Appetite for land subsides after en bloc fever dissipates

Developers will likely maintain a low supply in H1 2020 as they are waiting for the private home demand to grow.

After developers had their fill of the land sold off during the en bloc fever in 2016-2018, only giants like UOL and City Developments were left in 2019 to replenish their land banks. But even these big developers have slowed down, having acquired only one site each from the Government Land Sales (GLS) programme.

According to DBS Group Research, developers’ cautious approach towards land-banking will spill over into 2020. “With the government continuing to maintain a fairly low supply in the first half 2020 GLS, the infusion of new supply is likely to be more moderate and over time in the hope of meeting the annual demand for private homes,” said analyst Derek Tan.

The increase in Additional Buyer’s Stamp Duty (ABSD) to 25% (vs 15% previously) and the additional 5% non-remittable ABSD have also increased the capital commitment and significantly increased the risks for developers looking to add to their land banks. “Whilst developers might apply for remission of the 25% ABSD, expectations of a slowdown in sales velocity in 2019 might make developers rethink their land-looking (especially for the larger sites) altogether,” Tan said.

Sizing up the land bank is also put aside as developers continue to clear their inventories on the books. Based on DBS Group Research’s estimates, amongst the listed developers, most have focused on clearing their inventory on the books and most have achieved close to 40%-50% sell-through rates. The only exceptions include Kingsford with a 0% sell-through rate as its sales license was delayed because of the former Normanton Park site, whilst Guocoland and Allgreen have low sell-through rates as of July-September 2019, at 12% and 13%, respectively.

Land banking by M&A
Some developers are avoiding the increased costs for buying land, and are now looking to “land-bank” through mergers and acquisitions (M&A) with other developers. In fact, over $17b worth of deals were made in 2019.

Notable deals include CapitaLand’s acquisition of Ascendas Group, which is expected to boost the latter’s asset recycling pipeline and AUM to become amongst the top 10 asset managers globally. The acquisition of the remaining stakes in Marina Centre Holdings by UOL/UIC will also allow the consortium to potentially extract value through selective redevelopment, tapping on the various government schemes to boost asset values through increased gross floor area (GFA) or residential developments.

In another deal, CDL completed the acquisition of Millennium & Copthorne PLC (M&C), which will infuse the group with much operational and financial flexibility. Tan noted that CDL Hospitality Trusts may bulk up in size as the pipeline of assets from M&C may be injected into the REIT over time.
Land banking is not the sole driver of M&As, as growth prospects have also dried up, noted Jefferies Singapore equity analyst Krishna Guha.

“Asynchronous cycles of different geographies and property sub-sectors along with lower tenant concentration risk is likely to cushion distributions from idiosyncratic risks,” he said.

Mergers will provide the REITs with better odds to be included to indices, which will improve their liquidity, diversify their share ownership and lower their capital costs. However, the stock market’s reaction to these mergers has been noted to be mixed, with the share prices for ESR-REIT and OUE Commercial REIT, which recently underwent deals, either inline or lagging behind the sector’s performance.

Tan said the number of mergers amongst developers and REITs could increase in 2020. “We believe that some of these opportunities could come from sponsors who after a year of active M&A, may look to lighten up their balance sheets or realize value from assets that
have stabilised.”

Sponsors also remain active sources of assets. “Amongst the SREITs, we see the CapitaLand group of REITs to be most active in terms of potential recycling activities. The likes of Ascendas REIT (A-REIT), CapitaLand Mall Trust (CMT), CapitaLand Commercial Trust (CCT), and CapitaLand Retail China Trust (CRCT) may look to tap the sponsor for opportunities apart from pursuing third party opportunities. We also see potential action from FCT, which may look to acquire the Sponsor’s stake in North Point City South Wing or PGIM fund. The Mapletree REITs are also expected to remain on an acquisition spree with Mapletree Logistics Trust (MLT) and Mapletree Industrial Trust (MINT) being the most active in terms of bulking up their portfolio,” Tan said.