Cash Premium Climbs Upwards

By SUSAN TEO

Cash-Over-Valuation (COV) is defined as “the difference between the resale price and the market value of the flat” (HDB) that is paid by the buyer upfront. While not compulsory for HDB resale transactions, it is common in most transactions. The amount is negotiable between the buyer and seller, however if the resale price is “at or below the market valuation of the flat, there is no need for buyer to pay any COV.” COV was legalised because of illegal 'under counter cash payment', but there have been calls to have it scrapped as some argue that it ratchets up resale prices. This has been refuted by HDB (HDB Speaks).

For this year, reports show that the median COV finally showed an uptick, after falling for three consecutive quarters. The Singapore Real Estate Report (SRX) for Q3 2012 reveals a 15 percent quarter-to-quarter increase, with the median COV for this quarter standing at $30,000 up from the second quarter of $26,000. As can be seen from Table 1 and Table 2, there has been a quarter-to-quarter decline across all four housing types from 4Q 2011 to 2Q 2012, with the exception of 5-room and executive flats in 2Q 2012.

Table 1: Overall (Average for the 26 Districts) Median COV

	3-Room	4-Room	5-Room	Executive
3Q 2011	$31,094	$40,245	$46,571	$56,363
4Q 2011	$28,341	$36,200	$41,800	$46,000
1Q 2012	$23,171	$30,070	$32,994	$37,767
2Q 2012	$22,950	$29,543	$35,145	$39,769
3Q 2012	$25,942	$33,430	$39,479	$40,700

Source: Compiled using data from HDB Median Cash-Over-Valuation (COV)

Table 2: Quarter-to-Quarter Percentage Change in Median COV

	3-Room	4-Room	5-Room	Executive
4Q 2011	-8.9	-10.1	-10.2	-18.4
1Q 2012	-18.2	-16.9	-21.1	-17.9
2Q 2012	-1.0	-1.8	6.5	5.3
3Q 2012	13.0	13.2	12.3	2.3

Source: Compiled using data from HDB Median Cash-Over-Valuation (COV)

Since HDB scrapped its practice of releasing overall nationwide COV figures and “overall median COV figures for different housing estates and flat types” (Chin) in July 2011, the public has to rely on the median COV for each housing type in the different districts. HDB had been providing the former since the second quarter of 2007, but decided to stop because it adds little informational value for house buyers and sellers in their sales decision.

Read more articles at  
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References
1. Chin, Daryl, “HDB to stop releasing overall nationwide COV figures”, The Straits Times 23 July 2011, Print
2. Wong Wei Han, “COV Prices Rise After 9-month Decline”, TODAY (Singapore) 6 October 2012, Print
3. HDB, “Median Cash-Over-Valuation (COV) by Town and Flat Type”, Web
<http://www.hdb.gov.sg/fi10/fi10321p.nsf/w/BuyResaleFlatMedianCOV?OpenDocument>
4. HDB Speaks, “Why Can’t HDB Scrap the Practice of Paying Cash-Over-Valuation?” Web
<http://www.hdbspeaks.sg/fi10/fi10336p.nsf/cc/COV?OpenDocument>

Collective Property Sales in Singapore

by SUSAN TEO

Since the booming years of 2005 to 2007, en bloc deals in Singapore's real estate industry have not able to return to former levels. At its height in 2007, more than $12 billion worth of sales was closed with approximately 6,652 units being sold. The ensuing economic crisis in 2008 to 2009, unsurprisingly, witnessed a dip in transactions to under $1 billion. In the subsequent period of 2010 to 2011, the economy improved and collective sales picked up to reach about $2 billion.

In spite of the recovery, figures for 2012 suggest that collective sales may experience another slide. Year-over-year figures reflect a dip in transactions.

"Between January and June this year, the total transaction value of residential en-bloc properties fell to about S$250 million, from almost S$1.6 billion in the same period last year" (Wee Leng).

Property analysts have suggested various reasons for the low activity. These include the cooling measures rolled out by the Singapore\'s Government. In December 2011, an additional buyer's stamp duty (ABSD) was implemented. For developers, this means they have to pay a 10% ABSD if they fail to sell all units in the redeveloped site within three or five years of land acquisition. (ABSD is compulsory for residential land purchases, but developers are given a remission period of three years for projects with below 5 residential units or five years for projects with 5 or more units. During the stipulated time-frame, they will have to sell all units, or be subjected to ABSD with interest). Below is an illustration on what this entails for developers.

Impact on developer's profit (Simplified): -

Cost

• Land = $70 million
• Construction Cost = $30 million

Revenue (Selling Price)

• Price = $130 million

Gross Profit Margin

• Revenue – Cost = $130 million – $100 million = $30 million

• or $30 million / $100 million = 30%

But do note that developers usually borrow for land purchase and construction. In other words, they may only stump up $30 to $40 million of the $100 million required for the development.

Hence their equity is only

• Equity = $30 million

With an investment of $30 million (borrow $70 million), the return on equity is:

• Return on Equity (ROE) = Gross Profit / Equity

• ROE = $30 million / $30 million (Gross Mark-up) = 100%

With an additional ABSD of 10% being imposed on developers for exceeding 5 years in the sale of all units, the developer's returns will become (For simplicity, we did not include the interest on ABSD):

New Gross Profit Margin

• $30 million (Gross Margin) – $10 million (10% ABSD) = $20 million
• $20 million / $100 million = 20%

New Return on Equity will be:

• $20 million / $30 million = 66.67% (This is a huge drop of returns compared to the 100% previously)

Hence developers will bid for sites only if they think they can complete the development and sell all units within three or five years to avoid the ABSD, or if they can price in this ABSD and pass on the cost to the consumers.

