A tweak in time

/ The Edge Property |

September 9, 2016 9:00 AM SGT

On Sept 1, the Monetary Authority of Singapore refined the rules under the total debt servicing ratio framework for the refinancing of properties. This was done “in response to feedback from some borrowers who were unable to refinance their existing property loans, owing to the application of the TDSR threshold of 60%”, according to MAS in its statement.

Previously, only owner-occupied properties bought before June 29, 2013 were exempted from the TDSR loan framework. Now, that exemption has been extended to the refinancing of all owner-occupied properties purchased before or after TDSR was introduced.

Prior to Sept 1, owners of properties purchased for investment could refinance their loans above the TDSR threshold of 60% only if they committed to debt restructuring plans. They were also given a deadline of June 30, 2017 to pare their debt to the TDSR limit of 60%, failing which they would be given no more exemptions for refinancing.

With effect from Sept 1, the TDSR threshold has also been relaxed for property investors, regardless of when the property was purchased. They have to meet two conditions, however: to commit to a debt reduction plan and repay at least 3% of the outstanding balance over a period of three years. They also have to fulfil the financial institution’s credit assessment.

Relief for property investors

Eugene Huang, director and founder of Redbrick Mortgage Advisory, says: “The relaxation of the TDSR cap of 60% for refinancing will really help property investors, as they will now be able to refinance their properties at a lower interest rate.”

It is a relief for some older property investors who had feared having to offload their properties at less-than-ideal prices, as the previous requirement was that, if their debt level was not within the TDSR limit of 60% after June 2017, they would not be able to refinance. And when the higher interest rates kick in, and their rents are unable to help cover the monthly instalments, they would be forced to sell, adds Huang. Now, they no longer have the June 2017 deadline looming ominously.

MAS emphasises that the recent move does not represent a relaxation of property market cooling measures. “The TDSR is a structural measure to encourage prudent borrowing by households,” says Ong Chong Tee, MAS deputy managing director, in a statement.

Desmond Sim, head of CBRE Research for Singapore and Southeast Asia, says: “MAS is being proactive in responding to the voices on the ground and providing a lifeline for those affected by TDSR.” This is especially welcome in the face of a deteriorating global economy and mounting job insecurity, he adds.

The tweaking of the TDSR for refinancing will also help banks limit their non-performing loans linked to real estate. The monthly mortgage repayment usually forms a large part of household expenses, says Tok Geok Peng, executive director of secured lending, Consumer Banking Group (Singapore) at DBS Bank. “While we rarely see our customers’ refinancing requests being rejected because of TDSR requirements, this move now makes it more efficient for banks to process refinancing by existing borrowers.”

Investors with some reserves will prefer to hang on to their properties, as the replacement cost is high, owing to the additional buyer’s stamp duty (ABSD), says Redbrick’s Huang. Those without deep reserves either have already or are considering selling their properties “at whatever price they can get, as they do not foresee prices recovering anytime soon”, he notes.

Grace Ng, deputy managing director and head of auction and sales at Colliers International, echoes the sentiment. “Most of the property owners who are forced to put their properties up for sale today are those who can’t meet the TDSR requirements, and therefore can’t refinance,” she says. “They are also finding it a challenge to secure tenants — especially with competition from new supply and falling expatriate demand.” She therefore sees the relaxation of the TDSR threshold for refinancing providing a relief for such property owners.

Priced-down luxury units

Joy Tan, head of auction at Edmund Tie & Co, foresees the number of distressed sales moderating, thanks to the breathing space provided by MAS for property investors. This could also mean a drop in the number of mortgagee sales, she adds.

At ET&Co’s auction on Aug 31, a 2,153 sq ft, three-bedroom unit at Turquoise made its debut as a mortgagee sale. The opening price for the fifth-floor unit was $3.2 million ($1,486 psf). It received several bids at the auction, but the highest bid of $2.8 million ($1,301 psf) was still short of the bank’s reserve price. Had the unit been sold at $1,301 psf, it would have marked a new low for the condominium.

