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What antidote does the real estate market really need?

19/02/2020

The market is still digesting the fallout from the outbreak of the novel coronavirus but for sure, the residential market will be impacted by the health situation given that the Chinese make up a sizeable portion of home buyers in Singapore.

There are 49,173 uncompleted private residential units (excluding executive condominiums) with planning approvals. Of this 30,162 remain unsold. There are also an additional 4,575 private residential units that do not have planning approval yet.

Based on the 9,912 units sold in 2019, it should take developers roughly about five years to clear the existing stock and narrowly escape the ABSD penalty, assuming sales momentum in 2019 can be maintained. However, judging from the market reactions in our neighbouring countries affected by the coronavirus, it is unlikely that developers will be able to sell their projects before the ABSD penalty kicks in. Developers are likely to hold back new launches in view of the weaker sentiment. High-end luxury properties with more Chinese buyers could face slower take-up rates as viewings are expected to slow in the midst of the outbreak, albeit the impact should still be contained as Singapore continues to be seen as a safe haven location amid heightened global uncertainties.

In the immediate to medium term, however, home sales could take a plunge with fewer or no viewings taking place and potential buyers staying away from showflats. As an indication of how far sales could fall, China home sales plunged by 90 per cent in the first week of February compared to the same period in 2019, according to preliminary data on 36 cities compiled by China Merchants Securities Co. 

Already, before the virus outbreak, the Singapore market was expecting a quieter-than-usual January and February sales in the primary market due to a combination of factors including an early Chinese New Year and fewer new launches, now exacerbated by the virus outbreak. Should the sluggish market persist, developers would be hit with a double whammy – construction delay and potentially missing the ABSD deadline due to unforeseen circumstances which are not fault of theirs.

Last February 6, the Government announced that it is prepared to grant exemption to Singapore listed property developers with a substantial connection to Singapore from the requirements of the Qualifying Certificate (QC) regime.

Under the QC regime, 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. By this definition, all listed developers are considered foreign. Before the latest announcement, privately-owned Far East Organization and Hoi Hup are among the few developers exempted from the rules. QC allows developers up to five years to finish building a project and two more years to sell all the units. Developers who fail to do so, will pay 8 per cent of the land purchase price for the first year of extension of the sales period, 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.

Due to the hefty penalty, a wave of privatisation also happened on the Singapore stock exchange, which saw shareholders of SC Global, Sim Lian and Wheelock Properties taking the companies private.

As such, the newly announced QC exemption could potentially level the playing field for listed and non-listed local developers when it comes to land acquisition. It can also possibly ease their pressure to clear unsold inventory, when the real estate market is increasingly faced with economic challenges arising from the unexpected novel coronavirus outbreak. 

There have been talks around construction companies failing to meet the deadlines due to China workers not being able to return to Singapore and quarantine orders placed on affected workers in the industry. The authorities have also urged developers not to penalise the contractors and subcontractors due to the unexpected delay.

On the surface, the latest announcement does seem to provide some form of relief to developers during difficult times. Some might even wonder whether the intent was to relax the existing cooling measures, albeit in a more subtle manner.

However, in my opinion, the QC exemption hardly offers any reprieve for most developers, listed or not.

For one, the latest tweak does not ease the pressure on developers who have acquired land since December 2011 when the Additional Buyer’s Stamp Duty (ABSD) was first introduced. Under the ABSD rule, developers only have five years to finish building and selling all units in the development or pay a penalty of 10 per cent of the land price; the rates were hiked to 15 per cent and 25 per cent effective January 2013 and July 2018 respectively.

The ABSD remission deadline of five years from the date of land acquisition will kick in before QC penalty. That means in today’s context, any developer who has purchased land in the past five years, need to press ahead with the launches and try to finish selling every single unit within five years, or else pay a penalty of 15 per cent or 25 per cent of the land price with compounded interest depending on when the land was acquired.

Secondly, the bottleneck for construction delay in projects under construction has to be considered within a bigger and complex issue arising from the global supply chain disruption, not just a temporary labour shortage due to the virus outbreak.

Unlike during the SARS outbreak in 2003, China as the factory of the world, plays a much more crucial role now in the global supply chain and world economy. With many cities in lockdowns and world’s factories remaining shut or operating with reduced capacity, business activities in China have been severely hindered and downstream supply chains are disrupted amid the outbreak of the new coronavirus.

In Singapore, construction material and finished products are not expected to arrive in time for assembly. As manufacturers in China and the entire world are so interdependent on each other, it is hard to predict how soon manufacturing would resume and at what capacity. What has made the matter worse is the mandatory adoption of the pre-fabricated pre-finished volumetric construction (PPVC) method at many Government Land Sale sites. Modern construction technology such as PPVC requires all components to be assembled off-site before they are delivered to the project site under construction. These include door, glass panels, tiles, sanitary ware etc. It does not allow construction to proceed even if there is just one missing item. Hence the impact on the PPVC construction would be more pronounced, although the current disruption would likely impact all stages of construction.

The construction delay and the ripple effect beyond the short to medium term could have serious repercussions on the already fragile residential market. As the market sentiment weakens, the five-year period to finish selling all units in the new project may not be enough amid current market conditions. Worse still, the market could become de-stabilised if the current delay hinders the developer’s ability to clear the unsold inventory in an orderly manner.

Hence, what the residential market need is a stronger and more effective antidote – allowing for an extension of the current ABSD deadline in view of the seriousness of the virus outbreak. In addition, the current ABSD rule is also too blunt a tool, which does not differentiate the larger projects of hundreds or even thousands of units, from the smaller ones. As the economy is expected to head south, the larger projects have a much higher chance of missing the deadline, as they typically require a much longer time to sell out all the units especially during challenging times like now.

The more relevant antidote – the extension of the ABSD deadline, would help developers to stagger new home sales and manage risks better arising from supply overhang. It will go a long way to help the market to avert a worst-case scenario that housing units are dumped in the open market in a disorderly manner, hurting consumers and the economy.

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