Developers' bids for sites indicate Falling Home Prices

With concerns over a possible drop in private home prices of up to eight percent this year, many developers are becoming more cautious on how much they are willing to pay for private home sites.

Deciding on the prices to offer for a plot on sale, developers need to take into account the possibly lower home prices into their sums.

According to a BNP Paribas report, which analysed about 100 government land sale bids from 2007 to last month, developers are lowering their bids on land sites because of the uncertainty on whether prices will hold up by the time they would have to sell the project.

When bidding for a site, developers consider the break-even figure – meaning how much they will pay for the project, taking into account the costs of building it as well as other finance, administration and marketing costs, plus a little extra in terms of profits.

The report revealed that beginning in mid-2011, the difference between developers’ expected break-even price and existing selling prices widened to 19.8 percent, way above the mean of 12.1 percent.

The 12.1 percent mean represents the profit margin which developers have achieved on average. The eight-percentage point difference likely reflects developers’ efforts to guard against possible increases in selling prices.

Chong Kang Ho, an analyst at BNP Paribas, noted that a similar pattern was observed in Q2 2008 before home prices tanked and when margin buffers widened in the same manner.