Cracks in EC prices' glass ceiling

SINGAPORE - Tenders for three executive condominium (EC) sites will close on the same day - July 30. This unprecedented timeline has been designed by the Government to moderate tender bids and rein in private property price growth.

The previous practice of staggering deadlines allowed developers to wait and see if they won one tender before submitting a bid for the next. But they will now likely choose only one or two sites to bid for rather than risk winning all three at the same time.

It will be a keenly watched event as observers track if the new move will bring down the number of bids per site and affect the quantum of the winning bids, given the bullish offers for recent state tenders and the strong take-up rate for ECs.

Private residential land prices have risen quite significantly over the last two years, with the average rate of increase in hot spots such as Queenstown, Sengkang and Pasir Ris ranging between 33 and 40 per cent.

Some sites are more desirable than others and so worth paying more for. But sometimes, even two adjacent sites with almost the same attributes sold one year apart can fetch prices that differ by more than 30 per cent.

Just last week, the top bid for a Tampines Avenue 10 site was a jaw-dropping $562 per square foot (psf) per plot ratio (ppr). This is 34 per cent higher than that for an adjacent site sold in May last year, where Far East Organisation's Q Bay Residences is now being built.

The estimated selling price for the new condominium could start from $1,200 psf, about 20 per cent higher than the median price of $1,022 psf for Q Bay.

Land prices for EC sites, however, seem unaffected by the upward spiral of private residential sites. Compared to private residential sites, they have risen by a much smaller margin.

Over the past year or so, bids have largely been range-bound at between $300 and $340 psf ppr. Almost all 12 EC projects launched since October 2011 are selling at between $700 and $799 psf. Not once has any EC project's average selling price crossed the $800 psf mark.

Glass ceiling?

So, is there a glass ceiling for ECs, resulting in a range-bound land price? And if there is, could it soon be smashed?

There are a few reasons for a ceiling to exist. As recently as 2011, the Housing Board was still launching the Design, Build and Sell Scheme (DBSS) to cater to the "sandwiched" middle-income buyers.

The locations of DBSS flats were better than many ECs'. As a result, many "sandwiched-class" buyers opted for DBSS flats, which are often cheaper than ECs.

DBSS flats - essentially HDB flats with better designs - cannot be resold to foreigners, unlike ECs, which become fully privatised after 10 years. Also, DBSS buyers' monthly household incomes cannot exceed $10,000, against $12,000 for EC buyers.

Faced with a slow take-up rate in 2011 and last year, when some ECs were only 30 per cent sold two months after their launch, developers had to offer better value for money to attract the same group of buyers. This has kept EC prices in check.

In addition, being a hybrid of public and private housing, ECs still come under the purview of the Government.

Some developers have pointed out that it is common practice for them to let the authorities know of the indicative price for their EC projects before launch. (This is not the case for private residential projects.)

As such, they have to strike a balance between profit-making and providing affordable housing for the "sandwiched class". At the same time, developers have to be mindful of the income ceiling of EC buyers and their affordability.

Permanent residents and foreigners can buy private properties, but not ECs. These buyers make up about one-fifth of the mass market demand.

But with land and construction costs for private residential properties rising, how long can EC prices stay at the current level? Will they breach the $800 psf level soon?

The average construction cost for EC sites sold in 2011 and before was around $210 psf, but it has increased to about $250 psf.

If the land price for ECs breaches $356 psf ppr, the average selling price for the finished units will have to go above $800 psf, assuming another 20 per cent for marketing and other costs, and a 10 per cent profit margin for the developer.

The gap between new mass market homes and ECs has widened to a new record. In the second quarter, the median price of new mass market homes was $436 psf, or 58 per cent higher than that of ECs.

The difference is much wider than in the same period a year ago, when the gap between mass market homes and ECs stood at $237 psf, or 32 per cent.

One reason for this gap is that private condominium units are shrinking in size, resulting in higher psf prices.

In contrast, EC units are typically bigger, selling for a lower psf price. Even so, the gap is too big to be ignored. Data from the resale market shows that once ECs are fully privatised, the price gap between mass market homes and ECs narrows to as little as 5 per cent.

This makes the current ECs in the market even more attractive, as there is potentially higher capital appreciation.

Buyers are more inclined to purchase EC projects because they are deemed a "sure-win" bet as investments.

Increasing demand

ECs became even more attractive to both developers and buyers because of their partial exemptions from the new total debt servicing ratio (TDSR) framework.

Under the new rules, financial institutions may exclude the monthly repayment of the EC buyers' existing home loans in computing the TDSR, provided these buyers sell their existing properties within six months of taking possession of the EC.

It is no wonder that more developers, including foreign players, are eyeing the segment. Given that mid- to high-end properties are slow-moving, some developers which did not consider ECs in the past are now joining the fray.

The easy availability of cheap credit - from domestic sources and abroad - is also fuelling the demand for land. All these indicators point towards a more aggressive bidding scene for upcoming EC tenders.

If the bids turn out to be more bullish than market expectations, the possibility of EC selling prices remaining at the current level is quite slim.

EC construction costs have also gone up as Singapore's labour market continues to feel the squeeze from the tightening of foreign worker inflows.

Also, new rules requiring developers to pay charges for outdoor spaces open to the sky are likely to raise the average selling prices of units with private enclosed spaces, such as roof gardens.

Developers used to get this space for free, allowing them to bundle roof gardens with certain units and charge a lower overall price psf compared with units without private outdoor spaces.

Lastly, the 15-month waiting period could result in some pent-up demand from EC buyers.

If Singapore's economic fundamentals stay intact or show improvement when developers are ready to launch ECs next year, there could well be new benchmark prices.

With ECs likely to face upward pressure on prices from higher construction and land costs, now may be the right time to look for alternative ways to ensure ECs remain affordable to meet the needs of the "sandwiched class".

The last thing the general public wants to see is even ECs that are out of the reach of many aspiring Singaporean first-time home buyers and upgraders.

24th July 2013

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Cracks in EC prices' glass ceiling

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