineers and architects before a labourer even lifts a shovel.

‘Once you buy land, you have to follow through a development timeline. If you buy government land, you have to complete construction within a certain period,’ said Knight Frank chairman Tan Tiong Cheng.

This period is now seven years, after it was extended by a year last year.

This is where timing is vital and when any number of uncertainties can upset even the best-laid plans.

The sale price factored in at the start of the project may not hold up nine months or so down the track when the launch is held.

Construction costs may continue to rise while selling prices fall, as was the case in mid-2008.

And sales figures may not be what developers had hoped for.

And if they cannot sell their units before demand slows, they will be stuck with unwanted flats – possibly for years.

Singapore’s largest private developer, Far East Organization, for instance, still has a few unsold units from Rafflesia in Bishan, which was completed in 2003.

‘From a cashflow point of view, you can sell everything out,’ said the firm’s executive director and chief operating officer of property sales, Mr Chia Boon Kuah.

‘But if you’re fully sold, you can’t participate in the cycle. You need inventory to do so.’

Developers in Singapore have been known to hold on to unsold units for more than a decade, but holding on to a 99-year leasehold mass-market project poses another risk as the tenure runs lower every year.

‘Once the remaining lease gets closer to 80 years, the price depreciation starts to be more apparent,’ said Cushman & Wakefield managing director Donald Han.

During the Asian financial crisis, developers who bought sites at a high in 1996 could not turn a profit as demand waned and prices weakened.

That was after the Government increased land supply for private homes in May 1996 to temper prices, as well as lowered loan-to-value limits to 80 per cent, said a UBS Investment Research report last month.

‘In some cases, developers held the land for up to three to eight years before launching the homes for sale,’ it said.

Of course, it is impossible for any developer to get the timing perfectly right. All sorts of external factors, such as the health of the global economy, can affect property cycles.

When the property market heads south, what developers need are deep pockets.

‘There was nothing much one could do when the market was down. Those developers that did not have holding power undercut to sell,’ said Mr Kwek.

‘Those with financial clout could decide to hold instead because they knew the market was going to return and could wait for it.’

That is one thing that separates the big boys from the tiddlers, who often have limited capital and a hard time convincing nervous bankers to lend to them.

‘If you don’t have deep pockets, and you make a wrong development decision, you can keel over very quickly,’ said an industry observer who declined to be named.

In April 2008, small developer Bravo Building Construction pulled out of three collective sale deals when the market turned sour. The biggest of the deals was the mega $516 million Tulip Garden in Holland Road, which it bought in mid-2007 and for which it had to forfeit its $25.8 million deposit.

That is why alarm bells rang over some smaller listed players, such as SC Global and Ho Bee, around a year ago.

Analysts feared they had borrowed too much to buy land in prime areas where prices were falling fast. The concern was that these smaller firms could go under as they were stuck with the high cost of servicing their bank loans, and unable to launch or shift new high-end units.

Their stock was punished. SC Global shares lost more than 90 per cent of their value, falling from a high of $3.37 in 2007 to just 29.5 cents in March last year. They have since recovered to about $2, thanks to the market turnaround.

The banks got worried too. They started scrutinising the books of developers they had lent to, and looked at their collective loan position.

Credo Real Estate managing director Karamjit Singh said: ‘Because of the banks’ lack of confidence, it became very difficult for land transactions to take place. If anyone could buy land, he would need a lot of cash to cover the bulk of the purchase price. Basically, banks were not prepared to lend.’

To make things worse, developers faced the risk of previous sales coming undone.

The two great fears, said an industry observer, were the possibility of foreigners bailing out of Singapore, and large numbers of defaults from buyers who used the deferred payment scheme.

The scheme allowed buyers to defer paying the bulk of their purchase price until completion of the project.

‘Banks were worried. Everybody was sweating,’ said a property expert who declined to be named.

Many analysts were predicting fire sales and different degrees of defaults, as banks had turned very cautious on lending. Developers held their breath.

Fortunately, the large defaults that many had anticipated did not materialise, though there were some who lost out on their bets.

In February last year, a small developer, Jewel 1, backed out of a planned $44 million en bloc purchase of Cairnhill Heights at the 11th hour. It had bought the site during the collective sale frenzy in 2007, subject to government approval.

Two months later, a China investor made the news for failing to pay $30 million for 20 units at The Fernhill condo when the project obtained its temporary occupation permit. The investor later managed to resell 19 units, albeit at a loss.

Keppel Land also had to grant a six-month payment extension to a buyer who bought 51 units at its The Suites @ Central project.

MOVING FAST

LUCKILY, the global recession – while deep – did not last very long.

Just six months after the financial meltdown, the local property market stirred back to life together with a global rally in stock markets.

The suddenness and improbability of the turnaround caught everyone by surprise.

The pace at which things changed brought home to developers the need to be fast on their feet if they wanted to avoid being caught napping.

Being nimble, and being able to change tack to meet changed conditions, can make the difference between laughing all the way to the bank and crying into your beer.

ECG Property Group chief executive Eric Cheng told The Straits Times: ‘You can’t control the market but you can get a feel of it. So when the market is right, you must get your showflat and permits ready to launch as quickly as possible.’

Developers showed fast footwork last year when they quickly came up with small units to satisfy buyers shy about plonking down large amounts of cash amid a slumping economy and languishing stock market.

EL Development managing director Lim Yew Soon said his company was fortunate to have reacted fast by switching to small units for Illuminaire, when it had originally planned to ride out the year. If the firm had stuck to Plan A, it would not have been able to sell out the project at the price it achieved by switching to small units.

Some smaller developers slashed prices by up to half to move units and generate cashflow, while others offered sweeteners such as stamp duty waivers.

Far East Organization said it cut prices across the board after Lehman Brothers collapsed in September 2008. Prices of mid-end projects went down by 10 to 23 per cent.

But it quickly raised prices when it saw that demand was more resilient and pushed out several projects in the second half, said Far East Organization’s Mr Chia. In the end, the company had a record year.

The financial crisis was unlike anything that had hit the industry before and was more unforgiving on smaller players than big guns like Far East Organization.

‘If the worst-case scenario materialised – that is, the economy had shrunk 10 per cent – many businesses which had expanded during the previous three to four years would have failed,’ said CIMB-GK regional economist Song Seng Wun.

‘Many developers, especially the newer players which jumped into the fray in the high-end sector, or the highly leveraged ones, would have been under severe pressure. They may even have failed.’

The crisis was a sobering event for developers, coming right after the euphoria of 2007.

‘Every cycle will be an eye-opener for the smaller boys. They typically do not have strong holding power like the big boys do,’ said Cushman & Wakefield’s Mr Han.

Yet despite the victims and the bloodletting that occurs in every cycle, the lure of bricks and mortar and the profit they can bring soon work their magic again.

But as ECG’s Mr Cheng cautioned, it’s not a game for learners: ‘Developers must have the courage to buy land when others are not buying, and sell when you feel the market is right. And that’s when experience comes in.

‘Property development is not easy.’

Source: Straits Times, 20 Feb 2010