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Bullish land site bids could weaken demand

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Real estate experts warn of risks from aggressive bidding

Developers may be optimistic about the improving residential property market but real estate experts are ringing the alarm about the risks of sky-high government land sale site bids.

The aggressive bids and their implications for the property market were the talk of the industry yesterday at the Real Estate Developers' Association of Singapore (Redas) property market update seminar.

Redas president Augustine Tan warned that bullish bids amid an uncertain economic outlook could weaken demand and hasten the effects of increasing supply and vacancy.

The issue also gathered the most votes during a real-time audience poll, and was brought up again in the closing presentation by Mr Donald Han, managing director of Hospitality Strategies Asia Pacific.

Mr Tan told The Straits Times that bidders were assuming that property prices "will increase by the time the land is developed in two or three years".

"That is a huge assumption and there is a risk involved. There won't be runaway demand," he added, as the Government has announced the intention to keep cooling measures in place.

Mr Tan noted that more unsold units could push the vacancy rate from the current 8.1 per cent into double digits, affecting prices in the primary and secondary markets.

A key mitigating factor would be the supply of land, he added.

"We should not be quick on making decisions to increase the land supply," he said, noting that this is ironic as land supply is typically used as a policy tool to combat high prices.

But with developers hungry for land, increasing supply could worsen the market if demand is poor in the future, he said.

Mr Tan's remarks follow the recent uptick in land supply for this half of the year, announced last Thursday.

The 16 sites in the GLS programme can yield up to 8,125 private homes, up from the 7,465 units offered in the first half.

Analysts have said that the slight increase may not satiate developers' appetites.

Developers have been paying an average of 29 per cent more for residential plots over comparable sites sold in the past five years, according to a Cushman & Wakefield report.

Several records have been set for various locations, including a 99-year lease site at Stirling Road that went for a record $1 billion to a Chinese consortium following a heated contest featuring 13 bidders.

Mr Han said the bidding is driven by unprecedented optimism and transaction volumes, with new sales exceeding 1,000 units for March, April and May.

The level of confidence among developers in the first quarter this year was high, according to a real estate sentiment index compiled by NUS and Redas.

Foreign developers are also eyeing Singapore as they perceive that the market is "bottoming", noted Mr Han.

Mainland Chinese firms, in particular, are eager to diversify from their home base.

Dr Lee Nai Jia, head of research at Edmund Tie & Company, said foreign developers often have a "different agenda" aside from profit margins.

Many could consider Singapore just a platform to exhibit their product.

This could depress the profit margins of Singaporean developers in two to three years' time, he added.