Qualifying certificate (QC) rules have generally been effective in curtailing property speculation, but pressured developers, using innovative ways to escape the harsh penalties, raise the question of whether the policy's efficacy outweighs some of its unintended consequences.
QC rules were enacted to prevent foreign developers from hoarding or speculating on residential land in Singapore.
After the global financial crisis, developers tended to delay their project launches and hold out for a good launch window.
But they can no longer do so, with the rules now requiring all foreign and listed developers to finish building their projects within five years of acquiring the site; they also have to sell all the units within two years of obtaining a temporary occupation permit.
If they fail to meet the deadline, the penalties are punitive.
They incur extension charges at 8 per cent of the land purchase price in the first year; this goes up to 16 per cent in the second year and 24 per cent a year in the third and subsequent years.
This rule essentially shortens the window that a developer can hold onto a site.
Where developers could hang onto a plot of land for much longer in the past and still expect to profit from it, they now find it tougher to make a profit if they miss the current window - the penalties will eat into their profit margins.
Without the luxury of time to build and sell, developers should thus temper their prices when bidding for land.
QC rules are not the only bugbear of developers; the other is the approaching deadline for remission of the additional buyer's stamp duty (ABSD).
Under this ruling in force since late 2011, developers have been required to develop any residential site they buy, and sell all units in the project within five years to qualify for ABSD remission.
Failure to do this attracts an ABSD of 10 per cent on land cost with interest (5 per cent simple interest per annum); a higher 15 per cent ABSD applies to sites bought from Jan 12, 2013.
Credit Suisse estimates that the combined QC and ABSD charges could rise as high as S$1.3 billion this year.
Together, these two measures force developers nearing one or both deadlines to choose between paying a tax penalty and dumping their stock at a probable loss.
Indeed, some developers have opted to make a loss.
Last week, CapitaLand announced that it was biting the bullet and bulk-selling the leftover 45 units in its luxury project, The Nassim, to a company owned by veteran banker Wee Cho Yaw's family at a steep discount of 18 per cent from current sale prices.
Tiong Aik's Meadows Property, Wing Tai, City Developments and Heeton Holdings have all made similar moves recently, offloading unsold units at discounts of 16 per cent to 23 per cent.
City Developments went a step further; it injected some of its residential properties into "profit participation securities" (PPS), a private-fund platform that pays out returns to its holders.
This is a kind of creative financial engineering, as the transfer of unsold units from the listed developer to a group of Singaporean investors enables the developer to bypass the QC rules, which cease to apply once the units are wholly owned by Singaporeans.
The danger, however, is that because the structure of PPS is so complex and not easily understood, they could essentially be shifting the risks of the property assets onto their investors - accredited and sophisticated though they may be.
Delisting is another route developers have taken to avoid QC penalties.
Two examples are the formerly listed Popular Holdings and SC Global.
Granted, the number of developers who have delisted for QC reasons have been few, and that for them, it was likely that a confluence of factors, including difficult operating conditions, led to that decision.
But it is a downer for the Singapore equity market.
Besides dampening its vibrancy, it may inadvertently hurt security investors.
If controlling shareholders are taking the companies private when valuations of the assets are low, then delisting merely allows the majority shareholders to buy over the assets cheaply while depriving minority shareholders of future gains.
Overall, while it is inevitable that companies will find ways to work around policies, it would perhaps be wise at this juncture to study certain side effects of the QC and ABSD rules to assess whether they are detrimental to the wider economy and need to be addressed.
Innovative financial engineering and delisting may be unintended consequences of these policies, but bulk sales, on the other hand, are completely consistent with - maybe even the desired outcome of - the government's continued efforts to push private property prices down.
This article was first published on January 24, 2017.
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