Monday, October 26, 2015

Developers Facing Extension Charges

Earlier in the month, I wrote a post on a summary guide to some of the big developers listed in the stock market. You can view the post here.
 
In the recent weekend edition of the edge, they come up with a good summary guide for the impact of the extension charges in a worst case scenario for all the developers. It's interesting to note on some of these things but first let's take a recap of what is these extension charges all about.
 
Under the Residential Development Act, developers are required to obtain a qualifying certificate when they develop a project. These developers are then allowed 5 years to complete a project and a further 2 years to sell it upon receiving the TOP. Should they fail to do so within the allotted time, they would be liable for the extension charges under the QC rule. Developers have to pay 8% of the land purchase price for the first year of extension, 16% for the second year and 24% from the third year onwards. The charges are pro-rated based on unsold units over the total units in the project.
 
We know that this is very costly for developers as we will see in the below later and a few developers like SC Global has been taken private in order to avoid paying these charges.



 
The table above shows the worst case scenario, so obviously it takes into account the factor that these developers did not sell a single unit by then.
 
For instance, OUE's Twin Peaks and Wing Tai's Nouvel are both holding up the company's impact to the nav of 6.6% and 6.3% respectively. Other notable companies such as Bukit Sembawang and Heeton are higher at 7.1% and 20.7% due to their more exposure to residential unsold.
 
With these charges coming fast and furious, along with the potential hike in interest rates, we could see some of these developers give in and tried to sell their inventories at a larger drop percentage than what we've previously seen. At least, we've already seen Lafe Corp doing it by selling their Emerald Hills, which is located at prime area Somerset just beside The Robinson, sold at an attractive price of $1,700 psf.
 
If these developers are giving in, especially to residentials within the core district of 9/10/11, we could potentially see a viral cycle of lower demand and prices for residentials outside the core region, as the price spread between the core and non-core district will tighten.
 
I have been asked by several readers if developers are a good sector to be in right now. As far as my investing strategy for these developers are concerned, I'd prefer to get them really low such that I don't have to wait for an up cycle to earn decent returns for these investments. I'll be monitoring the development for this closely.

2 comments:

  1. Hi B,

    The developers will definitely try their best to avoid any extension charges. Other than selling the units cheap and taking the company private, do you think some of the companies will end up using their subsidiary companies to purchase the unsold units and repackage them as service apartment to rent out meanwhile? This will 1) give the developers some rental income meanwhile, 2) wait for improvement in the market, 3) avoid any indefinite extension charges by paying a 1 time ABSD.

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    1. Hi Anonymous

      You are right. There are some ways to get around this although all of them does need to be done on an arm length basis. Alternatively, they can also temporarily lease out their properties though I doubt these developers want to hold on to their inventory for as long as they'd like. I think the cycle is still a far far away and they'd rather clear their old inventories as much and move on from there.

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