Boutique developer distress

By Michael Lim

/ The Edge Property |

May 20, 2016 10:00 AM SGT

At JLL’s upcoming auction on May 24, a handful of houses will be put up for mortgagee sale. Four out of the five mortgagee sales are said to have originated from a developer. The developer is believed to be C&C Development, which was started by entrepreneur Ritchie Chua and incorporated in 2009.

This could signal the start of a wave of distressed sales from boutique developers who entered the market at the peak in 2013 and now find themselves cash-strapped and unable to complete the construction of their properties, says Grace Ng, veteran auctioneer and deputy managing director of Colliers International.

Three of the four houses developed by C&C Development that have been repossessed by the bank are semi-detached units in Serangoon Gardens, while the fourth is a detached house in Seletar Hills.

C&C Development could have overextended itself by acquiring a series of sites in quick succession at the top of the market, according to property agents familiar with the company. This is borne out by the previous caveats lodged for the four sites, all of which were made at the peak of the last property boom, between May and July 2013.

The semi-detached 60 Burghley Drive will be put up for auction with a guide price of $3.8 million on May 24

In Serangoon Gardens, C&C Development built a new three-storey semi-detached house with a built-up area of 4,500 sq ft at 60 Burghley Drive. The developer had purchased the 999- year leasehold, 2,800 sq ft site for $3.15 million ($1,125 psf) in May 2013. On the site was a single-storey, semi-detached house that has since been torn down to make way for the new structure. The new house is said to have received its Temporary Occupation Permit (TOP), but has yet to obtain its Certificate of Statutory Completion (CSC). The property will be put up for auction with a guide price of $3.8 million ($1,357 psf).

The house at 60 Burghley Drive was not the only purchase made by C&C Development in May 2013. Shortly after, it paid $5.86 million ($1,105 psf) for a 999-year leasehold, 5,296 sq ft bungalow site at 62 Berwick Drive. The developer then sub-divided the site into a pair of semi-detached houses with a land area of 2,650 sq ft each.

The built-up area of each three-storey unit is 2,960 sq ft. While the exterior of the house appears to be completed, the interiors are still unfinished. Therefore, the properties have not obtained TOP yet, according to agents. The guide price for the two semi-detached houses at 62 and 62A Berwick Drive is said to be $3.5 million each.

The pair of semi-detached houses at 62/62A Berwick Drive will be put up for auction by JLL on May 24. Both are mortgagee sales.

In July 2013, C&C Development purchased an old detached house at 122 Mimosa Crescent in Seletar Hills for $8.68 million ($1,064 psf), according to a caveat lodged then. The former house has since been torn down and redeveloped into a 16,200 sq ft bungalow with four storeys and a basement.

The house is also partially completed and has not obtained TOP. The property sits on a freehold land with an area of 8,157 sq ft. The guide price of the property at the auction is $10 million ($1,226 psf).

High acquisition price The developer secured all three sites at relatively high prices — an average of $1,100 psf — observes Sharon Lee, head of auction at Knight Frank. “Only an individual buying a house for his own use will pay such prices,” she says. “A typical developer would generally offer prices in the range of $800 to $900 psf as they need to price in the construction cost.”

Assuming an average cost of $300 psf to $400 psf for the construction of a house, Lee reckons that the 4,500 sq ft semi-detached house at 60 Burghley Drive could have been built for $1.35 million to $1.8 million. She estimates the pair of semi- detached houses at 62 and 62A Berwick Drive to cost between $890,000 and $1.2 million each. Meanwhile, the construction cost of the 16,200 sq ft detached house at Mimosa Crescent may have been in the ballpark of $4.86 million to $6.5 million.

This means the estimated total cost of the semi-detached house — land and construction — at Burghley Drive is $4.55 million to $4.95 million, while the pair of semi-detached houses at Berwick Drive are likely to round up at $7.64 million to $8.26 million. Meanwhile, the detached house at Mimosa Crescent is estimated to be in the range of $13.54 million to $15.18 million. The guide prices of the properties are below these estimated costs.

