A TENDER for an executive condominium (EC) site at Choa Chu Kang Drive last week fetched a top bid which was a record $320.86 per square foot per plot ratio (psf ppr).
It was a record by just by a whisker - only 28 cents psf ppr higher than the previous high for an EC site, set in May last year. However, the outcome may be cause for some concern.
ECs are a hybrid of public and private housing with initial buyer eligibility and resale restrictions that are completely lifted 10 years after the completion of the project.
This housing type was created by the government in the mid-1990s to cater to the sandwich class of buyers who find private housing too expensive but who earn more than the $8,000 monthly household income ceiling and are thus ineligible for direct purchases of public flats from the Housing & Development Board.
ECs have control mechanisms to prevent developers from pricing them too high. There is the $10,000 monthly household income cap for those buying ECs from a developer. And developers must set aside at least 95 per cent of units in the first month of launch for first-time home buyers. These requirements should serve as a check against developers pricing their projects too high and hence bidding too aggressively for land.
Some property consultants reckon there is a market for a new EC project if it is priced at about 20-25 per cent below a 99-year private condo in an equivalent location.
And it seems that in the current climate, some developers are optimistic that the 99-year private residential market would remain firm or even strengthen. If so, there will be that sandwich class of buyers for ECs to cater to - even at higher price levels.
If the aim, however, is to rein in private home prices at the entry-level segment, should the authorities consider directly allocating some EC sites again, with guide launch prices for the projects to be built on them?
Let's study the bid for the Choa Chu Kang site.
Some property consultants estimate that the top bidder - a joint venture between City Developments Ltd (CDL) and TID - will have a breakeven cost of about $650 psf. Next door, units at Mi Casa, a 99-year-leasehold private condo, have been sold at about $800 psf in the first two months of this year.
Going by some recent views within property circles of a 20-25 per cent price gap between a new EC project and a 99-year private condo, the project by CDL and TID should be priced at $600-$640 psf on average. But this would be below their estimated breakeven cost of $650 psf. And as commercial developers, they will aim to sell at a higher price to make a profit - probably at least $700 psf, some analysts suggest.
Indeed, CDL may need to attain this sort of price benchmark to defend its earlier bid in December 2010 for an EC plot about 2km away, near Segar LRT Station and facing Kranji Expressway (a location seen as inferior to the latest Choa Chu Kang site). CDL bid $270.51 psf ppr for the Segar Road site and its breakeven cost could be around $620 psf.
If the current positive sentiment among developers continues, they are likely to continue making bullish bids for EC sites, which in turn will lead to buoyant launch prices for new EC projects. Then even this hybrid housing type may increasingly slip out of reach of the sandwich class, as buyers may be forced to fork out a bigger cash sum for their purchases, if EC prices spiral upwards.
One way to address this situation would be for the authorities to, at least temporarily, start allocating directly a few EC sites as was the practice during the early days of ECs. Back then, EC sites were directly assigned to non-listed government-linked companies (Pidemco Land and Singapore Technologies Properties) as well as co-operative NTUC Choice Homes, at prices set by the government.
Pidemco Land merged with DBS Land in 2000 to form CapitaLand, which is listed and now functions entirely as a commercial entity.
But NTUC Choice Homes - as a co-operative with the mission of delivering quality housing at affordable prices to help more Singaporeans meet their aspirations to own private property - could be called upon to perform its social mission by helping to rein in the rise in EC prices.
The authorities could tender out EC sites in parallel with direct allocations. This may help prevent EC land bids from becoming too bullish, translating later to high EC prices. Such an arrangement can be temporary - once the current bullish property market stabilises, the authorities could stop directly allocating EC plots and sell them entirely through tender.
Developers would no doubt see any direct allocation as an intervention in the market, but then ECs are not a free-market product either, with all the income eligibility and other restrictions.