By Property Soul (guest contributor)

[Editor’s note: This article has been edited to make it more compact. You can read the original here.]

Where can we find enough homebuyers to take up close to 20,000 unsold units and another 32,000 new units in the supply pipeline?

Powerful Elsa versus powerless Anna

Walt Disney’s Frozen II just grossed $1 billion in box office a week before Christmas 2019. While kids are thrilled by Frozen, we adults are chilled by the word frozen, especially when referring to frozen assets, frozen accounts or frozen markets.

For those of you who haven’t watched Frozen or Frozen II, let my favorite Frozen character Olaf tell you the story:“It began with two sisters. One born with magical powers, and one born powerless …”

In Frozen, Elsa is born with magical powers, while Anna is a powerless ordinary girl. In properties, the government is superhuman Elsa with godlike power, while developers are ordinary human Anna with no power.

In early December 2019 at a gala dinner, the Redas president admitted that developers were concerned over the challenging market situation of high supply and subdued demand. They wanted to be more proactive in facilitating dialogue with the government. Redas will form a committee to raise concerns with government agencies. (The Straits Times, Dec 3)

At the same dinner, Second Minister for National Development Desmond Lee reinforced that continued government intervention is needed to maintain the market’s stability to protect homebuyers and home owners.

The government has implemented nine rounds of property cooling measures from September 2009 to July 2018. Each round of new curbs was made effective the next day. No advance dialogue with developers was necessary.

The next day after the Redas president voiced his concern over supply glut, the URA announced three confirmed sites and eight reserve sites for 1H2020 under the Government Land Sales programme, with the potential to yield up to 6,490 private residential units.

Anna: Okay, I don’t understand. You’ve been hearing a voice, and you didn’t think to tell me?
Elsa: I didn’t want to worry you.
Anna: We made a promise not to shut each other out. Just tell me what’s going on.
Elsa: I woke the magical spirits of the Enchanted Forest.

Trying to thaw the frozen cooling measures

The following week the CEO of City Developments Limited (CDL) urged the government to lengthen the ABSD deadline from five to seven or even ten years, citing the reason of worsening supply glut in the private homes market. (The Straits Times, Dec 11)

Anna: I know how to free the forest. I know what we have to do to set things right. We have to break the dam.
Olaf: But Arendelle will be flooded.
Anna: That’s why everyone was forced out. To protect them from what has to be done. The dam must fall. It’s the only way to break the mist and free the forest.

CDL believed that, in order to save the developers, the ABSD timeline must be extended. However, the government is unlikely to answer to CDL’s request, for four obvious reasons:

1) If developers cannot clear all unsold units five years after acquiring the site, they are required to pay 25 percent ABSD. And CDL’s chief just reminded IRAS that they are actually paying a total of 31.25 percent with compound interest of 5 percent per annum for five years. Why would the government extend the timeline?

2) When foreign or listed developers are unable to dispose all the units two years after completion of their new projects, they must pay Qualifying Certificate extension charges. Computed by the number of unsold units, it is 8 percent of the purchase price of the land for first year extension, 16 percent for the second year of extension, and 24 percent for the third and subsequent years. Why would the government bother about 20,000 unsold units and 32,000 new units in the pipeline?

3) Singapore’s property cooling measures are regarded as effective compared with other countries. The government aims to maintain a stable and sustainable private property market. Besides, the next election is just around the corner. Why the hassle of flipping an effective cooling measure to upset voters?

4) The government’s responsibilities are the sale of land sites, control of developer acts, and release of regulations to contain an overheated market. It is not their job to ensure the profitability of developers. The government’s main concern is whether homebuyers and local banks are over-leveraged, but not whether the interests of the developers are taken care of. Why act as Santa Claus to fulfill a developer’s Christmas wish?

Developers left to face the music

Developers are blaming the government for the harsh terms of the cooling measures. It looks like the ball is in the government’s court.

But weren’t these taxes already there when developers were aggressively bidding government land plots and acquiring en bloc sites in 2017 and 2018? Hadn’t they run their numbers in-house to check the profit margins before submitting their bids? Weren’t they aware of the new sites bought by other developers and the number of new units that are coming up in the next few years? Didn’t they know the number of homebuyers out there and see that it would take years to clear the stock?

Anna: Wait, what? Crazy? You didn’t say I was crazy. You think I’m crazy?
Kristoff: No. I did. You were. Not crazy. Clearly. Just naïve.

To be fair, the remissible ABSD was set at 15 percent of the land’s purchase price before July 5 last year. An additional 10 percent was slapped by MAS on the developers after the new curbs. And this was done after the government sold all the GLS sites at record high prices to local and overseas developers who were busy competing with each other fiercely to build their land bank.

Elsa: What were you doing? You could have been killed! You can’t just follow me into fire.
Anna: You don’t want me to follow you into fire, then don’t run into fire!
Elsa: Don’t you know there’s part of me that wants to go into the unknown?

In November 2019, MAS in its financial stability review warned that a potential oversupply of unsold units could put pressure on the private residential property market. It could bring down the prices if the demand does not rise correspondingly.(The Straits Times, Nov 29)

The peak of new projects facing their 5-year ABSD deadline will come in 2022 and 2023. But some developers are already giving discounts. Four months before its ABSD deadline, eCO at Tanah Merah sold its townhouses at $829 psf – a generous 36 percent discount from $1,302 psf a year ago.

Besides offering attractive discounts, developers can clear unsold units in bulk. In December 2019, thirteen semi-detached houses at Eleven@Holland were marketing at a guide price of $38 million or $2.9 million per house. It’s a good deal compared with $3.7 to $4.4 million for houses sold in the same project between 2011 and 2013. After completion in 2014, seven houses in the project were sold at $17.5 million or $2.5 million each in March 2017.

Mattias: That was magic. Did you see that?
Yelena: Of course. I saw it.
Kristoff: They’ve been trapped in here this whole time?
Anna: Yeah.

Now what?

It is ironic to read the responses of property agencies in the article “ABSD ‘extension’ may ease property glut but experts flag limp demand” (The Straits Times, Dec 12). Now they talked about problems of “flagging demand”, “affordability”, “supply-demand mismatch” and “developers are definitely under pressure”.

Remember right after the new curbs imposed last July, they were all saying that the number of 50,000 unsold units is “not a cause for alarm – as long as developers space out their launches before their five-year deadline”.A spokeswoman from JLL said then: “We believe a lot of our developers have deep pockets … and there is liquidity and pent-up demand in the market.”(Channel NewsAsia, July 21)

Seventeen months later, did they wake up one fine day and realize that there is oversupply in the new condo market? Did they come to terms with the fact that there are simply not enough homebuyers, HDB upgraders and foreigners to consume all the new units? Did they finally admit that new projects are not moving despite higher commissions offered by developers?

Do developers have strong magical powers like Elsa? How can they weather the snowstorm? Will the new sales market be frozen in the near future? When will it be unfrozen? We shall see.

Olaf: And Anna freezes to death, forever. Then she unfreezes. And then Elsa woke up the magical spirits, and we were forced out of our kingdom, and now our only hope is to find the truth about the past, but we don’t have a clue how to do that.

By guest contributor Property Soul, a successful property investor, blogger, and author of the No B.S. Guide to Property Investment.