Tuesday, December 2, 2008

Deferred Payment Scheme: Averting A Crisis

Source : The Straits Times, Dec 1, 2008

Act now to contain any fallout from property purchases worth billions of dollars

IN MANY ways, the credit crisis crippling vast tracts of the global financial system resembles a guerilla war.

It is fiendishly difficult to work out exactly who the enemy is or where he might be lurking.

It is deeply frustrating. Each time a financial firestorm is doused, another even more intense blaze erupts.

Although there seems to be no imminent end to the crisis, there are many useful lessons to be learned from the calamity so far.

Take Citigroup's recent painful experience, for example. The giant lender had to be saved from potential oblivion by a US government bailout after its share price collapsed, even though it was healthier than other global banks by many measures.

It is a sobering reminder that, in a climate of fear, it is wise to stay a few steps ahead of the crisis, keep tabs on possible flashpoints and defuse them before they become a full-blown crisis.

Until recently, Singapore had been in the fortunate position of having escaped much of the fallout from the crisis.

But since September, jobs have been lost and companies are struggling to rollover their loans. This came after the collapse of US investment bank Lehman Brothers sparked panic among banks, which then clamped down on lending activities.

The fallout has been felt most profoundly in the local property market where soaring prices last year attracted hordes of speculators snapping up condos in the hope of making a quick profit.

This sudden reversal has prompted analysts to raise concerns over possible systemic risks posed to banks from the downward spiral in property prices, given their big exposure to real estate loans.

Their biggest worry is focused on the record 14,811 private properties sold by developers to homebuyers last year.

Many of these flats were sold under a 'deferred payment scheme', introduced 10 years ago during the Asian financial crisis to help developers offload unsold properties and which was scrapped only in October last year.

This scheme enabled a homebuyer to pay only the stamp duty and 10 per cent of the purchase price upfront. The rest is paid only when the flat is given its temporary occupation licence (TOP).

At the height of the property market fever last year, the scheme was blamed for fuelling excessive speculation in sought-after condos because they could rapidly change hands several times as prices rose. All the speculator needed was the downpayment for the flat.

It is a completely different story now. By some measures, property prices have fallen back to the levels of last January. This means that many of last year's new property launches are now under water, and current prices are likely to be less than what buyers paid last year.

Awkward questions are being asked, such as what will happen to buyers on the deferred payment scheme when the condos are completed next year.

Will they simply walk away - writing off their deposits as a loss - and leave the nightmare of reselling the property to the developer? This would depress an already falling property market still further.

And how about those buyers who had the foresight to arrange a bank loan? Will the bank insist on doing a fresh valuation of the property and offer a smaller loan amount? What happens if the buyer cannot make up the difference?

Nobody in the market knows exactly how many of these units were purchased on the deferred payment scheme. And when the scheme potentially covered billions of dollars' worth of property purchases last year, it raises plenty of concerns.

In a climate of uncertainty, when even big banks can be rocked by a crisis of confidence, the guessing game played by analysts over the scale of this potential problem can easily spread fear among both banks and investors alike.

The Government has sensibly refrained from trying to talk up the property market. Instead it has stated openly that it cannot work against market forces and try to prop up prices artificially.

But it can get the various agencies to work together to produce a breakdown of the homebuyers on the deferred payment scheme - preferably by condo project - along with details of when the projects are likely to be completed.

This would enable all the interested parties - banks, developers and homebuyers - to make an informed decision on the seriousness of the problem and take measures to avert it.

It is very likely that the problem is not a big one and that the banks and developers have been scaring themselves unnecessarily.

Given the low interest rate environment, most genuine buyers may have already opted to make progressive payments as construction proceeds on their dream homes.

So long as they have a job and continue to service their monthly instalments promptly, they are still good credit risks, even though the value of their dream home may have fallen sharply.

But the manner in which the credit crisis has ambushed sound companies and brought them to their knees is scary.

Coming to grips with the deferred payment issue is an exercise worth doing. It will enable us to get ahead of the curve on the credit crisis for a change.

M'sians Again In Top Spot As Foreign Home Buyers

Source : The Business Times, December 2, 2008

For the second consecutive quarter, Malaysians continued to be the largest group of foreign buyers (including permanent residents or PRs) of private homes here.

Clover by the Park: Drew the largest numbers of foreign buyers in the third quarter

They bought 201 private homes, or accounted for 22 per cent of the total 903 caveats lodged for private home purchases by foreigners in Q3, a DTZ caveats analysis shows.

Indonesians bought 170 units, giving them a 19 per cent foreign buying share, followed by mainland Chinese (13 per cent), Indians (12 per cent) and UK citizens (6 per cent).

Projects that drew the largest numbers of foreign buyers in Q3 were Clover by the Park (40 units), Livia (30 units) and Kovan Residences (20).