However, because of the extra time required to pull down the existing developments on the acquired land, this causes developers to balk at en-bloc purchases. The ailing economy and the latest round of cooling measures implemented in October could serve as other deterring factors. Increasing Government Land Sales prices, escalating development charge rates and construction costs are the remaining factors.

Yet, en-bloc sales volume for the third quarter of 2012 showed signs of picking up – numbers surpass that for the first half of the year.

"On the collective sales front, nine transactions worth about $1 billion were concluded in 3Q2012. This value is higher than the total 15 deals worth $960 million concluded in 1H2012" (Tan).

The third-quarter residential transactions include: Chateau Eliza at Mount Elizabeth sold for S$92.2 million; Green Lodge at Toh Tuck Road sold for $191.9 million and Thomson View Condominium sold for $590 million. The exorbitant selling price of the latter is believed to have been propped by the upcoming Thomson MRT Line. However, these sales were closed before the new cooling measures were introduced this year. Together, with the sluggish economic outlook, one wonders if the impetus of the en-bloc activity will taper off. However the development of MRT lines could have an offsetting effect. Analysts have predicted more en-bloc sales of properties near upcoming MRT lines. 

References

1. Amy Tan, “Property Briefs: Home”, The Edge Singapore 8 Oct 2012, Print

2. Wee Leng, “Residential En-bloc Market on the Decline”, Channel NewsAsia 29 Jul 2012, Web

<http://www.channelnewsasia.com/stories/singaporelocalnews/view/1216442/1/.html>

3. Inland Revenue Authority of Singapore, “Remission (for ABSD)”, Web

<http://www.iras.gov.sg/irasHome/page.aspx?id=12822>

Singapore's Property Price Trend

by SUSAN TEO

This article takes a peek at the some of the latest property price trend in Singapore.

Most indicators suggest that prices continue to head north.

    The quarterly price index compiled by the Urban Redevelopment Authority (URA), showed that prices of private residential properties rose by 0.6 per cent in the third quarter of 2012; whereas the price increase was only 0.4 per cent in the second quarter of 2012.

    A similar upward trend was spotted in the National University of Singapore (NUS) Singapore Residential Price Index (SRPI), developed by the Institution of Real Estate Studies. Unlike the price index of URA, SRPI is a monthly index that only looks at the price movements of private non-landed residential properties. The URA price index, however, covers different categories of private properties. Specifically, for private non-landed residential properties, the URA index shows a price increase of 0.5 per cent for two consecutive quarters (ie. 2Q2012 and 3Q2012). SRPI reflected a 0.6 per cent increase for September 2012.

    Meanwhile for Singapore's public housing landscape, the HDB Resale Price Index showed a steady rise in HDB resale prices from the first quarter of this year; with numbers standing at 0.6, 1.3 and 2 per cent for the first, second and third quarters, respectively.

    Based on a study by a NUS don, Assoc Prof Tilak Abeysinghe, Singapore's real estate prices have been rising above the affordable level of a 4 per cent increase annually. This number is arrived at based on the lifetime incomes of Singaporeans.

    “The actual median price of both private and HDB units has risen by about 11 per cent a year since that time [sic mid-2006], higher than the trend price increase of about 8 per cent a year.” ("Inflated Housing Prices Should Ease")

    The continuous increase in real estate prices, coupled with quantitative easing policies in the US, Japan and Europe, have prompted the Governments in Singapore, Malaysia and Hong Kong to implement cooling measures to prevent property buyers from over-stretching themselves. For Singapore, on 6 October, the Monetary Authority of Singapore (Singapore's central bank) announced a lowering of the loan-to value ratio (LTV), for loan tenure that exceeds 30 years or extends beyond the age of 65, to 60 per cent for the first housing loan and 40 per cent for subsequent loans. The maximum loan tenure has also been capped at 35 years. This is the Singapore's Government sixth attempt at bringing down property prices since September 2009. It remains to be seen if this latest round of cooling measures will prove effective in reining in prices.

    On a more positive note, according to Assoc Prof Tilak Abeysinghe:

“As housing supply improves over the next few years and the immigrant population declines, we can expect house price inflation to fall to an affordable trend rate like 4 per cent” ("Inflated Housing Prices Should Ease")

    On a similar note, URA's latest figures for October revealed that sales volume for private residences have dipped. This is believed to be partly a result of the Government's newest cooling measures. Sales figures - excluding executive condominiums - showed a 26 per cent month-on-month decline. In absolute terms, 1,948 units were sold in October compared to 2,621 in the previous month.

    Looking ahead, more property launches are expected before the close of the year, but analysts are expecting sales to continue to moderate because of the festive mood, tighter loan regulations and as buyers take stock of development in the property market.

References

1. Assoc Prof Tilak Abeysinghe, "Inflated Housing Prices Should Ease", The Straits Times 4 Oct 2012 , Print

2. Teo, Esther, “New Private Home Sales Cool Rapidly in October”, The Straits Times 16 Nov 2012 , Print

3. HDB Resale Price Index, Web

<http://www.hdb.gov.sg/fi10/fi10321p.nsf/w/BuyResaleFlatResaleIndex?OpenDocument>

4. NUS Singapore Residential Price Index (SRPI), Web

<http://www.ires.nus.edu.sg/webapp/srpi/SRPI_Main.aspx>

5. URA, “Release of 3rd Quarter 2012 Real Estate Statistics”, 29 Oct 2012, Web

<http://www.ura.gov.sg/pr/text/2012/pr12-120.html>