The last transaction at Turquoise was in June — a mortgagee sale of a 2,777 sq ft, four-bedroom unit on the fourth floor that fetched $3.8 million ($1,368 psf). It was 47% below the original owner’s purchase price of $7.16 million ($2,580 psf) in November 2007. The 99- year leasehold condo was completed in 2010 and contains 91 units in two six-storey blocks.

The 2,153 sq ft, three-bedroom unit at Turquoise will be put up for auction a second time later this month. The unit is a “value buy”, according to ET&Co’s Tan, as a caveat lodged in October 2007 showed that the previous owner had paid $5.87 million ($2,726 psf) for it at the peak of the market, when the project was launched.

2,153 sq ft unit at Turquoise made its debut as a mortgagee sale with an opening price of $3.2 million

“Mortgagee sales of Sentosa Cove tend to attract a lot of interest, similar to those in prime Districts 9 and 10,” observes Tan. “However, most of these units tend to be sold in private treaties after the auction.”

A case in point is a 1,604 sq ft, three-bedroom unit at OUE Twin Peaks in District 9. The 18thfloor unit in the first of two identical 35-storey towers was sold for $3.5 million ($2,182 psf) in August in a private treaty brokered by Knight Frank. The unit at OUE Twin Peaks was first put up for auction by JLL in April, and a second time by Knight Frank in June.

The first owner of the unit at OUE Twin Peaks paid $4.5 million ($2,806 psf) for it in September 2012. The buyer, on the other hand, is said to be a Japanese national, who paid for the unit in cash.

A 1,604 sq ft, three-bedroom unit at OUE Twin Peaks was recently sold for $3.5 million at a mortgagee sale

“The mortgagee sale represented a good buying opportunity for the new owner, who bought for his own use,” says Sharon Lee, Knight Frank’s head of auction. It marked the first mortgagee sale at the 462-unit, 99-year leasehold upscale condo on Leonie Hill Road.

There are several reasons people prefer to buy the units in private treaties after the auction, not least because the successful bidders at auctions have to pay 10% upfront and settle the balance of the payment within a fortnight. In private treaties, the down payment is just 1%, says ET&Co’s Tan. “In the event that they change their minds about proceeding with the sale, they will forfeit only 1% in a private-treaty sale, instead of 10% at an auction.”

Besides the unit at Turquoise, another highend condo in Sentosa Cove that will also see a unit listed at ET&Co’s upcoming auction as a mortgagee sale is Marina Collection. The unit is a three-bedroom, 1,873 sq ft apartment on the second level with direct views of the swimming pool and the marina beyond.

The 124-unit Marina Collection was completed in 2011. In February this year, it was reported that the High Court had given United Overseas Bank the green light to sue two real estate agents for alleged deceit and conspiracy over inflated loans for 38 units at Marina Collection.

Of the 38 units, 37 reportedly defaulted and the units have since been repossessed by UOB. Many have since been leased, according to property agents in the know. This second- floor unit that will be put up for auction by ET&Co is not one of the 37, and was repossessed by another bank. The unit fetched $5.24 million ($2,800 psf) in December 2011, according to a caveat lodged.

Owners’ sale at auctions on the rise

ET&Co’s auction last month also saw some condo units in Sentosa Cove offered for sale by individual owners — in particular, two units at The Oceanfront. The 264-unit landmark condo is located at the mouth of the marina and was jointly developed by listed property giant City Developments and TID. The project was completed in 2010 and is one of only two high-rise condo developments in Sentosa Cove.

One of the two units at The Oceanfront that was put up for auction in August was a 3,573 sq ft, triplex penthouse with four bedrooms, a study and rooftop spa pool. The penthouse is said to command a 180-degree view of the marina. The buyer paid $4.84 million ($1,355 psf) for the penthouse in October 2009. The opening price at the auction was $4.7 million, but there were no bids and the property was withdrawn.