This four-storey detached house at 122 Mimosa Crescent with a built-up area 16,200 sq ft will be put up for auction by JLL

The developer’s string of site purchases coincided with the introduction of the total debt servicing ratio loan framework at end- June 2013, which put a limit on people’s ability to borrow for their property purchases. The TDSR had further dampened market sentiments and the overall buying mood as it came within months of the hike in the additional buyer’s stamp duty (ABSD) in January 2013. “The developer may not have anticipated the downshift in the market following the TDSR,” concedes Mok Sze Sze, head of auction at JLL.

Redevelopments Besides the TDSR, which constricted the pool of buyers in the landed housing segment, developers themselves were hit by the hike in ABSD to 15% in January 2013. For residential developments with four or fewer units, developers are only eligible for a remission on the 15% ABSD if they complete construction and sell all the units within three years of acquiring the site.

When it comes to distressed assets, banks usually give an individual between three and six months to sell a property on his own, says Mok. “If that fails, the bank will step in, have the property valued and appoint an auction house to sell it.” For developers, it’s more difficult to gauge as the company may have other business dealings with the bank, she adds.

Another mortgagee sale in the Serangoon Gardens neighbourhood is an existing 2½- storey semi-detached house on Braemar Drive. The former owner, believed to be an individual, paid $990,000 for the 999-year leasehold 2,800 sq ft site in January 2007. The old property was rebuilt into the current 4,650 sq ft house, which was com pleted in 2013. The first time the property was put up for auction was in December 2015. It was last put up for auction by JLL in April with an opening price of $4.2 million, and was withdrawn without a bid. It is now available for sale by private treaty with an indicative price of $4.5 million.

At Braemar Drive, a 2½-storey semi-detached house on 999-year leasehold land is available for sale by private treaty, with an indicative price of $4.5 million

There has been a rise in the number of mortgagee sales of landed homes in Serangoon Gardens, Yio Chu Kang, Bukit Timah and the neighbourhoods of Bedok and Changi in the east, according to Colliers’ Ng. This is because a lot of the boutique developers have zoomed in on popular landed housing estates, purchasing old houses on relatively large sites and redeveloping them for sale, she adds.

Serangoon Gardens has been particularly popular with both owner occupiers and boutique developers as it is an established residential estate and is sought after by expatriate families given its proximity to two international schools, the Australian International School and French International School. Over the past decade, a lot of investors were also attracted to the area due to demand from expatriate families. Many of them snapped up old houses and redeveloped them into 2½- to three-storey homes.

Spike in mortgagee sales of houses Based on data by Colliers International, the number of houses put up for mortgagee sale has spiked from just four in 2013 to 50 in 2015 (see table).

Source: Colliers International Research

It looks like the number is set to increase this year. In 1Q2016 alone, close to 20 of the landed properties that were put up for auction were mortgagee sales. Most of them were corner terrace houses, semi-detached and detached houses. Some were strata landed homes. “ Generally, for the bigger landed properties such as bungalows or semi-detached houses, mortgagee sales occur because of business failure,” says Colliers’ Ng. “This is because the owners are likely to be entrepreneurs who may have mortgaged their properties to support their businesses.”

With the economic uncertainties, turbulence in the stock market, corporate restructuring and retrenchments across many sectors, auctioneers foresee more properties being placed under mortgagee sales. “ Borrowers who are experiencing difficulties servicing their loans are facing challenges in disposing their properties owing to the higher price tags that come with these larger landed homes,” adds Ng.

Landed property is also restricted to Singaporeans and permanent residents who also require approval from the Singapore Land Authority’s Land Dealings (Approval) Unit. PRs are also subjected to a higher ABSD of 5% for their first property since 2013. “Therefore, the pool of buyers with financial means has shrunk further, and they are spoilt for choice today,” says Ng. Therefore, the bigger landed homes are taking a longer time to sell and are likely to be put up for auction multiple times, she adds.

This article appeared in the City & Country, Issue 729 (May 23, 2016) of The Edge Singapore.

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