How will Covid-19 and cooling measures such as ABSD impact the property market?

Last Wednesday (Feb 19), Deputy Prime Minister Heng Swee Keat told Bloomberg TV in an interview that the Government has no plans to ease property cooling measures.

“It is not on our radar at this point because we need to make sure that we stabilise the economy and we address long term structural issues,” he said.  

This is understandable given that the Covid-19 outbreak has led to a percentage point downgrade in the official forecast of Singapore’s economic growth this year.

At the same time, the outbreak will also have an adverse impact on the private residential market, with spillover effects on the entire real estate value chain and the longer-term stability of the property market. 

Why is this so?

Let’s take a look at where the market stands today as well as cooling measures such as the Additional Buyer’s Stamp Duty (ABSD).

Currently, developers now must build and sell all their units in a project within five years to get a remission of the ABSD on the land purchase price.

Otherwise they will have to pay the 25 per cent ABSD, with interest.

ABSD was 10 per cent when it was introduced in Dec 2011, before it was raised to 15 per cent in July 2013 and the current 25 per cent in July 2018.

In 2020, developers are going to launch some 10,402 units from 48 projects, based on Cushman & Wakefield Research’s estimate. Of these, 4,765 units or 46 per cent will come from the luxury segment or the Core Central Region (CCR) segment.

Traditionally, about 28 per cent of the buyers of CCR homes are permanent residents and foreigners from China, which has been hard hit by the Covid-19 outbreak.

Singapore has since banned travellers who have visited mainland China recently, and the majority of that includes Chinese passport holders who could be the potential buyers of these luxury units. In 2019, non-PR China buyers bought a total of 359 units, of which 141 units were in the CCR.

At a broader level, demand for private residential units might slow to a trickle soon, judging from the market reactions in our neighbouring countries affected by Covid-19.

As an indication of how far sales could fall, China home sales plunged by 90 per cent in the first week of February compared to the same period in 2019, according to preliminary data on 36 cities compiled by China Merchants Securities Co. 

Before the virus outbreak, the Singapore market was already expecting a more challenging sales environment in the coming months due to resistance to high prices and launch fatigue especially for smaller developments. The mood is now more bearish due to the virus outbreak.

The temporary shortage of labour will also have an impact on the property market.

Construction companies have expressed concerns about failing to meet deadlines due to workers from China not being able to return to Singapore and quarantine orders placed on affected workers in the industry.

The authorities have urged developers not to penalise contractors and subcontractors for the unexpected delays.

Beyond a temporary labour shortage, construction companies face a bigger and complex challenge arising from the global supply chain disruption caused by the lock-down in many China cities, with factories remaining shut or operating with reduced capacity.

In Singapore, construction material and finished products are not expected to arrive in time for assembly or use. As manufacturers in China and the entire world are so interdependent, it is hard to predict how soon manufacturing would resume and at what capacity.

What has made the situation more dire for Singapore construction firms is the mandatory adoption of the pre-fabricated pre-finished volumetric construction (PPVC) method at many Government Land Sales sites.

Modern construction technology such as PPVC requires all components to be assembled off-site before they are delivered to the project site under construction. These include door, glass panels, tiles, sanitary ware etc. It does not allow construction to proceed if there is just one missing item.

Although the current supply chain disruption would likely impact all stages of construction, the impact on PPVC construction would be more pronounced.

The construction delay and the ripple effect beyond the short to medium term could have serious repercussions on the already fragile residential market.

In about two to three years’ time, the Singapore residential market could deal with a supply overhang arising from the enbloc boom between 2017 and 2018.

At the same time, all developers are bound by a five-year ABSD remission deadline that is fast approaching amid slower sales.

On the supply front, there are 49,173 uncompleted private residential units (excluding executive condominiums) with planning approval.

Of this, 30,162 remain unsold. There are also an additional 4,575 private residential units that do not have planning approval yet.

Based on the 9,912 units sold in 2019, it should take developers roughly about five years to clear the existing stock and narrowly escape the ABSD penalty, assuming sales momentum in 2019 can be maintained this year.

Looking at how things are now, it is unlikely that developers will be able to sell their projects at the same pace as previously anticipated. 

In short, they could be hit with a double whammy – construction delays and potentially missing the ABSD deadline due to unforeseen circumstances which are no fault of theirs.

Developers could slash prices drastically to try to move units but this could have a destabilising effect on the market as a whole.

It is still fairly early days and how long the outbreak will last and how exactly it will affect the broader economy and the property market is still unclear. 

But if the outbreak worsens, there is a case to be made for the authorities to extend the current ABSD deadline.

The point is not only to provide much needed relief for developers, but to cushion the impact on the property sector.

As it is, the current ABSD rule is too blunt a tool, as it does not differentiate the larger projects of hundreds or even thousands of units, from the smaller ones.

As the economy is expected to head south, the larger projects have a much higher chance of missing the deadline, as they typically require a much longer time to sell out all the units especially during challenging times like now.

An extension of the ABSD deadline would help developers to stagger new home sales and manage risks better arising from supply overhang.

It would go a long way to help the market, long after the virus blows over, to avert a worst-case scenario that housing units are dumped in the open market in a disorderly manner, hurting both consumers and the economy.

ABOUT THE AUTHOR:

Christine Li is head of research for Singapore and Southeast Asia at global property consultancy Cushman & Wakefield.