Prices of posh homes starting to drop as developers get rid of unsold stock

See which developer will be badly hit.

In Barclays' report Developer fundamentals weakening of 27 September 2013, it wrote that it had expected home prices to correct up to 20% by 2015 with the luxury sector likely to be the worst hit due to the Qualifying Certificate (QC) rules. The QC rules give developers up to five years to finish building a project and two more years to sell all the units.

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They are not allowed to rent out unsold units. Developers whose shareholders and directors are not all Singaporeans have to get a QC to buy residential property for development, essentially including all listed developers.

We expect City Developments to one of the worst-affected developers by the QC rule given that 28% of its RNAV is exposed to the high-end luxury residential property market.

On 24 February, Wheelock Properties, known for its high-end property developments, announced that it has written down its suburban private residential project, The Panorama, by S$110mn, which we estimate at cS$150psf, implying a c10-15% drop from its initial launch price of S$1,343psf in January.

We believe this is due to poor sales with the 698-unit project having sold only 54 units, or 8% of its total units, to date. Wheelock bought the land at S$790psf ppr in January 2013 for S$550mn.
However, we believe it may be too early for other developers to write down their residential property projects for the following reasons: 1) the URA Residential price index has so far only declined 0.9% from its peak in 4Q13;

2) we expect up to a 20% decline in private home prices with most of the correction likely to happen only in 2015; and 3) coupled with typical profit margins of 15% when developers tender for projects, we expect minimal writedowns to occur in 2014 unless they are for luxury sites bought in 2007 at the peak prices.

For mass market sites, the only other developer that tendered for projects at the peak prices just before the TDSR measures were introduced on 29 June 2013 is Keppel Land, which bought a city-fringe site in Tiong Bahru for S$1,163psf ppr, a record for non-prime 99-year government land, in April 2013.