Agents channelling a chunk of commissions to buyers

WHILE the authorities' move to put curbs on developers re-issuing options to purchase should help reduce some distortions in Singapore's private housing market, another source of distortion persists.

This originates from property agents who channel a chunk of the commissions received from developers, to buyers - to boost their chances of clinching sales.

This is sometimes done under the guise of "referral fees" and the inducement is passed on to buyers indirectly - through a third party - to avoid detection, as such payments are in breach of guidelines set by the Council for Estate Agencies (CEA).

Industry sources told BT it is not uncommon for savvy property buyers to scout around for agents who agree to give them a bigger portion of their commissions.

As commissions are captured under a developer's cost of sales, they do not affect the headline price that the developer has to report to the authorities. In short, prices are inflated.

So far, it seems to have been challenging for the CEA to find evidence to nab these agents, say market observers.

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A spokesperson for CEA told BT: "The public can report cases of property agents who breach the above guidelines to CEA for investigation. CEA takes a serious view against property agents who do not act professionally and will take disciplinary action against them.

"Depending on the nature of the breach, this could involve written warnings, financial penalties, and/or suspension or revocation of a registration."

Not all property agencies allow their agents to engage in this practice, though they risk losing them to rivals who are willing to turn a blind eye to agents indulging in this practice.

Some developers loathe having to pay high commissions to agents, especially given the thin profit margins some of them are making relative to the development risk that they undertake.

Nevertheless, at times, they have had to relent - such as after finding out that some agents had been redirecting potential buyers for their projects to rival developers who are willing to reward them with higher commissions. The practice of agents giving buyers a cut of their commissions may not be new, but it gained momentum after the July 2018 cooling measures which led to a drop in private housing demand.

At the same time, developers were staring at a substantial pipeline of launches on sites acquired at high prices during the collective sale fever in the preceding two years. Developers have to complete developing any residential sites they purchase and sell all units in the new project within five years, to qualify for upfront remission of additional buyer's stamp duty (ABSD) on the land purchase price. Hence developers were under pressure to drum up sales.

"The best way for developers to move the units would have been to reduce prices, but earlier buyers would be upset and complain that they got a bad deal," said retired property consultant Tan Tiong Cheng, the former executive chairman of Knight Frank Singapore.

"So, developers came up with Plan B: Incentivising agents."

By that time, a consolidation in the property agency business had resulted in a handful of big players.

This put the agents in a stronger position to demand higher commissions from developers - of about 3 per cent for new project launches, compared with around one per cent previously.

Agents can command even higher commissions of, say, 7 to 8 per cent to clear remnant units in projects launched some time ago, industry players told BT. In short, post-July 2018, agents have enjoyed a big increase in commissions.

Said Mr Tan: "Voluntarily or involuntarily, some agents started offering sweeteners to buyers to commit to a purchase.

"So instead of the developer giving a price discount to the buyer, agents gave a cut of their commissions to buyers."

Not surprisingly, developers prefer to keep mum. As an industry source puts it: "The developer will say: 'I don't know anything about this. What the agents do with their commissions is their business'."

READ MORE: Of property options and market distortions