Competition for land still strong despite tepid market

BNP Paribas research shows differences in views on housing market outlook among bidders, while more new players outbid traditional developers

By

Lee Meixianleemx@sph.com.sg@LeeMeixianBT

While bidding prices have come off quite a bit, demand remains high with an average of nine bids per site from January to September 2015, up from 7.3 bids in 2014. 

FILE PHOTO

 More forming consortiums to bid

 Developers’ net margins weakening

OCT 7, 20155:50 AM

DEVELOPERS may be bidding more cautiously now, factoring the difficulty of selling their units into their bidding prices, but the competition for land remains healthy, BNP Paribas said in a recent report.

It may come as a surprise but tender exercises are seeing more bids per site as local players rush to replenish their land bank, foreign players look to invest in Singapore and construction players are bent on diversifying from the difficult construction market.

Like-for-like comparisons on plots sold this year compared to earlier sites in the vicinity show that bidding prices have come off quite a bit. But demand remains intense, with an average of nine bids per site from January to September 2015, up from 7.3 in 2014.

Part of the reason could be because developers are anxious to restock following recent land supply cuts in the Government Land Sales (GLS) programme, said BNP Paribas analyst Chong Kang Ho, who spliced data from 185 winning GLS sites from 2007 to September 2015 to come up with his findings.

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Studying the margin buffers, he found that developers' bidding behaviour has become more cautious, with margin buffers generally above the mean of 12.1 per cent. But they are still not "outright pessimistic", since the margin buffers are below the one standard deviation of 17.7 per cent.

The margin buffer of a winning bid refers to the difference between the prevailing price of launches taking place near the land tender site and the development project cost of that land.

The greater the margin buffer, the more cautious the developer is in its bid to protect against the risk of falling home prices. Conversely, the smaller the margin buffer, the more aggressive the developer is in its bid.

In the second quarter of 2008, for example, developers' margin buffers widened to a peak of 25 per cent, reflecting heightened caution as developers braced themselves for home prices falling when the world entered the global financial crisis.

Mr Chong also tracked the gap premium between winning bid values versus their median bid values, and found them to be widening again in 2015 - an indication that bidders have differing views on the housing market outlook, possibly due to rising uncertainty in the global economy.

A widening gap usually occurs during volatile times, such as a global crisis or after new policy measures are introduced, he said.

"One reason could be that developers may have differing views on policy impact, which lead to greater discrepancies in bid value for a period of time," he said

Developers are suffering, meanwhile. Mr Chong said the slower decline in land cost compared to steadily falling home prices (down another 1.3 per cent in the third quarter of 2015, according to official flash estimates) could hurt Singapore developers' margins, especially if selling prices keep falling in the primary sales market.

"Based on our analysis, net margins of developers' new projects fell to 11.8 per cent in 2014. This is down from 12.6 per cent in 2013, and down from 22-25 per cent in 2010-2012." (See chart)

Mr Chong also noted that the still intense competition for land and the increased participation from non-traditional developers are making it difficult for traditional Singapore developers to restock their depleting land bank.

He considers non-traditional players to be foreign developers, boutique local developers and construction-related firms, all of which are eager to expand their market share here to enjoy more economies of scale.

So far this year, traditional developers such as City Developments, Frasers Centrepoint, UOL, CapitaLand, Keppel Land and Far East Organization have not won any site. Even when they took part, they were outbid by new players.

There were, on average, 1.8 foreign developers that bid for every site this year, compared with 1.4 in 2012, he said.

Increasingly, more developers are also forming consortiums to submit their bids, which is probably to share risks in this precarious market.

    
 

Despite optimism over historic TPP, doubts persist

Deal still needs ratification, limited impact seen on Singapore in short run

By

Kelly Taykellytay@sph.com.sg@KellyTayBT

Soon Weilunsoonwl@sph.com.sg@SoonWeilunBT

Mr Song (left) thinks Singapore can stand to gain from the TPP by providing intermediary services that facilitate trade between partners. Mr Mills emphasises that ratification is going to be significantly tougher than the negotiations. "Especially in the US, the ratification process is likely to be hijacked by the upcoming presidential election."

