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Latest Property Cooling Measures: How Will This Impact Property Companies?

Singapore property stocks have plummeted today. At the time of writing, the Straits Times Index (SGX: ^STI) component stocks, CapitaLand Limited (SGX: C31), UOL Group Limited (SGX: U14) and City Developments Limited (SGX: C09) have fallen 5.03%, 9.81% and 16.15% respectively. So why is this happening?

Property cooling measures

The government announced two surprise property cooling measures that became effective today. This is aimed at ensuring price escalations do not go out of hand. Monetary Authority of Singapore (MAS) chief, Ravi Menon, warned investors to be careful as euphoria has led to aggressive bidding by developers for both en-bloc sale tenders and government land sites.

The Singapore property market has also seen a resurgence in prices and transactions over the past year as prices of private housing have increased by 9.1% since the trough in Q2 2017. This has already almost completely offset the cumulative price decline of 11.6% over the four-year period from mid-2013 to 2017.

Mr Menon added, “As I said, we welcome the recovery – why would anyone want the property market to continue sliding? (but) it needs to recover in line with economic fundamentals, not ahead of income growth.”

In essence, a sharp rise in price, without fundamental support of income growth, might lead to a destabilising correction in the future.

Adjustments to Additional Buyer Stamp Duty

Adjustments to additional buyer stamp duty (ABSD) have been imposed. A buyer stamp duty is the tax imposed on buyers for buying a property in Singapore. Singapore citizens and permanent residents who have yet to buy their first home will breathe a sigh of relief as there has been no change for them with rates at 0% and 5% respectively.

However, all other individuals and entities will face an additional 5% and 10% buyer stamp duty respectively. Below is the breakdown of the ABSD:

Source: MAS; author compilation

Loan-to-value limits tightened

The government has also increased the loan-to-value (LTV) limits by five percentage points for private housing loans granted by banks. Previously, a home buyer could borrow up to 80% (60% if extends past age 65 or loan is longer than 30 years) the value of the home. But now the limits have been reduce to 75% (or 55%).

This means that home buyers will now need to make a down payment of 25% the value of the property, compared to 20%. This is a substantial increase for most individuals. For instance, previously a buyer “only” needed to save S$200,000 for the down payment on a $1 million property. With the new regulations, buyers now need to make a S$250,000 down payment, a S$50,000 increase.

Effect on the property market

The new regulations will no doubt curb demand as investors have to now take into account the revised ABSD rates. Developers will also have to factor in the hefty developer stamp duty when calculating their returns on investments (ROI).

New home owners, despite having no change in the stamp duty, will also have to consider the lower LTV limits before purchasing a new home. This means that they need to save more for the down payment, potentially delaying their purchase of their first home.

How will this impact property developers?

Property developers will likely have to curtail its investments on new projects as the additional 5% stamp duty will have a meaningful impact on their ROI. Furthermore, developers who have been aggressively buying land sales may be hit as they are now facing a challenging sales environment with the new cooling measures in place.

Developers will now have to carefully manage their timeline and cashflows.

It remains to be seen what long term impact these new regulations will have on developers, but I advise investors to take a step back to let the story unfold. Even though developers’ share prices have fallen dramatically today, it may not necessarily mean a good buying opportunity if these new regulations do indeed have a negative long-term impact on profitability.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.