Lower sales, hefty extension charges feared to knock down Singapore’s luxury segment

Buyers likely to delay purchases.

According to CIMB, given supply concerns and policy curbs, it expects a buyers’ market with little pricing power for the developers in 2014-16. CIMB predicts a 10-15% drop in property prices in the next two years but expects high-end developments to be affected by a greater degree with looming extension charges and higher price sensitivity within upgraders.

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The mid-term supply concern is widely known, with physical completions at almost twice the historical supply and take-up. Knowing that high-end developments may face hefty extension charges in 2016, buyers have all the more reason to postpone purchases and wait for developers to cut prices to clear inventories.

We have forecast a 10-15% drop in property prices in the next two years but expect high-end developments to be affected by a greater degree. 

Sluggish demand within high-end residential market
The government’s tightening policies such as additional buyers’ stamp duty (ABSD) and total debt servicingratio (TDSR) have reined in buying appetite, especially in the high-end residential market.

The falling new home sales are largely supported by upgraders, as demonstrated by the rising proportion of purchaser with HDB address. We believe this group is generally more price sensitive and favours the mass-market segment. 

Consequently, buying activities in the core central region (CCR) and for units priced above S$1,600 psf are subdued. If the sluggish demand for high-end residential properties continues, developers with significant unsold inventories of high-end developments may be negatively affected by the extension premium.

Extension premium scheme for government sale sites
The Residential Property Act (RPA) requires foreign developers, which include listed housing developers, to apply for a qualifying certificate (QC) to purchase any interest in residential properties. 

Under current conditions required to obtain a QC, housing developers are required to complete construction within the 5-year project completion period (PCP) and sell within two years of obtaining the temporary occupation permit (TOP), failure of which will subject the developer to an extension premium. 

The extension premium is calculated based on the period of extension, as a proportion of tendered land price and pro-rated for the unsold proportion for completed projects. 

The governing agencies do, from time to time, grant exemptions and adjust the PCP according to market conditions, some of which are listed below. The PCP was extended in 1997 and 2009, during which the property price index (PPI) fell 10-20%. Given that the PPI has yet to witness declines at previous levels, we assume that the PCP will not be extended in the foreseeable future. 

2014-2016 – a buyers’ market
The mid-term supply issue is widely known, with physical completion being more than twice the historical supply and take-up. We expect this to lead to higher vacancy rates and downward pressure on both rents and property prices. 

In other words, it will be a buyers’ market with little pricing power for the developers.