Unsold homes big drag on developers' coffers

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http://www.businesstimes.com.sg/arch...ffers-20140607

Published June 07, 2014

Unsold homes big drag on developers' coffers

Punishing fees seen incentivising some to reprice projects to move sales in near term

By Lynette Khoo

[email protected] @LynetteKhooBT


DEVELOPERS have collectively paid up to $55.1 million in extension fees for unsold units in their private condo projects since 2012. They could potentially fork out another $80.7 million to extend the sales period for another year if they do not sell their inventory by year-end, according to a study by OrangeTee Research.

"As the penalty amounts to millions of dollars per project, we believe that it will incentivise some developers to reprice some of these projects to move sales in the near term," said OrangeTee research head Christine Li.

A total of 24 condo projects, mostly high-end ones, are still not fully sold two years after receiving their temporary occupation permits (TOPs) between 2010 and 2012, the study showed. Under the government's Qualifying Certificate (QC) rules, developers have to pay extension charges to extend the sales period after two years of the project's TOP.

All developers with non-Singaporean shareholders or directors need to obtain QCs to buy private land for new projects because they are deemed "foreign developers" under the Residential Property Act (RPA). This means the QC rules apply to all listed developers. Privately owned Far East Organization and Hoi Hup are among the few developers exempted from the rules.

Given that the QCs allow developers up to five years to finish building a project and two more years to sell all the units, the heat is on developers to clear their stock by the deadline.

To extend the sales period, developers pay 8 per cent of the land purchase price for the first year of extension, 16 per cent for the second year and 24 per cent from the third year onwards. The charges are pro-rated based on unsold units over the total units in the project.

Such fees drove luxury residential player SC Global to delist from the Singapore Exchange last year after sales slowed significantly due to the government's property cooling measures.

Analysts warn that more extension charges will kick in. The charges paid up so far are just the tip of the iceberg as projects built from land acquired during the 2006-2007 en bloc fever have just crossed a seven-year mark, they say.

"More developers are caught between a rock and a hard place" as they have to decide whether to pay the extension charges or cut prices to move the units, said SLP International executive director Nicholas Mak.

If they pay for extension charges, there is also the question of whether they can recover these costs later on, he said. This is why some developers of luxury projects are resorting to selling the units in bulk to mega investors.

OrangeTee's study of the 24 projects excluded three projects whose land costs could not be determined. It tracked sales of projects through caveats lodged, which it conceded could be lower than actual sales.

At the end of the first quarter of this year, there were 10,295 unsold units in the Core Central Region (CCR), 8,089 in the Rest of Central Region (RCR) and 12,433 in the Outside Central Region (OCR).

Based on URA caveats, there are 71 unsold units in Wheelock Properties' Scotts Square that TOP-ed in 2011 and 16 unsold units in Wing Tai's Helios Residences, which also TOP-ed in the same year.

"As unsold inventory builds up, there will likely be more bargains in the market if developers want to avoid paying penalties to extend the sales period, especially high-end developers who have already paid premium prices for their lands," Ms Li said.

The study excluded the fees that developers need to pay to extend the completion of projects beyond five years, as they can typically extend without paying the charges "based on technicalities".

Even in a more optimistic scenario where developers manage to sell 20 per cent of the remaining units for the rest of this year, further extension charges to be paid by developers by end-2014 will amount to around $68.3 million.

Some market watchers noted that the QC rules should mark a distinction between larger and smaller projects, given that it takes a longer time to move all the units in large projects in a difficult market as the current one.

Century21 chief executive officer Ku Swee Yong said that demand for high-end projects had been hit hardest by higher additional buyers' stamp duty (ABSD) since January 2013 and a borrowing cap under the total debt servicing ratio (TDSR) since June last year.

Even if a developer decides to set up an investment company to buy the units and rent them out, the company could be hit by a 15 per cent ABSD and is restricted by a loan-to-value limit of 20 per cent.

While there is good reason for having QC rules to regulate foreign participation in the housing market, these rules were in place before the ABSD and TDSR. "It is about time we review these measures," Mr Ku said.

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http://www.straitstimes.com/archive/...rices-20140607

Hefty levies may force developers to cut prices

Unsold units across 24 projects may have cost them $55m in extension fees

Published on Jun 7, 2014 1:10 AM

By Cheryl Ong


MORE home-buying bargains may be on the way as painful financial penalties start to take a toll on developers that have suffered slow sales.

Some developers that have not sold out units on time may have already been set back by a combined total of up to $55.1 million across 24 projects.

These hefty levies, imposed to regulate foreign land ownership, could give developers a powerful incentive to slash prices.

Rules under the Residential Property Act require developers with shareholders or directors who are not Singaporean to obtain a qualifying certificate for a new property development. They are then given up to two years after obtaining the temporary occupation permit to sell all units.

Developers that fail to do so have to pay extension charges which work out to 8 per cent of the land price for the first year, 16 per cent for the second year, and 24 per cent for subsequent years. This will be calculated based on the proportion of unsold units.

An OrangeTee survey of 24 projects completed between 2010 and 2012 - most of which are in the sluggish luxury market - showed that a substantial number of units were unsold, two years after obtaining the temporary occupation permit.

This means that extension charges for these projects could have cost developers up to a hefty $55.1 million in combined charges over the past three years, based on caveats lodged.

Another $80.7 million could be on the cards for these developers, if they wish to extend the sales period to the end of this year, noted OrangeTee.

"As unsold inventory builds up, there will likely be more bargains in the market if developers want to avoid paying penalties to extend the sales period, especially high-end developers that have already paid premium prices for their land," said Ms Christine Li, research head at OrangeTee.

Some projects that have already required a first extension include Residences at Emerald Hill, noted property consultancy Chesterton Singapore. The condominium obtained its temporary occupation permit in the second quarter of 2011 and has sold five of its 33 units. If the sales period is extended for a second year, its developer Lafe Development might have to stump up $6.1 million.

The 40-unit 111 Emerald Hill condo, which obtained its temporary occupation permit in the third quarter of 2011, has 16 unsold units and might face a second extension fee of about $4.6 million.

"These are due for expiry this year, which begs the question: Are they going to apply for another one-year extension?" said Chesterton Singapore managing director Donald Han. He added that a 16 per cent extension fee could hurt developers' bottom line.

"Even if you extend (the sales deadline), you're not sure if you're going to be successful in selling units, so you might be better off dropping prices by 16 per cent and that covers the Additional Buyers' Stamp Duty that foreign buyers have to pay," he said.

Ms Li added that there could be some opportunities for buyers with a longer-term investment horizon to take the plunge.

Bulk deals, the fastest way for developers to sell units, could even be made, she noted.

In the first quarter, 10,295 city centre units were unsold, while there were 8,089 on the city fringes and 12,433 in the suburbs. Condos completed by 2009 are mostly sold out.

Listed developers, which are not local companies since some shares could be owned by foreign investors, have opted to go private to avoid the levies.

SC Global, for instance, could have paid $5.5 million for an extension for its 66-unit The Marq on Paterson Hill, after its sales deadline in January last year.

The firm was privatised in March last year.

But sales of luxury homes are not just a function of prices on a per sq ft basis, but of the unit's total price tag too, noted Mr Han.

"The target market is the foreigners, who are affected by the Additional Buyers' Stamp Duty," he said. "The drop to get buyers in must be substantial. Developers might have to bring down prices by 15 per cent, but that is unlikely to happen."

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What if after cutting prices, still no buyers?