Desperate developers slash prices by 15% to dodge hefty government fines

This is the headline of an article published by Singapore Business Review on 7 October 2014.  You may access the article at  http://sbr.com.sg/residential-property/news/desperate-developers-slash-prices-15-dodge-hefty-government-fines#sthash.cK3bU5bl.dpuf


Clearly, Singapore's property market outlook is not rosy; how does it affect stocks like Keong Hong and KSH, which have a property development business?

Note that under the Residential Property Act, developers will have to pay an Additional Buyer Stamp Duty of 10% for land acquired after December 2011 and 15% for land bought after January 2013. 

For the case of Keong Hong, it has the following property development projects in Singapore:

• Twin Waterfalls EC -- This project has been fully sold; hence, no issue for this project; in fact, Keong Hong stands to book a hefty profit of about $17.4m (estimated) in 1H15.

• Skypark Residences RC - As of today (12 October 2014), 311 of the 506 units have been sold at an average price of $800.1 psf as compared to an estimated cost of about $624 psf (land cost $224 psf; construction contract awarded to Keong Hong as the main contractor is $317 psf; total cost is estimated to be $400 psf).  In the worst case that the project could not be fully sold within 4 years, by January 2017, the developer will have to pay the Additional Buyer Stamp Duty of 10% on the land purchase, which will translate into an additional cost of $21.19m or $22.4 psf. Though the profit margin will be eroded, it will not affect the profitability of the project significantly.  (Note that the developer could pay a fee to extend the disposal period for upto two years but if there is any unsold units at the end of the extension period, it still have to pay the full ABSD of 10%).

• The Daleys (or to be named as The Amore?) EC at Punggol Central/Edgedale Plains EC -- The project will be launched at the end of 2014; hence, TOP is expected to be in December 2018, there will be enough time for Keong Hong and its partner to move the units.

• New EC at Sembawang Avenue (next to Skypark Residences) -- there will be time for the developer to move the units as the land tender was awarded only in July 2014.

• Mixed use development at the former Joo Chiat Police Station site -- This project consists of two hotels, food and beverage outlets, and retail shops  are expected to be completed in 2016.  The hotels will be retained by the developers and the ABSD is not expected to an effect on the retail shops and F&B outlets as the demand is expected to be strong.

A similar analysis will be carried out for KSH in a later article.