SINGAPORE (Jan 15): A study by the National University of Singapore (NUS) Business School has raised a red flag over property developers who exchange information on the green.
Senior executives of real estate development firms who have informal exchanges with their peers while golfing acquired government land parcels at 14.4% lower bid prices, according to the study.
Between November 2010 and May 2014, these lower bid prices translated to losses in land sale revenue for the government of more than $147 million per year.
On average, this amounts to about 0.2% of government revenues and around 1% of total land sale proceeds.
“Senior executives such as directors and CEOs gather information through informal social networks to improve their companies’ performance,” says Professor Sumit Agarwal, a Low Tuck Kwong Distinguished Professor in Finance and co-author of the study.
“While information sharing is not prohibited by law, governments whose fiscal revenue relies on a large proportion of land sale revenues must be prudent of developers’ behaviour on the golf course to ensure a competitive land auction market,” he adds.
Evaluating how informal interactions via golf games affect information exchanges, the study compared data including the golfing activity of senior executives of land bidding property development firms with the bidding results of government land auction announcements.
According to the study, golf patterns of corporate top executives rose sharply following the semi-annual releases of the government’s land sale schedules in Singapore.
Relative to the week before such announcements, developers increase the frequency of golf games with other developers by 14% in the first week after the land sale announcements, and 24% in the second week.
Notably, it found that the sale prices of new residential units are about 8% lower when senior executives of real estate development firms have informal exchanges while golfing.
In addition, the study noted such land transactions by informed bidders generate short-term negative spill-overs to other properties in the vicinity.
According to the study, the prices of neighbouring projects are about 9.9% lower within 30 days after the land auction results are publicised.
“The ripple effect is seen when these lower land transaction prices send a negative signal indicating a downward market trend for property prices,” Agarwal says.
The study was co-authored by Professor Sing Tien Foo, Head of Department of Real Estate and Director of Institute of Real Estate and Urban Studies (IREUS), together with Assistant Professor Qin Yu and PhD student Zhang Xiaoyu of the Department of Real Estate at the NUS School of Design and Environment.
[UPDATE]
Following the publication of the NUS report, the Real Estate Developers' Association of Singapore (REDAS) issued a statement to the press, saying that it "categorically rejects" any suggestions that the industry engages in price fixing, insider trading or collusion.
The NUS study had concluded that the findings clearly do not suppport the authors' conclusion that there is "insider trading in the land market" or that there's a link between golfing and developers' land bidding behaviour. "It's disingenuous that this was not included in the media release for the report," comments REDAS.
"We question the validity of the methodology used and reserve the right to examine the findings to address the faulty assumptions in the paper," REDAS continues. "We are appalled by the lead researcher’s unsubstantiated assertion and the conclusions drawn by the authors are misleading."
REDAS further added that such reports "cast aspersions on the conduct of the many reputable real estate businesses in Singapore and creates distrust between the public, the authorities and the private sector."
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