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Developers face hefty extension charges over unsold units (Amended)

They may incur up to S$90m from April to December this year and S$238m in 2016 if the market stays quiet: C&W

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Property developers may incur up to S$90 million in extension charges for unsold units in their condo projects from April to December 2015, followed by S$238 million in 2016 if the health of Singapore's real estate market does not improve.

Singapore

PROPERTY developers may incur up to S$90 million in extension charges for unsold units in their condo projects from April to December 2015, followed by S$238 million in 2016 if the health of Singapore's real estate market does not improve.

This adds up to a staggering S$328 million that developers are expected to fork out in the worst-case scenario should they fail to sell any units by end-2016, according to calculations by property consultancy firm Cushman and Wakefield (C&W).

As at the end of the first quarter, developers had paid about S$119 million in extension fees for unsold units for condos completed from 2010 onwards. Condos completed before that were mostly fully sold in the property market boom, C&W said.

The huge jump in numbers from one year to the next is partly due to the way such Qualifying Certificate (QC) charges are calculated: at per annum rates of 8 per cent of the land purchase price for the first year, double that (16 per cent) for the second, and triple that (24 per cent) for the third/subsequent years of extension. The amount is pro-rated according to how many units are unsold.

The huge jump is also due to more projects completed (ie received their temporary occupation permit) in 2014 compared to 2013. Since "foreign" developers are required to sell their units within two years of completion, more would be incurring these charges in 2016, compared to 2015.

The definition of "foreign" includes developers with even just one foreign shareholder or director, which is why all listed companies are deemed "foreign". The rules are aimed at preventing foreign developers from hoarding or speculating in residential land in Singapore.

"From the policy angle, the intention was to allow developers to build and sell, thus contributing to the housing supply and hopefully a reduction in prices," said KPMG Singapore principal tax consultant Leung Yew Kwong. "Otherwise, developers might simply hold onto their unsold units and wait for prices to go up, or for the cooling measures to be dismantled."

Among the developers who could incur considerable QC charges these two years are CapitaLand, City Developments (CDL), Wheelock Properties, Wing Tai, Heeton Holdings, and foreign multinational conglomerate China Sonangol.

CapitaLand's QC-bearing projects include Urban Resort at Cairnhill Road (which will incur about S$1 million by end-2016); The Interlace at Depot Road (S$20 million by end-2016), and d'Leedon at Leedon Heights (S$13 million by end-2016).

CapitaLand stressed that this is only if it does not move any unsold units by then. Also, The Interlace and d'Leedon are among the largest condo projects here with 1,040 and 1,715 units respectively, hence their inevitable bigger number of unsold units.

"As the developments are largely sold, the estimated extension charges for the first year, if payable, are not substantial and constitute only a small fraction or less than 2 per cent of the selling price of the unsold units, and therefore have limited impact on our overall financials," it said.

Nouvel 18, a luxury project along Anderson Road, a 50-50 joint venture between CDL and Wing Tai, has not been launched yet and so has no sold units. It has until November 2016 to sell the units. In the worst-case scenario where all the units remain unsold, the JV will have to pay up to S$38 million in extension premiums. This amount is pro-rated based on the proportion of unsold units in the project.

Wing Tai has another upscale project nearby, Le Nouvel Ardmore, which remains 91 per cent unsold a year after completion. It will incur about S$15 million in charges if sales continue to be dismal.

Also in the vicinity is Wheelock's Ardmore 3. The 96 per cent unsold translates to about S$14 million in QC charges by end-2016 if units remain unsold.

As for China Sonangol's TwentyOne Angullia Park, 83 per cent was unsold at last count, which means it may incur up to S$19 million in extension fees by end-2016.

For the big listed developers, analysts say these charges, while seemingly hefty, make up a minuscule percentage of their market cap and book values and are thus unlikely to make a dent on their financials.

Rather, it is the smaller developers such as Heeton that may face a more punishing reality. The developer, about S$160 million in size, has potential QC charges running up to about S$19 million by end-2016 in the worst-case scenario.

This is for projects such as iLiv@Grange, Lincoln Suites (built with Koh Brothers, Lian Beng and KSH) and The Boutiq.Just five months away from its two-year deadline in October 2015, Heeton has recently engaged C&W to conduct an expressions of interest exercise to find an en bloc buyer for all 30 units in iLiv@Grange.

It received three bids attached with different conditions, and the developer is reviewing its strategy going forward. The project in the plush Grange Road area has not sold a single unit since it was completed in October 2013.

C&W research director Christine Li thinks that there is little hope of projects moving by themselves, judging from how some projects here have not sold anything at all in the last two years.

"On the other hand, developers who have been proactive in marketing either individual units or bulk purchases of whole projects have achieved better results," she said.

As most of the unsold units facing QC charges are in the core central region, Ms Li believes that developers should consider bulk sales or project relaunches, as there is still interest in the high-end segment from both institutional and retail investors.

There are not many other options a developer hoping to avoid QC charges has left. Already, the possibility of converting homes to serviced apartments to wait out the slow market has been ruled out, after the Singapore Land Authority said such developers would not be absolved from the two-year deadline and extension charges.

Lee Liat Yeang, real estate lawyer at Rodyk & Davidson, said that developers need to do the math. "If the QC company has a few units left, it might wish to consider selling the units off at a bargain discount. After all, such units will contribute to profits and it makes sense to just clear them and move on."

The two other options are to go the "Hiap Hoe route" (ie selling units to the parent firm) or the "SC Global route" (ie delisting).

"The QC company's holding company might wish to set up an investment company to buy the leftover units, but such purchases will attract buyer's stamp duty and additional buyer's stamp duty (ABSD) accordingly. The controlling individual shareholders who are Singaporeans or permanent residents can also buy at lower ABSD rates (compared to foreigners)," Mr Lee said.

Developers also need to weigh other costs, such as whether QC charges in their first year will exceed the stamp duties they have to pay, bearing in mind that if the units remain unsold a year later, the QC charges will double and there is no way of knowing how the property market will fare then, said Mr Leung from KPMG.

He also thinks that developers' method of delisting or changing their ownership to Singaporean just to escape QC charges defeats the policy's original intention, which was to add to housing supply and correct prices.

Amendment: An earlier version of this article said that  iLiv@Grange was co-built by Heeton and Soilbuild. Soilbuild was not involved in the development. The article has been amended to reflect this.