Two units at The Oceanfront were put up for sale by auction last month by their owners

The other unit at The Oceanfront that was put up for auction was an eighth-floor, 1,894 sq ft apartment with three bedrooms and a study. The unit had an opening price of $2.7 million ($1,426 psf) and received a bid of $2.46 million ($1,299 psf). It was below the owner’s reserve price and the property was withdrawn. The owner paid $3.3 million ($1,742 psf) for the unit in January 2010, having purchased it in a sub-sale.

More owners have put their properties up for auction sale, as it is a more transparent and effective mode of reaching out to genuine buyers, says Ng. The number of owners’ sales increased from 84 to 141 from 1Q2016 to 2Q2016, according to Colliers. Meanwhile, the number of mortgagee sales remained relatively stable at 70 and 72 in 1Q2016 and 2Q2016 respectively (see Table 2).

Plight of strata shop investors, factory owners

Besides condos, many investors were also lured into buying small strata shops from 2010 to 2013, when the property cooling measures began to be introduced progressively. Many of these strata shops are located within mixed-use developments that were launched for sale then. As the strata shops were not subject to ABSD, many investors were encouraged to switch from investing in residential to commercial property. The absolute prices proved to be attractive, especially those priced from $500,000 to less than $1 million, observes Ng. “However, many of these buyers who purchased the units off-plan were new to investing in commercial space, and didn’t realise the importance of location and frontage.” The result is that some of the owners are now finding it a challenge to secure a tenant or even a buyer now that the projects are completed. The number of shops appearing at auctions have doubled from last year.

At Colliers’ auction last month, a 183 sq ft shop in Basement 2 of the newly completed freehold The Promenade@Pelikat in the Upper Serangoon area was offered for sale by an owner. The unit had an opening price of $650,000 ($3,551 psf), but was withdrawn without a bid. At ET&Co’s auction in August, a 366 sq ft unit on the first level of East Village, also a mixed-use development but located on Upper Changi Road, was put up for sale. It was a mortgagee sale, and the opening price for the unit at East Village was $1.68 million ($4,590 psf). It also received no bids and was withdrawn. Another strata shop that appeared as a mortgagee sale was a 409 sq ft unit in the basement level of Thomson V Two on Sin Ming Road. The unit was put up for auction by JLL on Aug 25. The opening price was $900,000 ($2,200 psf), but the property was withdrawn without finding a buyer.

The deteriorating business environment has also led to an increase in the number of mortgagee sales of factory units, says Colliers’ Ng. For instance, a 1,539 sq ft factory unit on the first level of North Spring Bizhub in Yishun was put up for auction at Colliers’ Aug 24 auction. It had an opening bid of $750,000, and was sold under the hammer for $838,000, slightly above its opening price of $830,000. The factory unit has a 60-year lease with effect from 2011.

Knight Frank’s auction last month also featured two industrial units, both of which were mortgagee sales. One was a first-floor warehouse unit with a mezzanine level at Oxley Bizhub 2. The 1,894 sq ft unit had an opening price of $980,000 ($517 psf). The other unit was a 1,894 sq ft factory unit with a mezzanine level on the ninth floor of the neighbouring Oxley Bizhub. The unit had an opening price of $830,000 ($438 psf). Both units, which have 60-year leases from 2011, were withdrawn.

Despite the tweak in TDSR for refinancing properties, mortgagee sales will continue to climb as global and local economic conditions continue to worsen, cautions Colliers’ Ng. She projects that the total number of mortgagee sales this year will range from 270 to 280, which brings it on a par with the level during the global financial crisis in 2008 (see Table 1).

Ng says, “The consolation is that the number of mortgagee sales today is just a fraction of the more than 2,000 units a year in the last economic slowdown from 2003 to 2005.” She attributes the drop in the number of mortgagee sales to the current low interest rate environment and the TDSR introduced two years ago, which has proven to be effective at reining in speculation and preventing investors from overextending themselves.

This article appeared in The Edge Property Pullout, Issue 745 (Sep 12, 2016) of The Edge Singapore.

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