Obscure rule may trip up condo developers

Straits Times: Mon, Aug 06

MOST aspects of the real estate market here get long and loud discussion in a nation in love with bricks and mortar. But one issue, mainly affecting the top end of the market, has been bubbling away quietly, attracting little attention so far. It relates to the fact that developers with foreign shareholders are required to sell all units in new residential projects they develop within two years of completion - or face stiff penalties. But faced with a slow take-up rate in the upmarket condo sector, as demand from foreign buyers slackens, these developers have lobbied the Government for an extension beyond the two-year period. Their lobbying is so low-key that few analysts are even aware of it. Yet, this is one issue which can be very painful for some developers if the Government does not yield to their persuasion. It is also an issue laced with the moral hazard dilemma that now regularly crops up in the financial market. Some have argued that the rules should not be bent simply to serve a selected group, and that it is not the Government's job to make sure that developers make fat profits. To grasp the issue involved, it is worthwhile understanding the regulations governing the development of residential projects. Under the Residential Property Act, all developers, except those whose shareholders and directors are all Singaporeans, have to obtain a "qualifying certificate" (QC) in order to buy residential properties for development. Although this condition is imposed to control foreign ownership of land here, it also catches all SGX-listed property developers since some of their shares may be owned by foreign investors. A developer issued with a QC is given up to seven years - up to five years while the project is being built and another two years after obtaining the temporary occupation permit (TOP) on the project - to market and sell all its units. Renting out the unsold units is not allowed. To ensure compliance, he has to put up a banker's guarantee for 10 per cent of the purchase price of the property, which may be forfeited if he fails to fulfil the QC's conditions. Since January last year, a developer is given the option to pay an "extension charge" if he cannot meet the five years' deadline from the issue of the QC to complete his project. This works out to 8 per cent, 16 per cent and 24 per cent of the property purchase price for the first, second and third extra years respectively. If he fails to sell all the units at the end of seven years, he has to pay a "pro-rated" extension charge, based on the proportion of unsold units he still holds. It is this payment which developers are hoping to avoid, by lobbying for an extension beyond the two years' grace period after TOP to unload the remaining unsold units. So far, the problem does not appear to be a serious one, with The Straits Times reporting that developers in half a dozen projects had sought extensions beyond the two-year window period. But mid-2005, seven years ago, marked the start of two years of collective sale fever, which resulted in sites such as Lucky Tower in Grange Road and Hilltops Apartments at Cairnhill Circle being sold to be redeveloped into upmarket condos. Some developers may still have an inventory of unsold units left over from that period, for which an extension charge will have to be paid if they are not sold soon. So, it is no consolation to upmarket developers that while sales in the private residential market have continued to stay healthy this year, they are slowing. The second quarter total of 5,572 units sold is already 17 per cent down from the 6,682 units sold in the first quarter. And since December last year, foreigners have had to pay an extra 10 per cent stamp duty when they buy a house here, and this has dampened the buying fervour for upmarket condos. An estimated 1,374 foreigners bought residential properties in the fourth quarter last year. But after the extra stamp duty was imposed, this number fell to 345 in the first quarter of this year and then to 334 in the second quarter. In theory, developers should be enjoying a sweet spot because of the low financing charges they will incur in the current low interest rate environment to hold on to unsold units and wait for property prices to appreciate further. But the extension charges, that have to be paid on unsold units, may force some of them to cut prices in order to move sales. So other than the usual supply and demand, an obscure government regulation may also be having a bearing on how the top-end condo market is faring. [e-mail] Source: The Straits Times