However, in terms of projects where foreign buyers had the largest share of caveats lodged in Q3, the chart toppers were The Lakeshore in Jurong and Nassim Park Residences.

Foreigners took 55 per cent or 17 of the 31 units that changed hands at The Lakeshore, and accounted for 48 per cent of the 31 caveats also lodged for Nassim Park Residences during the July to Sept quarter of this year.

Non-PR foreigners made up the bulk of the foreign buying at The Lakeshore, Nassim Park Residences, Kovan Residences, Dakota Residences and Park Infinia at Wee Nam in Q3. However, PRs bought more units than non-PR foreigners at Livia (in Pasir Ris), Clover by the Park in (Bishan) and Beacon Heights (at St Michael's Road).

The total 903 units that foreigners (including PRs) acquired in Q3 was a 6 per cent drop from the previous quarter, and made up 22 per cent of total private home deals in Q3, down from a 25 per cent share in Q2.

DTZ executive director Ong Choon Fah expected foreign investors to continue to be cautious about buying properties in Singapore in the near term. 'There's a lot of frightened money around. Some investors have the money but fear that if they buy today, tomorrow it may be cheaper. This is keeping them away. However, foreigners, especially PRs buying for their own occupation, are more likely to adopt a longer term view and make a commitment,' she added.

PRs bought 53 per cent or 476 of the total 903 private homes picked up by foreigners in Q3, with non-PR foreigners accounting for the remaining 47 per cent. The PR share was similar to the 54 per cent in Q2.

Property Groups Find Asset Sales Tough Going

Source : The Business Times, December 2, 2008

A SERIES of aborted divestments by Singapore property groups lately highlights the challenges of relying on asset sales in the current environment.

Last weekend's edition of BT featured two stories on the same page, on Singapore's two biggest listed property groups - CapitaLand and City Developments Ltd (CDL). Both are in the same boat, with their respective planned divestments of overseas assets not completed.

CDL's London-listed hotel subsidiary Millennium & Copthorne Hotels announced that the agreement for the disposal of Millennium Seoul Hilton hotel to Korean group Kangho AMC Co had been terminated as the buyer was unable to finalise its financing arrangements amid the global financial turmoil.

CapitaLand's 30 per cent-owned associate Inverfin Sdn Bhd, which owns Menara Citibank tower in KL, reported that the sale-and-purchase agreement for the sale of the office tower had been terminated as the buyer, IOI Corporation Bhd, did not pay the balance purchase price on the completion date.

There have also been instances of transactions of Singapore buildings not being completed. Ho Bee announced last month that its proposed $30 million sale of Frontech Centre, an industrial building in Bukit Merah, had fallen through. The buyer is understood to have been US fund group Angelo Gordon. BT also reported last month that Australian property fund manager Blaxland did not go ahead with completing its planned acquisitions of eSys Technologies' building in Changi North and SH Cogent Logistics' warehouse building in Penjuru Close in Jurong.

The pullouts reflect the difficult conditions for property investment sales, caused by several factors. Firstly, funding is tight. But even potential buyers with financial muscle may get cold feet or decide it simply makes more sense to walk away from their purchase now and forfeit the deposit, as sliding property values will present more attractive investment propositions in due time. There may also be other issues at play, such as exchange rate fluctuations. For instance, from a potential buyer's perspective, the Aussie dollar's 21 per cent depreciation against the Singapore dollar in the past three months would make purchasing Singapore properties less attractive.

Putting things in perspective, a seasoned property consultant said: 'The current climate makes asset sales difficult, whether you're selling an apartment or a shopping centre.'

Property groups will have difficulty selling assets even to their sponsored real estate investment trusts (Reits). With the stockmarket slide, Reits are trading at very high yields, which makes it difficult for them to make yield-accretive acquisitions. And the current tight funding environment affects Reits as well; their priority these days is refinancing existing debt instead of sourcing new debt for further acquisitions.

The situation is likely to continue for at least the new few quarters; that will have implications for Singapore's property groups. Heavyweight CapitaLand has booked handsome profits from divesting assets in the past few years. In the past two years, the group has divested some $9 billion of assets - an exercise that has generated well over $1 billion in profits.

The group still has other assets that it could potentially divest, such as its industrial property portfolio here and even some of the office blocks held by its sponsored Reit CapitaCommercial Trust.

Prior to the global financial crash, CapitaLand would have had a high chance of success if it had continued on its path of asset disposals. Now, buyers are scarce and even those that are around would demand distressed sale prices (as cushion against further declines in property values after their purchase).

The trying financial climate will affect asset divestment strategies of even a heavyweight like CapitaLand. But at least it has stronger financial muscle to weather this storm even if it can't make major divestments in the near future.

