Deferred Payments Scrapped In Bid To Cool Property Fever

Source : The Business Times, October 27, 2007

Market players expect blip, not crash, to follow the exit of the buy-now-pay-later scheme.

In a surprise move yesterday, the government said that it was withdrawing the deferred payment scheme (DPS) for the sale of uncompleted private properties in a bid to discourage speculative buying and cool the property market.

Market players said that the move could unnerve some buyers in the short term - leading to a drop in demand. A crash, however, was unlikely as the recovery of the mid-tier and mass markets this year shows that there is strong underlying demand from non-speculators.

Developers will not be allowed to offer the DPS with immediate effect, but a developer that has already obtained approval to offer the scheme for a project may continue to do so.

The DPS allows buyers to buy a property by forking out only a 10 per cent or 20 per cent downpayment, with the rest due upon completion - sometimes as long as three years later.

The scheme was introduced at a time when the property market was lacklustre and the economy was in recession.

But with the property market now booming, critics have said that the scheme encourages speculation as some seek to resell their properties at a profit without immediately worrying about payments.

Announcing the scrapping of the DPS yesterday, the Urban Redevelopment Authority (URA) said that the scheme was no longer needed as the property market has recovered.

The Real Estate Developers’ Association of Singapore (Redas) agreed, saying that it understands the government’s decision to withdraw the DPS. ‘The need for this scheme has diminished with the strong market recovery over the last two years,’ Redas added.

A spokesman for City Developments (CDL) said that the move had been ‘expected’ for some time.

It is estimated that less than half of the buyers of CDL’s projects use the DPS. Said the spokesman: ‘We have been actively discouraging buyers from taking up DPS by way of a price differential.’

Lippo Group is one of the few developers that have not offered the DPS for any of its launches here. ‘I do not think it would affect the sales of our projects,’ Lippo executive director Thio Gim Hock said.

Lippo developments like The Trillium and Newton One have sold well. Mr Thio believes that Lippo’s buyers are not speculators. But he concedes that although the buyers may not flip properties immediately, some do sell after a few months.

The market could see an initial cooling in response to the government intervention, analysts said.

‘What will affect the market is the idea that the government is flexing its muscles,’ said Ku Swee Yong, Savills Singapore’s director of marketing and business development. ‘Frankly, how the signal is going to be interpreted or misinterpreted is going to decide the market’s reaction.’

Mr Ku also said that institutional funds that invest in property here could be unhappy as the government’s move adds volatility to the marketplace.

Looking at the other side of the issue, Lippo’s Mr Thio pointed out that with the DPS, banks, which lent money to developers for construction, had to bear greater risks. ‘In a rising market, banks are not worried to give loans,’ he said.

Citigroup economist Chua Hak Bin had raised the alarm in a report earlier this year when he pointed out that the estimated average debt-to-equity ratio at Singapore property developers with a market capitalisation of more than $1 billion rose to 61 per cent in the first quarter, from 50 per cent a year earlier.

However, Dr Chua believes the rationale for axing the DPS now has more to do with ‘taking away the froth at the high-end market’.

‘Banks have become more cautious anyway,’ he said.

United Overseas Bank (UOB) said that the move should help property prices stabilise. ‘That’s good news for the loans market as more property buyers would now be taking loans with banks,’ said Kevin Lam, the head of UOB’s loans division.

Property stocks are expected to fall on Monday when the market resumes trading. ‘It (the announcement) will affect market sentiment as it will have an impact on future demand,’ said David Lum, an analyst at the Daiwa Institute of Research. ‘The stock market always looks to future demand, and it is no secret that the scheme has been one of the major drivers of demand.’