What is area harmonization and the changes made?
Previously, different agencies employed varied floor area measurements for distinct purposes. For instance, URA utilized gross floor area (GFA) for building intensity assessments, SLA employed strata area for ownership delineation, BCA utilized statistical gross floor area (SGFA) for determining total floor areas, and SCDF utilized accessible floor area (AFA) for fire safety requirements.
This led to Qualified Persons (QPs) investing considerable time and effort in calculating diverse floor areas to meet the distinct regulatory requirements of different agencies. The varying floor area definitions also resulted in confusion for property owners seeking to undertake addition and alteration works within their strata units, encountering an increase in GFA despite no augmentation in strata floor area.
The modifications outlined in the circular are set to be implemented by four government agencies: URA, Singapore Land Authority (SLA), Building and Construction Authority (BCA), and Singapore Civil Defence Force (SCDF), with key changes resulting from the harmonization effort including:
a. Measurement of all agencies' floor areas to the middle of the wall.
b. Inclusion of all strata areas as GFA.
c. Exclusion of all voids from strata area.
d. Adoption of an aligned definition for SGFA computation by BCA and SCDF.
How does the harmonization of area definitions impact developers?
As a result of area harmonization, we foresee a possible decrease in land bid prices during Government Land Sales (GLS). Another noticeable consequence after the adoption of harmonization changes is that developers experience reduced profit margins, as previously "free" areas for homebuyers, such as strata areas, aircon ledges, and curtain walls, are now included in GFA calculations.
“Free” areas such as aircon ledge spaces constituted approximately 4% to 5% of the overall saleable area of private residential units, and buyers are billed for them as part of the payable strata area for condo units. However, under the previous computation, the government does not impose charges on this aircon ledge area, effectively treating it as a cost-free space for developers.
Developers typically leverage their complimentary aircon ledge space to offset the average cost per square foot of the entire apartment, which enables them to present a lower overall per square foot selling price to buyers.
Due to the effects of area harmonization, developers will need to implement higher per square foot prices for upcoming condo projects. This adjustment is necessary as they no longer benefit from the free aircon-ledge buffer space that previously helped lower their average per square foot price.
Since the commencement of area harmonization on June 1, 2023, several projects have been impacted, including:
Marina Gardens Lane
Tampines Avenue 11
Lentor Central Residences
Tampines Street 62
Clementi Ave 1
Toa Payoh Lor 1
Pine Grove Parcel B
Take for example Sim Lian Group's successful bid for a land site in Jalan Tembusu, secured at a rate of $1,069 per square foot per plot ratio (psf ppr), which is approximately $300 psf ppr less expensive than neighboring projects in the Dakota area. This unusual event of nearly a 30% reduction in bid price may lead you to wonder whether it signifies a decrease in developer confidence, and whether it could potentially contribute to a downward shift in future private property prices such as within the Dakota area.
A more recent instance involves the bidding for Pine Grove (Parcel B) just last month, where Sinarmas Land and MCL Land submitted the highest bid. The bid price of $692.388 million put forth by Sinarmas Land-MCL Land equates to $1,223 per square foot per plot ratio (psf ppr), marking a 23.8% increase over the second-highest bid of $988 psf ppr submitted by the joint venture between UOL Group and Singapore Land (SingLand) Group.
The image below displays the three highest bids submitted for Pine Grove (Parcel B):
It's worth mentioning that the highest bid of $1,223 psf ppr for Parcel B is 7.2% less than the $1,318 psf ppr submitted by UOL and SingLand for the adjacent Parcel A; and Parcel A attracted five bids at the conclusion of its tender last year, while Parcel B received three bids.
The top bid of $1,223 psf ppr for Pine Grove Parcel B also stands as the lowest among the three sites that concluded their tender. The other two sites, located at Toa Payoh Lorong 1 and Clementi Avenue 1, garnered the highest bids of $1,360 psf ppr and $1,250 psf ppr, respectively.
The images below illustrate the submitted bids for Toa Payoh and Clementi:
How can developers address reduced profit margins resulting from area harmonization?
As mentioned earlier, previously "free" areas for homebuyers, such as strata areas, aircon ledges, and curtain walls, are now included in GFA calculations, which led to a reduced profit margin.
Given this challenge, how can developers regain their profits? One strategy may involve considering an upward adjustment in the launch prices for new properties. However, it's crucial to acknowledge that this approach could present difficulties, potentially narrowing the pool of potential buyers and making the property financially out of reach for many.
Other approaches for developers is either to reduce construction cost or acquire land at a more affordable rate during Government Land Sales (GLS), as demonstrated by their strategy with the aforementioned land parcels.
Latest developments in Government Land Sales (GLS)
In a statement released on December 6, the supply of private housing in the Confirmed List of the Government Land Sales (GLS) program has been raised from 5,160 units in the second half of 2023 to 5,450 units in the first half of 2024. This marks the highest supply on the Confirmed List in a single GLS program since the second half of 2013.
With this increase, the total pipeline supply of private housing, including Executive Condominiums (EC), is expected to reach around 59,100 units, addressing the robust demand for housing.
The GLS Programme for 1H2024 consisting of ten sites on the Confirmed List and nine on the Reserve List, have locations with the potential to deliver approximately 8,910 private residential units, 107,750 square meters of gross floor area (GFA) for commercial purposes, and 530 hotel rooms.
The full list of residential sites, commercial sites and more can be found on the MND website linked here.
What impact might this have on future land prices?
The harmonization of GFA definitions is a key factor shaping shifts in the real estate sector, potentially leading to a decline in land bid prices during Government Land Sales (GLS) after its implementation.
Nevertheless, developers are unlikely to accept the diminished profit margins. Consequently, future launch prices are less likely to experience a significant decline, as an upward adjustment in launch prices will serve to help developers recover their losses.