Citigroup SG Market Weekly - The Property Lending Boom

June 26, 2007

Banks' growing exposure to property sector raises concerns

Govt may need to step in to curb surge in such loans: Citigroup report

By Alvin Foo

THE financial industry is becoming so exposed to the property sector, via loans to developers and other market players, that the Government may have to impose cooling measures.

The warning came yesterday in a Citigroup report highlighting the surge in lending to firms making the running in Singapore's real estate boom.

It said the lending pattern is unusual in that there has not been an expected increase in home loans along with the boom. 'Instead, property developers, construction companies and financial holding firms have been driving the lending boom.

'In the next phase, mortgages will likely climb and accelerate over the next few years as the rate of completion surges, development of collective sale properties gets under way and investment companies unload their properties to end-buyers.'

In the report by Citigroup economist Chua Hak Bin, the bank identified three causes for the debt dynamics.

Firstly, the deferred payment scheme has moved the financing burden to developers. Debt-equity ratios of listed developers rose to 61 per cent in the first quarter from 50 per cent a year ago.

Secondly, there has been a surge in collective sales, which explains lagging mortgage growth. A recent Jones Lang LaSalle report noted that $16.2 billion of collective sales were done between the beginning of 2005 and May 15 this year.

Thirdly, there has been a sharp rise in property purchases by investment firms or funds - a tenfold jump over the last nine months, according to the Urban Redevelopment Authority.

Citigroup said recent moves to apply a touch of the brakes to the market - such as bringing forward stamp duty and releasing more land - have had limited impact.

'However, any new measures will likely be calibrated and will not be as draconian as those in 1996, which included capital gains tax, Central Provident Fund restrictions for down payment and restrictions on foreign borrowing and purchases.

'Some tightening of the deferred payment schemes may be a possibility,' it said.

But the Monetary Authority of Singapore said existing measures were adequate. It said yesterday: 'We are monitoring developments and expect banks to maintain prudent credit standards in their property-related loans.'

Most market players feel intervention is premature and unnecessary.

Daiwa Institute of Research analyst David Lum said: 'There's a boom but it is happening only after eight or nine lean years. It's part of the cycle. I don't think the authorities will clamp down so soon.

'Besides, the overlending is largely confined to the luxury sector, so I don't think the Government will touch that as it is more concerned with the mass market.'

One bank economist said: 'The boom is not yet huge. It'll be alarming only when we see people no longer being able to afford HDB flats, and that hasn't happened.'

Minister for National Development Mah Bow Tan said last week there was no danger that the heat from the private property market would filter down to the HDB segment.

Industry experts say the market is a long way from the property hysteria of the mid-1990s. Knight Frank's head of consultancy and research Nicholas Mak said: 'The Government should let the market correct itself.'

He said speculation purchases accounted for close to 30 per cent of total transactions in 1995. The figure now is about 7 per cent.

'If the Government decides to intervene, it should address problems very specifically, unlike the broad-based measures introduced in 1996. Those scared away speculators but also genuine investors and home buyers.'

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