Time To Put An Official Number To DPS Units

Source : The Business Times, December 9, 2008

THE deferred payment scheme (DPS) was introduced more than 10 years ago in the middle of the 1997 Asian financial crisis, which dented interest in Singapore's property market.

Developers welcomed the scheme. The DPS allowed home buyers to put down just 10 per cent or 20 per cent of the purchase price when buying a property, with the rest due only after a project obtained its Temporary Occupation Permission (TOP).

The premise behind the DPS was to allow buyers, especially HDB upgraders, to buy a private home in advance of their HDB flats reaching the five-year minimum occupancy period.

However, during the recent property boom, the DPS gave both investors and speculators a window to bet on a rise in property prices. They did not have to secure any form of financing upfront, which meant that the banks' traditional role in measuring credit risk was effectively bypassed.

Securing loans

But questions are now being asked of many of the properties bought in the recent property boom using the DPS before it was suspended in October 2007. With the bulk of the property launches in 2007 due for TOP in 2009 and 2010, the tighter credit market and more stringent lending terms have made it harder for these buyers to secure loans.

'In cases where the property is still 'in the money' and the buyer can't secure a loan, we think the buyer would turn to the secondary market to exit the property,' said OCBC Investment Research analyst Foo Sze Ming. 'However, for properties that are not 'in the money', buyers may have to sell at lower prices or worse, default on the purchase.'

If many buyers end up defaulting, it will end up hurting the overall property market, depressing prices even further as supply increases. Developers' operating cashflow and earnings will also come under pressure.

Estimating the impact

Given the consequences, estimating how big an impact the DPS will have has become the preoccupation of market watches and analysts in recent weeks.

But they do so with patchy data and many assumptions. To begin with, many of the homes initially sold under the scheme have been re-sold on the subsale market, which means that they are no longer under the DPS. So an assumption has to be made there. In a Dec 3 report, DBS Vickers Research analyst Adrian Chua looked at the subsale status of projects likely to obtain TOP in 2009 and compared the figure to the total number of units sold in the development.

'This gives us an indication on the number of units potentially still under the DPS, given that many developers take the prudent approach of not extending the DPS to secondary buyers (from subsale transactions),' he said.

Using this method, he estimated that some 50 per cent of units in CapitaLand projects expected to obtain TOP in 2009 - including RiverGate and Riveredge - were under the DPS. He used this figure to calculate the impact of both a 10 per cent default and a 20 per cent default on CapitaLand's FY2009 earnings per share, operating cash flow, net gearing and interest cover.

His conclusion was that CapitaLand and five other developers - City Developments, Ho Bee Investment, Keppel Land, UOL Group and Wing Tai - are not likely to be too badly hit even under a 20 per cent default scenario.

But other analysts have made their own assumptions and have come up with more dire predictions. Some have cited the DPS issue hanging over the heads of developers here when issuing 'sell' calls on property stocks. These negative reports have spread fear among investors and could cause jittery banks to withhold financing to developers.

Differing views

The wide spectrum in views highlights the problem - right now, no one knows how many units are still on the now-defunct DPS, and consequently, how badly developers will be hurt if some buyers walk away from their deals. One property consultant put the number of units still on the DPS at about 4,000-5,000. But the figure is still an estimate.

What is needed is for the authorities to sit down with the developers to pin down an exact figure to the number of units still on the DPS in projects obtaining TOP in 2009 and 2010, preferably project by project.

If the problem is not as bad as it's now made out to be by some (which is what the developers are telling analysts and banks behind closed doors), then such a disclosure can only be good for all parties involved - developers, investors, home buyers, banks and the authorities, who have been working to ensure stability in the property market.