The residential market was recently rife with talk about looming deadlines for the Additional Buyer’s Stamp Duty remission. Developers do not have to pay ABSD on the purchase of land if they complete and sell all their units within five years from the acquisition date. Those who fail to do so, even if they are left with just one unsold unit, will incur a 10% ABSD if they purchased the land between Dec 8, 2011 and Jan 11, 2013, and 15% if they purchased the land on or after Jan 12, 2013. A 5% interest rate per annum will also be levied.
The rule has prompted some prospective buyers to believe there will soon be bargain deals for projects that are nearing this five-year deadline, especially those with a large inventory of unsold units.
It may sound counter-intuitive but projects with a small number of unsold units have the biggest incentive to offer attractive discounts. The discount will help speed up sales. At the same time, there is sufficient time for the developer to sell off all its units.
On the other hand, projects with a large inventory of unsold units — say over 300 — might not complete selling their units even if they were to slash prices. In 2015, many existing launches moved less than 10 units per month on average. Any discount offered is simply to drive sales momentum, rather than avoid the ABSD charges and the discount rates are likely to be low to moderate.
Take The Trilinq at Jalan Lempeng. The project has been frequently cited in recent months as it is potentially the first to incur the 10% ABSD, given its 528 unsold units as at January. Recently, the market speculated that the developer has slashed prices to move sales and avoid the ABSD charges. Based on caveats lodged, the developer had indeed offered 5% to 10% discounts at the project, but was it to avoid the ABSD?
The Trilinq has around 10 months before the ABSD charges, estimated at $51 million, are due early next year. This means the developer must sell an average of 50 units a month to avoid the charges — a tall order given the soft market sentiment today. Hence, we think the discount cited is simply to drive sales momentum, rather than to avoid the ABSD charges. The discount may also be a one-off incentive as the developer is not desperately avoiding the charges.
There is a possibility that the developer slashed prices to clock in as many sales as possible so it would be left with a small number of remaining units that they could buy back through an investment company. The developer would then be able to avoid the ABSD on the land purchase as the project would be considered fully sold. Is this a feasible option?
If The Trilinq sells 20 units each month for the rest of this year, its developer would still be left with about 300 units unsold by the time the ABSD on land purchase is due by early 2017. The developer would need to fork out $59 million — for normal stamp duty and ABSD to purchase these units — which exceeds the estimated $52 million ABSD payable on land.
The developer must sell about 25 units per month for the rest of the year such that the normal stamp duty plus the 15% ABSD payable to purchase the remaining units in the property do not exceed the ABSD payable on land.
To do this, the developer has to offer significant discounts. In addition, the developer might have to hold the units for a while to avoid paying the seller’s stamp duty, while incurring property tax and maintenance fees at the same time. Given the situation, the developer might prefer paying the ABSD charges if the stock of unsold units is significant.
Developers have to hold the units for a while to avoid paying the seller’s stamp duty if they were to buy back through an investment company
Projects with a small number of unsold units might be the most aggressive with their discounts
What about projects which have a moderate stock of unsold units, say between 100 and 300, such as Kingsford Hillview Peak? These projects fall under the category of “borderline” cases. Developers have or may dangle some discounts to minimise the number of units they have to purchase through an investment company, in case they fail to clear all the unsold stock when the ABSD is due. However, it is hard to determine if the discount would be attractive as that would depend on the developer’s holding power, land cost and competition from upcoming launches.
Our analysis excluded projects with an exclusive total number of units — less than 150 — as the developer might prefer to purchase their remaining units through an investment company when the ABSD is due.
Against this backdrop, we are of the view that projects with a small number of unsold units — less than 100 — might be the most aggressive with their discounts. The discount will help speed up sales, and at the same time, there is sufficient time for the developer to complete selling all their units. Having profited from the sale of other units earlier, developers for these projects may not want the hassle of buying the remaining units through an investment company.
Theoretically, projects such as eCO, Stratum and Jewel @ Buangkok may fall under this category (see table). Despite their brisk sales, there is a small probability that these projects may be left with a small number of unsold units close to their ABSD deadlines. It is up to prospective buyers to monitor their take-up rate and the developer’s marketing strategies over the next few months.
Despite brisk sales, there is a small probability these projects may be left with a small number of unsold units close to their ABSD deadlines
This article appeared in The Edge Property Pullout, Issue 719 (March 14, 2016) of The Edge Singapore.