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To discount or not to discount?

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The ABSD paradox

| BY FEILY SOFIAN & ESTHER HOON |

The residential market was recently rife with talk about looming deadlines for the Additional Buyer’s Stamp Duty re-mission. Developers do not have to pay ABSD on the purchase of land if they

complete and sell all their units within five years from the acquisition date. Those who fail to do so, even if they are left with just one un-sold unit, will incur a 10% ABSD if they pur-chased the land between Dec 8, 2011 and Jan 11, 2013, and 15% if they purchased the land on or after Jan 12, 2013. A 5% interest rate per annum will also be levied.

The rule has prompted some prospective buyers to believe there will soon be bargain

deals for projects that are nearing this five-year deadline, especially those with a large inven-tory of unsold units.

It may sound counter-intuitive but projects with a small number of unsold units have the biggest incentive to offer attractive discounts. The discount will help speed up sales. At the same time, there is sufficient time for the devel-oper to sell off all its units.

On the other hand, projects with a large inventory of unsold units — say over 300 — might not complete selling their units even if they were to slash prices. In 2015, many existing launches moved less than 10 units per month on average. Any discount offered is simply to drive sales momentum, rather than avoid the ABSD charges and the discount

rates are likely to be low to moderate.Take The Trilinq at Jalan Lempeng. The

project has been frequently cited in recent months as it is potentially the first to incur the 10% ABSD, given its 528 unsold units as at January. Recently, the market speculated that the developer has slashed prices to move sales and avoid the ABSD charges. Based on caveats lodged, the developer had indeed offered 5% to 10% discounts at the project, but was it to avoid the ABSD?

The Trilinq has around 10 months before the ABSD charges, estimated at $52 million, are due early next year. This means the developer must sell an average of 50 units a month to avoid the charges — a tall order given the soft market sentiment today. Hence, we think the

discount cited is simply to drive sales momen-tum, rather than to avoid the ABSD charges. The discount may also be a one-off incentive as the developer is not desperately avoiding the charges.

There is a possibility that the developer slashed prices to clock in as many sales as pos-sible so it would be left with a small number of remaining units that they could buy back through an investment company. The developer would then be able to avoid the ABSD on the land purchase as the project would be consider-ed fully sold. Is this a feasible option?

If The Trilinq sells 20 units each month for the rest of this year, its developer would still be left with about 300 units unsold by the time

The Trilinq showflat. The recent discount is likely to drive sales momentum,

rather than avoid ABSD charges.

EP2 • THEEDGE SINGAPORE | MARCH 14, 2016

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THEEDGE SINGAPORE | MARCH 14, 2016 • EP3

the ABSD on land purchase is due by early 2017. The developer would need to fork out $59 million — for normal stamp duty and ABSD to purchase these units — which exceeds the estimated $52 mil-lion ABSD payable on land.

The developer must sell about 25 units per month for the rest of the year such that the normal stamp duty plus the 15% ABSD payable to purchase the remaining units in the property do not exceed the ABSD payable on land.

To do this, the developer has to offer significant discounts. In addition, the developer might have to hold the units for a while to avoid paying the seller’s stamp duty, while incurring property tax and maintenance fees at the same time. Given the situation, the devel-oper might prefer paying the ABSD charges if the stock of unsold units is significant.

What about projects which have a moderate stock of unsold units, say be-tween 100 and 300, such as Kingsford Hillview Peak? These projects fall un-der the category of “borderline” cases. Developers have or may dangle some discounts to minimise the number of units they have to purchase through an investment company, in case they fail to clear all the unsold stock when the

ABSD is due. However, it is hard to de-termine if the discount would be attrac-tive as that would depend on the de-veloper’s holding power, land cost and competition from upcoming launches.

Our analysis excluded projects with an exclusive total number of units — less than 150 — as the developer might prefer to purchase their remaining units through an investment company when the ABSD is due.

