Hitting the nail right on the head

‘Give market a freer hand’
Reporting by Esther Ng and May Wong
Today, Singapore

Should there be this much Government intervention in the Singapore property scene, and is it healthy?

Calling for a freer hand for market forces, the president of the Real Estate Developers’ Association of Singapore (Redas) yesterday challenged the official wisdom behind the issue of private housing affordability.

Mr Simon Cheong, speaking at an industry luncheon, argued that the Government’s land sales programme has, in some instances, in fact accentuated the mismatch between demand and supply and contributed to higher pricing.

He also questioned if restraining the rise in property values was the right approach to making private housing affordable, and asserted that some speculation actually improves liquidity and staves off market bubbles.His candid comments – which he said he had been “advised” against making, “for fear of it being a sensitive topic” – found resonance among some industry watchers, while others still argued for the State’s role in curbing market volatility.

Mr Cheong zeroed in on the Government’s Reserve List for land tenders, highlighting two examples of the conundrum developers face.

In June 2008, a bid of $118 per square-foot per plot ratio (psf ppr) for a Tampines site for condominium housing was rejected as being under the reserve price; this month, the site was awarded for a top bid of $421 psf ppr – 3.6 times higher.But the Government has taken steps to boost the system’s responsiveness: Earlier this month, it announced it would now consider a public tender if more than one party submits minimum bids that are close to the reserve price within a reasonable period.

And a Ten Mile Junction mixed use site with a failed bid of $162 psf ppr in April 2008, went last month for $437 psf ppr, 2.7 times more.

“Had the two sites … been awarded back then at ‘market prices’, the current demand-supply mismatch scenario in the residential market may have been more smoothened, and price increases for such mass market projects more muted overall,” Mr Cheong said.

“With a higher land cost, these developers must now sell at higher prices just to maintain an equitable level of profitability.”

His point was that in periods of high volatility, the reserve price system was “not able to respond quickly enough to real-time changes happening in the marketplace. This lag is exacerbated by the time for a land tender exercise to run its course”.

In favour of the State stepping in to cool the market was Chesterton Suntec International’s Colin Tan, who highlighted the danger of price volatility distorting the market and allocation of resources.

Case in point: When foreign investors sent high-end segment prices surging, leading developers to “rush into that segment because of the profits they could make, and neglect the mass market” – causing prices to skyrocket.

Said Mr Tan: “Volatility makes it hard to determine between speculative and true demand. True demand was masked; you can’t plan your housing needs this way.”

But Jones Lang LaSalle’s Dr Chua Yang Liang, head of research for Southeast Asia, agreed with Mr Cheong that less intervention was better – just enough to help aspiring upgraders make the transition from public to private housing.

Credit controls the real issue?

What of the “angst” of those people for whom private housing is priced out of reach?

“It is a dangerous misconception that rising values alone are the culprit,” said Mr Cheong, citing supply imbalance and a credit glut as other possibilities. “Improving credit standards to higher quality may be the issue, not the affordability of private housing per se.”

As for speculation – oft treated as a dirty word here – the Redas president sought to distinguish between investors, who use minimal bank borrowings to buy and sell properties, and speculators, who leverage aggressively and put the entire credit system at risk.

“As we see it, buying what you cannot afford is speculation … So again, the issue may be having control over credit rather than speculation per se,” he argued.

Still, a degree of speculation keeps the market healthy, Mr Cheong explained: When demand far exceeds supply, “speculators provide investors with a secondary source to a scarce commodity at a price premium … Encouraged by the higher prices, developers respond by launching more developments for sale, and in so doing narrow the gap with demand”.

Agreeing that speculators add market vibrancy, Cushman and Wakefield managing director Donald Han said: “We need to cultivate an environment for foreign investors to come in – if every three months you interrupt, you send the wrong signal.”

Still, Government measures are necessary to “prevent sharp peaks and valleys – you don’t want a knee-jerk situation where people go into negative equity,” Mr Han added.

Ultimately, Credo Real Estate managing director Karamjit Singh saw Mr Cheong’s views as forwarding much-needed market perspective. “It would be good to have that dialogue, so that ultimately, what comes out by way of policy changes reflects the ground’s feedback,” he said.

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