Wednesday, March 10, 2010

The rise of policy risk

THE phrase ‘Catch-22′, taken from the title of Joseph Heller’s seminal work, has come to describe a double-bind scenario where one feels caught between the devil and the deep blue sea. It may also soon come to describe the situation for developers here with the recent announcement of new government measures aimed at cooling property market sentiment and avoiding a housing bubble, barely half a year after the introduction of initial measures.

While the impact on physical demand is widely expected to be minimal, the timing of this second move has increased caution within the property sector.

New demand-side measures

To recap, the measures announced were:

  • The levying of a seller’s stamp duty (SSD) on those who acquire residential units from Feb 20 onwards and sell them within a year, and
  • The lowering of the Loan-To-Value (LTV) limit to 80 per cent from 90 per cent for housing loans provided by regulated financial institutions in Singapore.

These are demand-side measures undertaken by the government to ensure that property market activity is driven by genuine rather than speculative demand, even as current subsale activity remains far below the peak levels in previous cycles.

These measures are in addition to those introduced in September last year, when the government increased the supply of land for private residential developments and removed the Interest Absorption Scheme. The latter was widely regarded as having been put in place to deter speculation in a buoyant property market.

Are they pre-emptive?

The two rounds of measures introduced were pitched as pre-emptive, and this has largely been the case. While primary market demand fell off slightly in the months following the September measures, prices still continued on their upward trend (albeit more moderately). Then in January this year, sales trebled over the previous month as prices continued to appreciate. This triggered the second round of measures.

Both times, the government acted when speculative activity was comparatively lower than at the height of the previous property market booms and overall prices were trending below previous peaks. It seems apparent that the measures are not intended to kill off genuine demand, but to forestall the exuberant behaviour that rode on positive sentiment associated with an improving economy and a still-low interest rate environment.

The focus here appears to be on encouraging greater financial prudence among prospective buyers and on ensuring that housing prices are motivated by economic fundamentals rather than ‘quick-buck’ expectations.

Limited impact is expected

In lowering the LTV limit, the government took care to state that less than 10 per cent of housing loans would be affected and that the cap would not apply to Housing and Development Board (HDB) loans. First-time buyers or second-timers upgrading would also be exempt from the new limit.

This measure effectively sets a minimum downpayment of 20 per cent for buyers. It is expected to reduce the demand for resale HDB flats from private property owners and permanent residents not eligible for HDB loans, though we do not expect the impact to be significant.

Trying to ascertain the impact of the SSD is a little more challenging. In our attempt to add more colour on this impact, we combed through the subsales since October 2009, matching them to their date of purchase to see the number of recent subsales that took place within a year of purchase. We chose October 2009 as it represents the first full month following the first round of measures introduced on Sept 14, 2009. As such, we believe the subsale data since October would have played a role in the government’s decision to introduce fresh measures.

We found that just around 10 per cent of subsales since October were for units ‘flipped’ within a year. Furthermore, more than half of these units were purchased in the first few months of 2009 when overall sentiment was still weak.

Such buyers could have had a view that the market would recover, or could have been genuine buyers who were subsequently tempted by the capital gains when the property market rebounded strongly in the second half of last year.

In other words, these buyers in a downmarket are unlikely to have been speculative buyers chasing rising prices. In any case, the headline percentage of 10 per cent itself is marginal, leading us to conclude that the impact of the SSD is not likely to be significant. Judging by the continued buoyancy of the market in the weekends following the latest measures, our analysis looks to be correct.

So where’s the Catch-22?

The latest measures signal that the government is prepared to act early and swiftly to prevent an asset bubble forming. If these measures prove to have minimal impact, policy risk is heightened and future measures are likely to be more severe. As such, strong sales may be not-so-good news for now, which effectively undermines the developer’s profit or asset-turn motive.

On the flipside, if stricter measures come our way, the risk of the property market turning becomes more real, leading to another potentially grave scenario for developers.

Demand still looks genuine

For now, buyers remain undeterred and much of the demand appears genuine. Buyers range from owner- occupiers to investors looking to property as long-term investments, with a rental yield and potential capital appreciation, to those who wish to hedge against inflation.

What next?

Supply-side strategies continue to dominate, with the expectation that the government will increase the supply of both public and private housing, such as its announcement this Monday to make available a larger supply and wider variety of sites in its land sale programme in the second half of this year.

The government also announced last Friday certain rule changes for the HDB market, largely aimed at reducing speculation and to sharpen the differences in housing benefits between citizens and permanent residents.

The re-introduction of the capital gains tax seems unlikely for now, given that speculative levels are still low in comparison to previous cycles – and simply because there is so much more that the government can do before pulling out this card. For one, it could increase the cash portion in the initial 20 per cent downpayment.

With the rise in policy risk, investors should look at developers with a lower number of unsold units within their landbank. These include Wheelock Properties and Ho Bee, as well as diversified players like CapitaLand and UOL Group. These developers are likely to be less affected by new demand-side policies.

Reits have an edge over developers as the former offers more defensiveness in an uncertain policy environment. Hospitality plays, such as CDL Hospitality Trust and Ascott Residence Trust, as well as retail landlords like CapitaMall Trust are good options.

As the government has made clear, the measures are intended to promote a stable and sustainable property market, not to kill it. A second set of measures in a short time has certainly kept developers and speculators on their toes. The blade has certainly been sharpened, but for now, it still looks far away enough to not be threatening.

The writer is an equity analyst for the property sector at DBS Vickers Securities

Source: Business Times, 10 Mar 2010

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