OCT 7, 20155:50 AM

Singapore

IT may have taken over five years of negotiations and has been as hailed as a historic accord, but in welcoming the Trans-Pacific Partnership (TPP) agreement, Singapore economists and business leaders were also quick to point out the challenges and issues that remain.

For one, the deal still has to be ratified in all 12 countries (comprising Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam). And even when that happens, Singapore companies - particularly smaller-sized firms - will have to get up to speed on the TPP's terms, in order for meaningful gains to be made.

Its impact on Singapore is also expected to be relatively muted in the short run, especially since the Republic already has existing free trade agreements (FTAs) with all but two of the 11 other countries (Mexico and Canada). In addition, China's absence from the TPP will limit the deal's influence, say observers.

Even so, the landmark deal has been hailed as the biggest trade agreement in history. According to the International Monetary Fund (IMF), the 12 TPP countries represent a massive market for Singapore businesses. Together, they boast a population of 800 million and a combined GDP of around US$30 trillion - amounting to 40 per cent of global GDP.

Referring to the conclusion of negotiations as "a historic moment", Prime Minister Lee Hsien Loong said in a Facebook post on Tuesday: "The TPP is an ambitious free trade agreement ... Our exporters will have better market access to these countries, and investors can expect a more open and level playing field. The agreement will open up more opportunities for SMEs (small and medium-sized enterprises) in TPP countries, and make it easier for them to do business. In the long run, our people will enjoy greater prosperity and more jobs."

Indeed, in eliminating or at least reducing tariffs and other barriers to trade, the new pact will boost trade and investment flows for Singapore. In 2013, the TPP countries accounted for 30 per cent of Singapore's total goods trade, worth S$300 billion, and 30 per cent of foreign direct investment in Singapore, amounting to S$240 billion.

Business groups were cheered by news of the deal, highlighting the TPP's future role in opening up new opportunities, and improving business conditions in the region. Said the Singapore Business Federation (SBF): "More importantly, it could effectively help to address the 'behind the border' issues which many businesses face in today's complex environment."

Economists were also optimistic about the positive spillover effects that the TPP might bring, albeit more reservedly.

Noting that current economic sentiment is still sluggish, OCBC's Selena Ling believes that the agreement's effect will be muted and will not spur a big pickup in trade. "But in the long run it can only be good for Singapore. Singapore has a fairly open trade regime - the more access there is, the better it is."

CIMB's Song Seng Wun thinks that although Singapore will not benefit greatly from it, it can stand to gain by providing intermediary services that facilitate trade between partners. "Trade needs to be facilitated by banking or legal services, which Singapore is good at."

Said Credit Suisse economist Michael Wan: "I would say that the TPP is more than just symbolism - there's a net gain to trade, a net gain to GDP."

But the deal "is not just about economics", stressed Victor Mills, chief executive of the Singapore International Chamber of Commerce (SICC).

He told The Business Times: "It might seem to some people that Singapore has very little to gain (given its many existing FTAs). But I think that would probably be to ignore the bigger picture ... Assuming the TPP is ratified, it will anchor the US to the Asia- Pacific. This strategic imperative has always been part of Singapore's foreign policy from independence onwards.

"If the US is going to evidence its pivot to Asia, it needs to ratify the TPP - because then it has even greater skin in the game in ensuring free navigation of the seas, and balancing the rise of China as a superpower. That is to ensure peace and stability in the region - these are not motherhood statements; these are imperatives."

Still, Mr Mills emphasised his view that ratification is going to be significantly tougher than the already tense negotiations. "Especially in the US, the ratification process is likely to be hijacked by the upcoming presidential election. There will be all sorts of bumps along the road to ratification."

Economists such as Mr Wan and Barclays's Leong Wai Ho also picked at the TPP's limited impact, given its exclusion of China and India. The two giants are expected to become the world's largest and third largest economies respectively by 2030.

Still, Eugene Lim, head of Asia Pacific Trade & Commerce Practice at Baker & McKenzie, noted: "It would have been better if China was in the TPP, but without the TPP, Singapore already has preferential market access into China under the Asean-China FTA and the Singapore-China FTA ... That said, the TPP does provide for the ability of new countries to join the pact."