Against this backdrop, we are of the view that projects with a small number of unsold units — less than 100 — might be the most aggressive with their discounts. The discount will help speed up sales, and at the same time, there is sufficient time for the developer to complete selling all their units. Having pro fited from the sale of other units earlier, devel opers for these projects may not want the hassle of buying the remaining units through an investment company.

Theoretically, projects such as eCO, Stratum and Jewel @ Buangkok may fall under this category (see table). Despite their brisk sales, there is a small proba-bility that these projects may be left with a small number of unsold units close to their ABSD deadlines. It is up to prospec-tive buyers to monitor their take-up rate and the developer’s marketing strategies over the next few months.

EP4 • THEEDGE SINGAPORE | MARCH 14, 2016

Projects with a small number of unsold units might be the most aggressive with their discounts

THEEDGE P R O P E R T Y COVER STORY

OVERSEAS NEWS

FROM PAGE 1

PROJECT ADDRESS NO OF UNSOLD UNITS ESTIMATED ABSD AS AT JANUARY DEADLINE (2017)

eCO Bedok South Avenue 3 22 February

Stratum Elias Road/Pasir Ris Drive 3 16 April

Jewel @ Buangkok Compassvale Bow 39 June

Sant Ritz Pheng Geck Avenue 24 July

The Skywoods Dairy Farm Heights 38 September

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Despite brisk sales, there is a small probability these projects may be leftwith a small number of unsold units close to their ABSD deadlines

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Chinese developers have stepped up onshore renminbi bond sales

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China housing frenzy makes property bond fund managers darlings

The home-buying frenzy in Shanghai and Shenzhen is spurring China’s fund man-agers to load up on property bonds. Renminbi- denominated

real estate notes returned 2% this year, third only to electric and oil service companies among Chinese corporate securities, according to Bloomberg analysis of a Bank of Ame rica Merrill Lynch index. In a sign of confidence, Poly Real Estate Group Co sold five-year notes at 2.96% on Feb 23, eight basis points (bps) lower than the rate for debt issued by China Development Bank Corp, the nation’s biggest policy lender.

Home prices in Shenzhen, China’s southern business hub, have jumped 52% over the past year, while those in Shanghai surged 18%, prompting the official Xinhua News Agency to warn against “panic” buying. The rally is cutting developers’ borrowing costs after the central bank lowered interest rates six times since Novem-ber 2014. Chinese developers are also replacing dollar debentures with cheaper renminbi financing, boost-ing demand for their offshore notes.

“We favour property bonds be-

cause the government will continue to boost the industry,” says Qiu Xinhong, a bond fund manager at First State Cinda Fund Management Co, which oversees RMB10.7 billion ($2.27 billion) of assets. “The improv-ing balance sheets, the falling bor-rowing costs and the increasing sale prices will help reduce developers’ credit risks.”

Midnight queues The government’s monetary stimulus and loosening of property curbs last month have spurred buying mania

in some first- and second-tier cit-ies. Lines of prospective buyers out-side property agents’ offices in a Shanghai suburb clogged roads and forced police to curb traffic to main-tain order, Caixin reported on Feb 29. Some buyers even waited in line from midnight to buy homes in second- tier city Nanjing, capital of the east-ern province of Jiangsu, government- owned website JSChina.com.cnreported on Feb 28.

The excitement allowed develop-ers to sell RMB79.39 billion of bonds in the first two months of this year

in the onshore market, up fourfold from RMB18.35 billion a year earlier, data compiled by Bloomberg shows.

Dalian Wanda Commercial Proper-ties Co’s 2020 bond returned 12% in the past three months, while Wuhan Langold Real Estate Co’s 2018 notes returned 10%.

Christopher Yip, an analyst in Hong Kong at Standard & Poor’s, says excessive price increases in top-tier cities bring more uncertainties than benefits to developers and could spur targeted government restrictions. Shanghai’s most-senior official said on March 6 the city’s property mar-ket had “overheated” and should be more tightly controlled.

“The divergence of pricing be-tween top-tier and lower-tier cities isn’t healthy,” says Yip.

