Startling But False

July 2, 2011

I was startled when I read the front page article in the Business Times “Profit margins for DBSS developers ‘look high’ ” (Jun 30).  It alleged that the DBSS developer’s profit margin for Centrale 8 was 76%, even after it had reduced its highest selling price by over $100,000.

I thought it could not be right and had it checked.  Sure enough, the article was fraught with serious errors.

For example, it quoted a land price of $82,222,000 and a maximum GFA of 721,188 square feet for the project.  Both figures were wrong. The correct figures were respectively $178,128,000 and 682,385 square feet.  This was a huge difference of almost $100 million.  The errors led to a gross over-estimation by BT of the developer’s profit and gross profit margin.

Based on these figures alone, the profit margin would have been 26%, not 76%.

But even the reduced figure was wrong, as the article had excluded key cost items such as financing, marketing and administrative costs. These are significant costs and when included, would have further lowered the profit margin for all the DBSS projects listed in the article.

I have been in MND for 5 weeks, and not sleeping well.  I am working my guts out to try to calm the market, for the good of all Singaporeans.

But I can’t do it alone. I need all to help.

HDB architects are working round the clock to ramp up BTO supply.  Contractors are building up capacity to deliver the flats on time.  HDB is setting BTO prices carefully to help guide the market.

I hope our media can do their part too.  There is some panic buying out there, by people worried that prices will continue to rise.  Sensationalised articles will merely feed the frenzy.

If only BT had verified the facts, the misleading article could have been avoided.  Please help to circulate this blog to your friends.

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Buying Shoe Boxes?

June 24, 2011

© Urban Redevelopment Authority. All rights reserved

When I first read of this term, I felt it rather derogatory. But apparently, it is a common term in the industry globally. It refers to an apartment which is very small, typically below 500 sq ft. This is about the size of a standard hotel room here. (A 3R standard HDB is about 700 sq ft.)

Many Hong Kong apartments are almost shoe-boxes; Tokyo too. Singaporeans are however house proud and we want our apartments to be cosy, comfortable and spacious. Most will not have land, but they must not be claustrophobic.

The emergence  of shoe-box units here is a recent phenomenon. And it seems to have a demand. The annual take-up of such units has increased from 300 units in 2008 to 1,900 in 2010, or from 6% to 12% of developers’ sales over the same period.

80% of the buyers are Singaporeans, presumably for investment, with a view to rent to expats or singles.

Industry analysts and developers made these comments to me about shoe boxes.

First, many of these units will be completed soon. By 2014, the total number of completed units will increase from 1,100 to 3,800, based on known plans.

Second, some developers who bid high prices for sale sites, are planning to build shoe-box units, adding to the build up.

Third, the newer shoe-box developments are in the suburbs. Their appeal to tenants remains untested.

Some analysts wonder aloud if buyers know what they are in for. Some have suggested that the government should step in to impose a minimum size.

My instinct is not to second guess the market. Some shoe-box units do add to the diversity of housing options here. But we are closely watching its development.

For now, what is important is for potential buyers to weigh the benefits and risks carefully.

On our part, we are requiring developers to give buyers an accurate representation of the units they are buying, both within the show flats and in the sales materials.  Analysts can also help refine their analysis by including separate analysis for each category of housing products. Comparing price per sq ft for different products is like comparing apples with oranges.

A shoebox unit is not the same as a 3 room flat. So please go in with eyes open.

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June 18, 2011

Photo Credit: Sim Lian Group Limited

A private developer’s DBSS launch in Tampines, with the upper end of the 5 room units priced at $880,000, caused a stir in the social media. The negative reaction was not surprising.

DBSS is a class of housing type between HDB flats and Executive Condos (EC)/private condos.  It forms a tiny portion of the total housing options for Singaporeans.

While HDB flats are designed and priced by HDB, DBSS flats are designed and priced by private developers.  If the private developer prices it too high and there are no takers, there will be no sales.

Netizens would like MND to come in and tell the private developer to cut its price.  When they tendered for the land, price control was not a term of the tender.  If contracts, after they are awarded, can be varied arbitrarily, this will damage Singapore’s reputation as a business hub, with severe repercussions.

But netizens are not powerless.  If buyers find a price too high, they can walk away.

Neither am I. On my part, I am ramping up more BTO launches and pricing them appropriately.  I am currently preparing the next BTO launch.

I am launching 25,000 units this year. 12,000 units have already been launched.  Another 13,000 units will be launched this year, averaging 1,800 units per month.

I have been advised to do larger launches.  Large launches offer buyers a wider range of choices, and reduce the odds of repeated disappointment. I think this is sound advice.

I am therefore working with HDB to see how the June and July launches can be combined for a larger launch. And I will price them wisely. Certainly, they will not be near what the recent DBSS launch suggests.

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My Worries

June 9, 2011

© Urban Redevelopment Authority. All rights reserved

A sharply rising property market upsets and frightens many.  Young people aspiring for the Singapore Dream get angry to see the dream seemingly slipping away.  Their parents worry for them and get into panic.

We have to confront this issue head-on.  Alas, policies often cannot deliver instant results.  Still, we must do what we need to, as problems do not fade away by themselves.

However, even as we tackle the immediate problem, I must keep an eye on the medium term for possible pitfalls.   Sharp property price increases cannot go on forever.  Gravity cannot be wished away.  We have always recognised that unsustainable, rapid price increase brings with it enormous risks and that got us to act earlier on. While sharp rises are painful, sharp declines are just as disastrous.  Those who borrow to go into properties thinking that prices will continue to rise, will be thrown into financial hardship should prices drop and banks start calling.  The world witnessed this barely 2 years ago when the US property market crashed and we all suffered from it.

I think it is my duty to sound an alert.  A sort of a health hazard advisory, that things can go very wrong suddenly.  Why is that so?

First, 35,000 private units (condos and landed properties) have already been sold, though still in construction, with payments in various stages of completion.  But there are 45,000 units in the pipeline, waiting to be built and sold.

Second, to meet strong demand from developers and property buyers, URA has just announced its Government Land Sale Programme for the second half of this year.  This will inject another 8,000 private residential units into the market. Together with committed investments, some 53,000 units will be looking for buyers over the next couple of years or so. That is not a trivial number.

Third, the external situation is not exactly bullish.  Europe sovereign debt will take a long time to clear.  The Middle East crisis can still go ugly.  If that leads to a spike in oil prices and halts the fragile global economic recovery, the impact on Asia and Singapore will be direct and immediate. Moreover, foreign buyers of these properties have been strong.  In the recent quarter, they made up 16% of all buyers of these private properties.  Many Singaporeans also buy properties with the intention to rent them to foreigners coming here to live or work. In the event of any external shock, both foreign demand and rental demand can fall quite quickly. The impact can be serious if the drop in demand happens at a time when there is a substantial increase in supply. Further, low interest rates will not remain so forever.  Cost of borrowing and repayment must go up and households must factor this in.

These are the worries in my mind.  I am not alone.  As one property analyst put it in his recent analysis, some property investors seem either “blissfully ignorant” of the massive supply that will hit the market from 2013, or under the belief that the impact would affect others and not themselves, just like “some reckless drivers who think that traffic accidents would only happen to other people and they are immune to any mishaps.”

A market correction or any crash is not a given. If all goes well, the economy will continue to grow and those who bought properties here will enjoy good returns when their units are completed in the next few years. But no one is immune to mishaps. With so much uncertainties, I must advise investors and upgraders to bear these considerations in mind when they go to show rooms and contemplate if they should sign up.

What seems rosy today may turn out to be thorny, if we are not careful.

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