Tough call for developers thinking of walking away from en bloc sale

SINCE the latest property cooling measures took effect on July 6, at least two developers have called off their purchases of residential collective sale sites.

In late July, Tee Land announced that it had decided against exercising its option to purchase Teck Guan Ville in Upper East Coast for S$60 million. It would forfeit its one per cent deposit; Tee Land had signed the 'option to purchase' agreement in late June.

Earlier this month, Lafe Corporation said it would not be completing the S$57 million acquisition of Fairhaven, a 15-unit development in Sophia Road; it had entered into the deal in March. Lafe said the S$5.7 million in total deposits will be forfeited to the vendors. The group expects to recognise a loss of about S$8.5 million in the current quarter - arising solely from not completing the acquisition and related transaction expenses and taxes (including S$2.3 million in stamp duties already paid on the contract).

Some other parties are also said to be considering pulling out of collective sale purchases.

Developers have been caught flat-footed by the July cooling measures which are aimed at putting the brakes on escalating private home prices.

When things were hunky-dory, developers were aggressively buying land on the expectation that they could launch new projects on these sites at per square foot (psf) prices substantially higher than prevailing levels at the time. This scenario is unlikely to materialise in the near term.

Add to this the fact that some developers may have been informed by the authorities that they will be able to build fewer homes on their en-bloc site than they had proposed in their Pre-Application Feasibility Study (PAFS) on traffic impact, submitted to the authorities.

This means the developer would have to build larger units - and thus have to lower the target psf prices to keep absolute prices within the affordability sweet spot for buyers. This would lower the project's psf average selling price. Adding on to the pressure are the conditions for upfront remission of the additional buyer's stamp duty (ABSD) on the purchase price of the site, where developers have to undertake to complete the new project and sell all units within five years. This can be a tall order, particularly for biggish projects, and not least amid current market uncertainties.

With the cloudy outlook for the private housing market following the latest cooling measures, the business risks for residential developers have gone up, and some of them are staring at the very real possibility of suffering a loss if they go ahead with their collective sale purchase.

Developers will have to weigh this possibility against the costs of abandoning an en bloc deal. For a start, the developer may have to forfeit whatever deposits already paid to the vendors - depending on the clauses in the sales contract. It also faces potential reputational risk - vendors in future transactions may not wish to deal with such buyers.

Minority shareholders of a listed developer may also question the hit to the bottomline from forfeiture of the deposit. A key question for a developer is whether forfeiting a 5 or 10 per cent deposit makes sense if it intends to buy another residential site in future - since it would have to cough up the new 5 per cent non-remittable ABSD which took effect on July 6.

In the months to come, some developers may be caught between a rock and a hard place.