Will agressive land bids crunch developers' margins?

Firms must be cautious in keeping up with the competition, analyst warns.

There remains a difficulty in the operating environment for property developers as they face narrower margins due to costlier lands.

According to Maybank Kim Eng analyst Derrick Heng, the fierce competition has already paved the way to escalating land prices this year, arising from the limited land-banking options as the Singapore government scales back its Government Land Sales (GLS) launches.

Heng cited the sale of a condominium site at Sengkang as an example.

He explained that the top bid submitted for the said site by Sing Holdings and Wee Hur joint venture was 17% higher than average price paid by Chip Eng Seng JV for two adjacent land plots at High Park Residences in August 2014.

To recall, Sing Holdings and Wee Hur joint venture won the bid for the Sengkang site with an offer of $287.1 million, or about $517.03 psf.

“Prior to that, GuocoLand paid a record SGD1,239 psf for a prime residential site at Martin Place in July,” Heng said.

More so, there is a similar pick-up in prices for Executive Condominium segment.

Heng stated that EC sites sold this year cost 16-25% more than sites sold last year.

And while these strong bids put pressure on developers pockets, other cost items have not fallen enough to offset them. Heng noted that declining construction cost will probably be insufficient to augment higher land costs unless selling prices are raised.

"We note that the 5% decline in construction costs from their peak is much smaller than the 9.4% decline in home prices," he said.