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City & Country: Developing Asia sees strong growth in land prices

THE prices of prime development land in the Southeast Asian capitals of Kuala Lumpur, Bangkok, Jakarta and Phnom Penh grew faster than those in the mature markets of Hong Kong, Singapore and Tokyo, according to the Knight Frank Prime Asia Development Land Index released last month.

Data for the index was collected from 13 parcels each of prime residential (apartments or condominiums) and commercial (office) development land in 13 major cities in Asia over two years from December 2011.

The cities in the index are Phnom Penh, Cambodia; Beijing, Guangzhou, Shanghai and Hong Kong, Greater China; Bengaluru, Mumbai and the National Capital Region, India; Jakarta, Indonesia; Tokyo, Japan; Kuala Lumpur, Malaysia; Singapore; and Bangkok, Thailand.

“As the first-ever index on development land prices of this size and scope, it will become an important resource for developers, investors, financiers and policymakers,” says Nicholas Holt, head of research for Asia-Pacific at Knight Frank. “We felt that there was a real gap in the market in terms of tracking development land prices across Asia. Some countries do track land prices, for example, Singapore, but not with a consistent methodology across the whole region. In certain markets, the paucity of deals and lack of transparency in deals make it very difficult to know exactly where development land prices are going. Our index provides that information.”

The index reveals that in Southeast Asia, prime residential development land in Bangkok saw the highest price growth over the last two years at 190.7%. This was followed by Jakarta (184%), Kuala Lumpur (67.2%) and Phnom Penh (35.7%). China completed the top five, coming in at fourth place with 37%. For prime office development land, however, Jakarta came out tops with 192.3%, followed by Kuala Lumpur (64.9%), Beijing (52.1%), Bangkok (52.6%) and Phnom Penh (35.3%).

The index reveals that in Southeast Asia, prime residential development land in Bangkok saw the highest price growth over the last two years at 190.7%

The repeated residual valuation methodology used by the index looks at what a reasonable developer would expect to pay for development land, given the gross development value of the potential scheme, costs (construction, profession, contingencies and financial), required profit, acquisition costs and relevant taxes.

According to Holt, Knight Frank did not use this methodology for Singapore, which has a comprehensive development charge rate compilation that covers various areas of the city-state. The compilation comprises 118 geographical sectors for nine different user groups and is updated half-yearly by the government.

While the Knight Frank Prime Asia Development Land Index reveals that developing Asia has low liquidity and rapid land price appreciation, developed Asian cities such as Hong Kong, Singapore and Tokyo have the highest land prices and redevelopment opportunities.

“In these mature markets, the lack of prime development land has led to more emphasis on redevelopment opportunities while, given the higher cost of land and in some cases high holding taxes, there is often more pressure to develop quickly,” says Holt.

He sees continued strong growth in developing Asia’s cities. “The strongest development land price growth is indeed in developing Asia with the residential and office development land index for these markets significantly higher than for Hong Kong, Singapore and Tokyo.

“This is partly due to the fact that developing Asia is coming from a lower price base and partly due to the fact that cooling measures have impacted residential land in Hong Kong and Singapore.

“Moving forward, we expect emerging Asian development land markets to continue to outperform developed Asian markets. We are likely, however, to see a slowing of price growth rates in Thailand, Indonesia and China as these markets are slowing down a bit.”

Holt believes that the massive land price growth in Indonesia will likely be tempered by the July election as well as a general slowdown in the market. “Please note that we expect land prices to grow, just not at the same rate as between 4Q2011 and 4Q2013,” he says.

Holt sees development land price growth rates in Thailand slowing down as well because of its continuing political uncertainty.

As for China, he says, “There are signs that the residential market is slowing and China’s economy, as a whole, will slow down as it rebalances. The impact on property prices will affect land prices, although again we expect prime development land prices in Tier 1 cities to remain resilient.”

The strongest development land price growth is indeed in developing Asia with the residential and office development land index for these markets significantly higher than that for Hong Kong, Singapore and Tokyo. — Holt

Intra-Asian activity

The Knight Frank Prime Asia Development Land Index also reveals that because competition for prime development land remains strong, there is an increasing number of developers and investors looking overseas for opportunities. This is evident from the 55% year-on-year increase in intra-Asian cross-

border developments driving development land price growth, says Holt.

“Partnering an experienced foreign developer to benefit from the co-branding and to tap overseas expertise is among the key motivating factors contributing to the increase in cross-border developments,” he explains. “We expect this movement of developers going into joint ventures offshore to increase, not only due to the aforementioned factors but also due to push factors in the local markets, especially the cooling measures introduced, most notably in the China, Singapore, Hong Kong and Malaysian residential markets.”

Among the significant cross-border transactions involve Oxley Rising Sdn Bhd, a subsidiary of Singapore-based Oxley Holdings Ltd, purchasing property in Jalan Ampang, Kuala Lumpur, for US$137.8 million in November 2013 and Sun Hung Kai Properties of Hong Kong securing the Xu Jia Hui Centre project in Shanghai for US$3.559 billion in September last year.

The index is slated to be released every six months, showing development land price changes and significant development land deals over the period, according to Holt.

In our backyard


Will the impressive growth in the prices of development land in Kuala Lumpur continue?

“As far as growth is concerned, I feel we have reached a developed status where we find our central business district and growth centres meeting market demand. So, certainly, land prices will continue to grow,” says Knight Frank Malaysia’s managing director Sarkunan Subramaniam. “We have had quite strong growth over the last few years, as highlighted by the Prime Asia Development Land Index, and in my opinion, this will continue as long as there is demand for such products, coupled with a strong economy and access to financing.”

Many believe development land is scarce within the city, but Sarkunan begs to differ. He says developers are just being selective about where they want to build because of the land prices.

Developers nowadays have to pay a premium to get land off the hands of institutions and old families in order to offer a product in KLCC.” — Sarkunan

“If you look at the KLCC area, there is a lot of land there. It is just whether people want to sell at a certain price for redevelopment. Developers nowadays have to pay a premium to get land off the hands of institutions and old families in order to offer a product in KLCC. Those who can’t afford the high prices go to the suburbs.”

On whether there is a glut of office space in the KLCC area, Sarkunan says, “There is no oversupply in the office market. There are few good Grade-A office buildings, accounting for only 10% to 15% of stock.

“Moving forward, there will be a balance between the residential and office markets with maybe more residential developments in a couple of years, followed by good office buildings catching up.”

Sarkunan also notes that developers are taking to demolishing old buildings to build new products on the sites. “This trend will continue because the price of land justifies the demolition of these old buildings for a higher plot ratio. This is what we call higher and best use of property. This happens when the value of the land is higher than the value of the existing building plus the land.

“The existing building becomes an encumbrance, depressing the value of the land. Demolishing it brings higher and better use, which brings better returns. I certainly see this happening to the older buildings in town.”

In conclusion, Sarkunan says the office market is still good with high-end and MSC-status green products while the residential market is healthy with mid-range products priced at RM1,500 psf.



This article first appeared in The Edge Malaysia Weekly, on May 12 - 18, 2014.

 

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