Property stocks stay firm despite land injection

News seen as positive for some developers who are low on landbanks

(SINGAPORE) Property stocks defied market expectations and stayed firm yesterday, the first day of trading after the government said that it will release a record supply of land for private homes in the second half of this year.

The FTSE ST real estate holding and development index gained one per cent to close at 639.59 points yesterday, shaking off the Ministry of National Development's announcement last Friday that it will offer 27 residential sites for sale in its H2 2010 land sales programme.

Analysts were expecting developer stocks to pull back on news that a total of 13,905 units can be built on the 27 sites - which will dramatically increase the supply of land for private homes and hence bring down home prices.

But share prices of major property groups stayed flat or rose slightly for the most part yesterday - in line with the rest of the market. CapitaLand gained 0.9 per cent to close at $3.54; City Developments rose 0.8 per cent to close at $10.20 and Keppel Land rose 2 per cent to end at $3.53.

An analyst with a foreign bank here said that the news is 'not necessarily negative' for developers, many of whom are running low on their landbanks.

In fact, the shortage of land sites was pushing some developers to over-bid and over-pay for the more attractive sites, he said. And if the trend had continued, developers here could have been driven into paying ever-increasing prices for land sites and then ended up having to make provisions for these sites when the current property bull run ends.

But analysts agreed that one outcome from the large supply of land in the second half of the year will be a reduction of land prices for suburban plots. Many of the 27 residential sites offered by the government are in the 'outside central region', a proxy for suburban mass market locations.

'With so many sites available, developers are likely to be more selective and prudent in their bids for the available sites. We believe the most immediate impact would be lower land prices,' said Citigroup analyst Wendy Koh.

Echoed DMG & Partners Research analyst Brandon Lee: 'In view of the increased supply, we expect land prices for upcoming tenders to immediately taper off from the recent $450-$500 per square foot (psf) range to $350-$400 psf, a range which implies a more affordable selling price of $800-$850 psf (as compared to the present $900-$950 psf) - assuming a modest profit before tax margin of 10 per cent.'

The number of bids for each government land tender should also 'normalise' to 6 to 8 from the current 10 to 15, Mr Lee said.

But given that there is still some time before the sites will reach the public as new residential projects for sale, the mass market could still remain strong given the tight supply of HDB flats and the record-low mortgage rates, Ms Koh added.

And analysts also continued to be bullish on the high-end and luxury segments of the private property market, where the supply of land still remains scarce.

Source: Business Times, 25 May 2010