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Property prices in Singapore are on down turn since 14 quarters, however, the declining prices is not discouraging the property developers.
Since the settling of price on March, property developers have paid 29 percent premiums for land purchases. That is according to a report from Cushman & Wakefield. This implies property developers are buying land in highest value in the last five years. Here are some of the reasons why property developers are so eager to purchase land at high price:
The land sales vs recovering housing market
When the buyers are purchasing land aggressively, it is speculated that the market has recovered. Likewise, when the developers are not buying land, it means the developers have general notion that the property market is profitable. It is as simple as this.
Interestingly, this theory is not right. Even though this holds some truth, developers are buying property because the property market is recovering is an overtly simplification.
There are other points to consider as well. Developers have to acquire more land, and they don’t look at the market condition always. Here’s a reason why developers are still purchasing land even when the market is volatile:
Future projections are the main reason behind land purchases and not the current price.
In most cases, property developers do not consider the current price when they buy land. Their decision is based on their assumption on the future market price.
Consider this. After the land is acquired, developers will spend few years developing the property and then launch the unit sale. Sometimes developers hold the launch to let the market regain its health so that they can get better price.
Developers will also take clue from the property market in other countries. If property markets in other countries are going down, they will try to attract foreign investors to invest in Singapore.
When the property developers are buying more land even though the market is weak, it cannot be considered unusual act. The developers are buying land at this moment because developers believe that the market is settling down.
In February and March, property sales went high. In march 1,806 private homes, which do not include Executive Condos, were sold. This is the highest sales volume since June 2013. Nonetheless, property prices have not soared significantly. This suggests that the property market is at inflection phase.
The developers are sure that by 2019 or 2020, prices will go high. Because of this assumption, they are acquiring more land. Actually, if the developers do not start purchasing land right now, they won’t have anything to sell when the market starts booming.
Land may not be available as needed
Real estate business is quite different from other business because you need land to develop property and land is not always available.
A TV manufacturer or car manufacturer can order as much raw materials as he wants whenever he wants to produce more, however, a developer cannot acquire land whenever he wants. Therefore, to have sufficient lands in order to develop more property, a developer has to have land stock. Land pricing is one of the major issues as it cannot be predicted rightly. Furthermore, Singapore is land scarce country and government land sales cannot be predicted.
Because of these reasons, developers always rush to acquire land whenever the governments launched land auction. The nature of business does not allow developers to rely on their land supply and they are rushing to buy more when available.
Location of land is not always the same
Unlike other commodity, the land plots are not similar. The barrels of oil or gold bars are similar, but not the land. Each plot of land has its unique value, the property prices are based on the location. Therefore, developers are always trying to buy land because each plot has different value. They never consider the market when purchasing land.
Take this example. There were 24 bids for the Toh Tuck land sale, which are the highest bids for non-landed government land sales. The reason why the Toh Tuck land sale was bid by highest numbers of developers is because of its location. Toh Tuck is in the proximity of the new Beauty World MRT station and close to the prime Bukit Timah housing district. No other land plots will have similar features.When the land plot is in good location, the developer can easily convert it to a profit. It may not bring very good profit, but it will surely give profits.
Having said this, developer confidence in acquiring land is not entirely different from the market trends.
When the developers exhibit positive sentiments, it also reflects confidence in the real estate market. Developers’ sentiments may be entirely different than the market. Therefore, we should never go far with the developers that are aggressively buying land. The developers’ prediction that there will be property price hike in 2020 may not be true. The developers are not fortune tellers, therefore, they are running to acquire land does not mean their investment will pay off. Since businessmen are risk takers, they are taking risk in buying land. It is difficult to tell that property market will go high in 2020.
Buying landed property is another good option. Victoria Park Villas, a landed over at Bukit Timah has seen good take up rate recently and with further price reduction. They have since sold about 50% about about $4m mark.
Belgravia Villas, a freehold cluster house at Ang Mo Kio has also seen pick up in transaction which cost from $2.5xm onwards.