Smaller players are not in the same boat. Some companies burdened with heavy debt and which had been hoping to unload some of their properties to improve their balance sheets will be caught if they can't sell their assets.

Hopefully, the malaise in the property investment sales market will not drag on too long.

UK House Prices Fall 8.1% YoY In Nov

Source : The Business Times, December 2, 2008

(LONDON) House prices in England and Wales fell by 1.1 per cent in November to take them 8.1 per cent lower year-on-year, property consultancy Hometrack said in its monthly survey yesterday.

The pace of monthly decline eased slightly from October's 1.3 per cent drop, but the average house price is down to £161,400 (S$375,600), the same as in January 2006.

British house prices tripled in the 10 years running up to their peak in the middle of last year, but have since fallen by as much as 15 per cent in other surveys as the global financial crisis has caused the supply of mortgages to dry up.

'All the indicators from the latest survey point to a continued fall in property prices in the short term,' said Richard Donnell, director of research at Hometrack. 'A weak economic outlook and limited availability of mortgages are set to keep prices under downward pressure in 2009.'

He added that transaction volumes might be bottoming out, with a hard core of buyers and sellers who have to move left in the market. -- Reuters

Property No Longer A Safe Asset

Source : The Business Times, December 2, 2008

(LONDON) Real estate used to be the ultimate all- weather asset class, with low correlation to volatile stocks and unexciting bonds. But in today's debt-starved market, property is not the safe haven it once was.

Trusted property market tenets have been deformed by an acute shortage of debt and a worldwide souring in economic fundamentals, leaving the sector in a deep rut - awash with equity and rich with discounts but bereft of buyers.

Before, property rental income could rise even if values fell and as one regional market sagged, another flourished. But now, property market misery is universal and many of the world's biggest investors are standing on the sidelines.

'Things are going to be a difficult for quite a while,' Robert Houston, chairman and chief executive of of ING Real Estate Investment Management, told Reuters.

'Everyone wants to know when the bottom of the market is. I have a good record at calling these things and all I'm prepared to say is that we haven't reached it yet.'

Like the majority of its peers, ING has slowed the pace of its real estate investments in recent months, refusing to gamble capital when the only thing it feels sure of is that property prices worldwide will continue to fall.

The EPRA/NAREIT Global property index has slumped to a lifetime low of 861 points at market close on Nov 21 from an all-time high of 2,897 on Feb 23, 2007, but bargain hunters have yet to be spurred into action. -- Reuters

Dubai High-End Property Defaults Rise

Source : The Business Times, December 2, 2008

Developers told to review projects not launched or unsold

(DUBAI) Dubai is witnessing an increase in defaults on high-end properties as financing conditions worsen and is likely to see smaller developers merge, a member of the Gulf Arab trade hub's financial crisis committee said on Sunday.

'There are more and more defaults on the high end if banks do not give mortgages and speculators are (many) in the market,' Marwan bin Ghalita, chief executive of the Real Estate Regulatory Authority (Rera), told Reuters in an interview.

Tighter mortgage lending, a liquidity squeeze and a real estate slowdown have hit Dubai, part of the seven-member United Arab Emirates federation, in recent months.

Signs that Dubai's property boom days are over are increasing as developers scale back projects, property prices fall and jobs are cut.

Secondary prices in Dubai and Abu Dhabi fell 4-5 per cent in October from the previous month, with Dubai's advertised villa prices falling by 19 per cent after several banks tightened lending conditions in August and September, HSBC said recently.

Mr Marwan sits on a nine-strong crisis panel set up to tackle the effects of the global financial crisis on Dubai. The council reports to Dubai's ruler.

He said that now would be a good time for smaller developers to join forces, and that he expected some to do so.

'If you look at the market, a merger between smaller companies would give it confidence. I always support . . . good mergers in any sector if it adds value to the sector,' he said.

In October, Dubai developers Deyaar and Union Properties denied that they were in merger talks but were unable to say if the government might order a tie-up.

Mr Marwan said that developers should review projects that had not yet been launched, or where only a few units had been sold.

'This is not a good time to start a new project if you don't have enough liquidity to construct,' he said. 'Slowing down is very important and this is what we at Rera asked the developers to do about a year back. Slow down and review is very important for the market.'

Mohamed Alabbar, a Dubai government official who also chairs the crisis committee, said late last month that the emirate would pull back on its building spree in the light of the financial crisis.

Mr Marwan said that the only market that was truly suffering in Dubai was that for off-plan properties.

'The only market that is not doing well is the off-plan . . . because there are a lot of the speculators on some of the projects. Some of the banks are not dealing with this crisis professionally so they stopped financing,' he said, noting that some developers were also asking for too high a price.