As a strong proponent of free trade, Singapore currently has 21 FTAs and Economic Partnership Agreements (EPAs) in force with 32 economic partners. These collectively account for 80 per cent of exports
.

IMF warns emerging market companies have overborrowed US$3t

OCT 7, 201511:11 PM

[LIMA] Emerging market companies have an estimated US$3 trillion in overextended loans that threaten to trigger a sharp credit crunch and capital outflows in economies that have already been hit hard by low commodity prices, the International Monetary Fund said on Wednesday.

The IMF warned that a messy withdrawal of stimulus measures in advanced economies could start a "vicious cycle of fire sales, redemptions, and more volatility." The US Federal Reserve has said it is on track to raise rates for the first time in almost a decade by the end of this year.

Overborrowing in emerging market economies likely adds up to an average of 15 per cent of their gross domestic product, and 25 per cent of China's GDP, the IMF said.

Emerging markets where companies tapped easy credit to soften the impacts of the global financial crisis are now on the verge of a credit downturn, the IMF said. Many of the borrowers are state-owned enterprises and the lenders are often local banks. "Corporate and bank balance sheets are currently stretched," it said in its Global Financial Stability Report. "Immediate prudential attention is needed." China's exposure to credit risks as it transitions to a more market-based economy is especially worrisome, the Fund said.

China's August stock market crash and sudden devaluation in August rattled global markets. "Direct financial spillovers include a possibly adverse impact on the asset quality of at least US$800 billion of cross-border bank exposures," the Fund said.

The IMF said China should improve access to it equity market to provide companies an alternative to bank financing.

The IMF calculates that there is around US$1.5 trillion in embedded leverage in US bond funds through derivatives, which could unwind dramatically if the Fed's normalization process provokes liquidity shocks.

Bankers, investors, as well as regulators from the Fed have expressed concerns about bouts of bond market volatility, particularly after a "flash crash" on Oct 15, 2014. Many market participants have blamed the volatility on crisis-inspired rules requiring more capital, less proprietary trading and stress tests that have reduced liquidity in markets.

The IMF's warning comes after years of near-zero interest rates and massive stimulus programs in the United States and Europe that have failed to return growth to pre-crisis levels. "Monetary policies in key advanced economies must remain accommodative and responsive," the IMF said.

It recommended the Federal Reserve hold off on raising rates until it sees additional signs that inflation is quickening. Subsequent hikes should be gradual and well communicated.

The Federal Reserve has faced criticism for not providing more clarity on when it will raise interest rates, a hotly anticipated move that has caused volatility in emerging markets.

REUTERS

    
 

Heineken boosts Caribbean, Malaysian presence

Dutch beer giant Heineken Wednesday announced a deal worth 696 million euros (S$1.1 billion) with the world's biggest distiller, Diageo, to boost its presence in the Caribbean and Malaysia. 

PHOTO: REUTERS

OCT 7, 20159:24 PM

[THE HAGUE] Dutch beer giant Heineken Wednesday announced a deal worth 696 million euros (S$1.1 billion) with the world's biggest distiller, Diageo, to boost its presence in the Caribbean and Malaysia.

Heineken has taken control of the Jamaican company Desnoes & Geddes, acquiring Diageo's 57.9 per cent stake.

The Dutch brewer now holds 73.3 per cent of the Jamaican company, which produces Red Stripe and Dragon beers.

"Heineken will in due course make a mandatory offer for all shares of D&G not already owned by Heineken," it said in a statement.

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The company has also won full control of GAPL, which has a majority stake in the Malaysian brewer GAB, producers of such beers as Tiger, Anchor and Malta.

GAPL also holds the license to distribute Guinness and ABC Stout in Singapore.

Heineken bought Diageo's shareholding of just under 50 per cent of GAPL to gain 100 per cent control of the company.

"As majority owner, Heineken will be able to drive the investment and strategic direction of the operating companies in Jamaica and Malaysia," it said.

"The Caribbean and Southeast Asia are strategically important," the company added.

Meanwhile, the Dutch brewer said it had sold its 20 per cent stake in Guinness Ghana Breweries to Diageo, giving the British company more than a 70 per cent share of the Ghanian company.

Diageo, which also makes Johnnie Walker whisky and Smirnoff vodka, is one of the world's largest producer of spirits.

AFP