Terence Cheng, a fund manager who helps manage a fund targeting foreign-currency bonds for HuaAn Fund Management Co in Hong Kong, says finances of property companies are improving. A total of 47 Chinese listed developers have total debt larger than equity as at the 3Q2015, com-pared with 50 a year ago, according to data compiled by Bloomberg.

Policy support“Property developers’ fundamentals are getting better and better,” says Cheng. “The government won’t tighten the mar-ket since only some first-tier cities are seeing price gains while increases are not big in second- or third-tier cities.”

In south China, for example, Guang-dong Governor Zhu Xiaodan says his province is drafting a plan to allow some large state-owned enterprises to pur-chase homes to help reduce inventory.

Chinese dollar-denominated property bonds have also been rising, with the yield on Future Land Develop ment Holdings’ 2017 note falling 42 bps this month to 6.81% and that on Ever-grande Real Estate Group Ltd’s 8.75% 2018 notes dropping 36 bps to 9.15%.

Gordon Ip, a Hong Kong-based senior fund manager at Value Partners Group Ltd, says there is still room for dollar property bonds to gain because of the industry’s importance to the whole economy. “We believe the Chinese government will continue with supportive measures because they need to support the growth of gross domestic product and property is quite a big component of that,” Ip says. — Bloomberg LP

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Developers have to hold the units for a while to avoid paying the seller’s stamp duty if they were to buy back throughan investment company

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THEEDGE SINGAPORE | MARCH 14, 2016 • EP5

EP6 • THEEDGE SINGAPORE | MARCH 14, 2016

| BY TAN CHEE YUEN |

A 1,249 sq ft pool-facing unit at The Equatorial on Stevens Road is list-ed on TheEdgeProperty.com at $1.85 million, or $1,481 psf. The Edge Fair Value, a valuation tool on TheEdge-

Property.com, puts the indicative value of the property at slightly above $1,500 psf.

The latest transaction in the development was in July 2015, when a 1,249 sq ft unit on the second floor fetched $1.88 million, or $1,506 psf. Another transaction was that of a 1,378 sq ft unit on the fourth floor, which was sold for $2.05 million or $1,488 psf in January 2015.

The asking price bears a resemblance to 2010/11 levels. In September 2010, a 1,249 sq ft unit on the sixth floor changed hands for $1.76 million, or $1,410 psf.

The Equatorial is a freehold condominium completed in 2001. The 95-unit development is located within 200m of Stevens MRT station of the Downtown Line. Singapore Chinese Girls’ Pri-mary School is located within 1km of the proper-ty and those within 2km include Anglo-Chinese School (Primary) and Nanyang Primary School.

Last year, there were four rental contracts for three-bedroom units measuring between

1,300 and 1,400 sq ft at The Equatorial. Month-ly rents for these contracts averaged $4,300, or $3.18 psf.

Scan the QR code for value deals at The Equatorial and near-by projects

As TheEdgeProperty.com is not party to the con-tract between the client and agent, it is unable to verify information provided by the agent

THEEDGE P R O P E R T Y DEAL WATCH

Last July, a 1,249 sq ft unit at The Equatorial fetched $1.88 million, or $1,506 psf

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Freehold condo in district 10 selling at $1,481 psf

Rental contracts for 1,300 to 1,400 sq ft units at The Equatorial in 2015

Latest sales transactions at The Equatorial

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CONTRACT DATE AREA (SQ FT) LEVEL PRICE ($ MIL) PRICE ($ PSF)July 20, 2015 1,249 Low 1.88 1,506Jan 29, 2015 1,378 Low 2.05 1,488Nov 24, 2014 1,378 Low 2.08 1,513Oct 1, 2014 1,507 Mid 2.50 1,659Nov 15, 2012 2,067 Mid 3.55 1,718

MONTHLY RENTLEASE DATE $ $ PSFDecember 4,700 3.50April 4,300 3.20April 3,700 2.70March 4,500 3.30

*Low floors: L1 to 7, Mid floors: L8 to 15, High floors: L16 & above

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