Prices for 'affordable' off-plan properties could pick up in the second quarter or 2009 if banks increase lending, he said.

Mr Marwan said that Rera would enforce a law on the registration of off-plan property sales, after a Muslim holiday next week. Rules for time shares were also being finalised.

'People will be selective in where they put their money. It's not like before where people came to buy anywhere.' - Reuters

Property Market Now Shows Classic Signs Of Downturn

Source : The Business Times, December 2, 2008

Analysis of Q3 caveats by DTZ points to new trends relating to subsales, foreign buying, HDB upgraders

Three classic signs of a Singapore property downturn have emerged in the third quarter - a slide in subsales and foreign buying, but a bigger share of HDB upgraders in the private home buying pie.

Property consultancy DTZ's analysis of caveats for private home purchases shows that total subsales of non-landed private homes fell 8 per cent to 473 units in Q3 from the previous quarter. Subsales also accounted for a smaller 13 per cent share of purchases of non-landed private homes in Q3, compared with 16 per cent in Q2.

Subsales of high-end condos/apartments slowed down even more in Q3 2008. The number of subsale purchases involving units priced at least $1,000 psf fell 24.2 per cent quarter-on-quarter to only 213 transactions, accounting for 45 per cent of overall subsales of non-landed private homes in Q3, against 54 per cent in Q2 2008.

The number of foreign buyers (including permanent residents) of private homes (both landed and non-landed) slid 6 per cent quarter-on-quarter to 903 in Q3. Also, these buyers made up 22 per cent of total private home deals in the quarter, down from 25 per cent in Q2.

DTZ senior director (research) Chua Chor Hoon said: 'A large proportion of foreigners buy for investment. Hence when prices are falling, there is less interest. Furthermore, with economies and property markets slowing down all over the world, many of the foreigners have been affected back home and they may pull out their overseasinvestments.'

DTZ executive director Ong Choon Fah also points out that attractive property values are emerging in other cities which Singapore will be competing with. 'Foreign investors have lots more opportunities to consider where to invest,' she added.

The dip in subsales may be due to the fact that it has become more difficult for 'specuvestors' and speculators to offload their properties in the current quiet market.

'For investors who take a long-term view, especially for better assets, the tendency would be to ride out the market,' says Mrs Ong.

HDB dwellers tend to make up a bigger proportion of private home buyers during a property downturn. 'Many of them are buying for owner occupation. Some may be sitting pretty on gains on their existing HDB flats which they bought directly from the HDB some years ago. Together with CPF savings, it may be easier for them to cross over to private homes,' notes Mrs Ong.

Buyers with HDB addresses picked up 1,718 private homes in Q3, up 34 per cent from the previous quarter.

Their share of caveats lodged for private home purchases rose to 41 per cent in Q3, from shares of 34 per cent in Q2 and 28 per cent in Q1 this year. HDB upgraders' 41 per cent share of private home purchases in the July-Sept quarter was the highest quarterly share in four years.

'The trend was supported by the narrowing gap between HDB resale flat prices and private home prices in Q3, as HDB resale prices continued to increase while private home prices fell,'

Ms Chua said the latest Q3 jump in private homes bought by HDB dwellers was mainly in the primary market. The number of units these HDB dwellers picked up from developers leapt 89 per cent from Q2.

Livia in Pasir Ris and Clover by the Park in Bishan were the two most popular projects among HDB buyers in Q3, with 192 units and 142 units respectively sold to HDB upgraders.

Analysts say HDB upgraders' share of total private home purchases may rise further. In Q2 2002, their share surged to 81 per cent and at the trough of the Asian Financial Crisis property slump in Q4 1998, the figure was 68 per cent.

Subsales refer to secondary market deals in projects that have yet to receive their Certificates of Statutory Completion. This may be anywhere from three to 12 months after the project gets its Temporary Occupation Permit (TOP).

DTZ said that for total subsale deals of non-landed private homes, the median price continued to fall in Q3, easing 11 per cent quarter-on-quarter to $941 psf - the lowest since Q3 2006, according to DTZ. 'In view of softening market demand, owners are more realistic in asking prices,' it said.

The Sail @ Marina Bay got the strongest subsale interest in Q3, with 30 deals (compared with 34 in Q2). The median subsale price for the project slid 6 per cent quarter-on-quarter to $1,719 psf, following a 14 per cent slide in Q2.

Median subsale prices also fell 3 per cent for Park Infinia at Wee Nam to $1,380 psf, The Esta (slipping 5 per cent to $910 psf) and City Square Residences (down 6 per cent to $960 psf).

Mrs Ong expects subsales to continue trending downwards although there will be spikes as major projects get their TOP. That's when there's usually more sales activity as the finished product can be viewed by potential buyers and the prospects of renting the units would increase the appeal of such homes to potential investors.