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BT EXCLUSIVE

URA steps up tracking of repeated issue of OTPs

It's discouraging private developers from practice, which inflates home sales figures. Such deals also run the risk of falling through, leaving developers with unsold stock

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The Urban Redevelopment Authority (URA) has been tightening its monitoring of a property market practice that may be inflating the home sales figures of private developers.

Singapore

THE Urban Redevelopment Authority (URA) has been tightening its monitoring of a property market practice that may be inflating the home sales figures of private developers.

This refers to an arrangement some private home buyers make with a developer, via a property agent, to continually re-issue options to purchase (OTPs) upon expiry - without any forfeiture of the booking fee.

This can be done for up to a year - or even as long as up to 18 months - from the date of the first OTP. The idea is to give the buyer time, for instance, to sell his existing home.

Observers say that some genuine upgraders need more time to marshal their financial resources before they exercise the option to purchase a new private home.

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That said, such arrangements are also being gamed by property investors or speculators who may eventually not proceed to exercise the options, thus aborting the deal.

This could result in a breach of loan covenants stipulated by banks to developers.

Even genuine home upgraders - perhaps feeling less secure about their jobs amid the recession these days - may end up aborting the deal and forfeiting a quarter of the 5 per cent booking fee to the developer. This amounts to 1.25 per cent of the purchase price - a precious sum of money to someone without income or on a reduced income.

When contacted, a URA spokesperson said: "URA engages developers regularly to obtain and provide feedback. As part of recent engagements, we have reminded developers to only grant the Option to Purchase to buyers who are ready to exercise them within the validity period."

The option validity period is up to five weeks.

Talk on the grapevine has it that the URA has of late been communicating the above message to developers who are getting ready to launch projects.

Some developers with existing projects on the market have been contacted by the URA to discourage them from re-issuing OTPs.

Since last year, the URA has periodically asked to examine developers' log books of the OTPs granted for their private residential projects.

By doing this, the URA can see the number of cases involving continual re-issue of OTPs, the length of time this has been going on, and the incidence of such deals eventually being aborted.

Information on the buyers involved in such arrangements is also available, which may give the authorities a sense of whether a purchase was genuine in the first place, or could have been made by a property agent, for instance, The Business Times understands.

After reviewing the log book, URA may ask some developers why options were reissued multiple times, and convey to the developer if it thinks too many re-issues have been granted.

The executive director of a major residential property development company told BT: "For instance, in some cases, developers have been asked whether buyers who keep asking for the option to be re-issued over an extended period of time, have the means to buy the property in the first place.

"Another message being given to developers is that buyers should not be pressured into entering transactions."

URA officials have also met some developers and told them in no uncertain terms not to keep re-issuing options, he added. "While the monitoring and checks have been going on for some time, the warning seems to have become stricter now. Some developers are fearful of losing their sales licence. These warnings ought to be taken seriously."

Giving his take, CEL executive director Michael Ng said: "Granting a re-issue of the OTP for a reasonable period may help genuine upgraders and buyers by giving them sufficient time to sell an existing property or other assets.

"This may be the only way they can upgrade. Otherwise, they may face a cash flow problem from having to fork out upfront, cash equivalent to nearly 36 per cent of the purchase price on a second property - within two months of the OTP date."

This comprises the initial 20 per cent of the purchase price to be paid to the developer's project account (including the 5 per cent booking fee), the buyer's stamp duty of up to 4 per cent, and 12 per cent in additional buyer's stamp duty (ABSD) to be paid to the taxman.

The 12 per cent ABSD applies to Singaporeans buying their second residential property. However if the purchase is being made by a married couple (which must include a Singapore citizen), they are eligible for a refund of the ABSD on their second property, provided that, among other things, they sell their first residential property within six months of the completion of the second property (assuming it was uncompleted at the time of purchase).

For Singaporean couples buying a second property that is completed, they have to sell their first property within six months of the date of purchase of the second property.

Mr Ng of CEL Development said that a developer who grants a re-issue of OTP over a long period runs a higher risk of the buyer aborting the deal if the market takes a turn for the worse. "This could leave the developer with a lot more unsold units close to the five-year deadline for selling all units in the project (as part of conditions for upfront remission of ABSD on the land purchase price granted to a developer)."

An analyst noted that if this happens, the developer may slash prices to avoid having to pay the ABSD with interest as penalty.

Agreeing, a mid-sized listed property developer said there is risk of competition. "Let's say someone picks up a unit in my project today and I keep re-issuing the option to him, and next year, my competitor launches a project nearby at lower than my price. The buyer may decide to walk away from the deal with me by forfeiting the 1.25 per cent of the purchase price, to buy a unit in my competitor's project instead."

Desmond Sim, research head for South-east Asia at CBRE, said: "While there may be genuine reasons for re-issuing OTPs in some cases, it would not be surprising if the authorities clamp down on the practice, given that it creates distortions in market perception, for instance, that developers have been posting strong private home sales in the past few months vis-a-vis the reality reflected in the economic indicators."

"The authorities are ensuring there is enough prudence in Singapore's property market."

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