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Staggering $238 million extension charges for property developers

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As a wealth builder, I will always try to avoid investing in property stocks because this sector is prone to many restrictive government policies due to the scarcity of land in Singapore. For many property developers, among the most unpopular policies should be the Qualifying Certificate Rules under the Residential Property Act. Under this set of rules, listed property companies are technically considered as “foreign companies” as they would have some foreign shareholders. Thus, they are obliged to sell all their units within 5 years from the date of the Qualifying Certificate or collective sale deal. Failing to do so would incur hefty penalty.

According to property consultancy firm Cushman and Wakefield (C&W), property developers may incur about $238 million of extension charges in 2016. This is certainly not a small amount to be scoffed at and it is also important to note that the extension charges are not one-off penalties. Developers would face annual charges as per the following:

  1. 8% per annum on the purchase price of the residential property for
    the first year of extension;
  2. 16% per annum on the purchase price of the residential property for
    the second year of extension; and
  3. 24% per annum on the purchase price of the residential property for
    the third and subsequent years of extension.

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From the perspective of a home-owner, this policy certainly favor them as it would have served the intent of preventing foreign developers of hoarding lands. But unfortunately, like many things in life, there are always loopholes. To get around this policy, many listed property developers had chosen to delist from SGX to avoid paying the extension charges. Examples are Popular Holdings and SC Global. Another way is for the listed company to all unsold units to a privately held Singapore company.

Thus, eventually, home-owner remains the ultimate loser because many developers refuse to lower their selling prices even during current poor market condition. This may eventually results in a lose-lose situation for both developers and home-owners because even though supply side remain resilient, the demand side will be affected. This is especially with draconian measures like the Additional Buyer Stamp Duty (ABSD). The winner is of course the Singapore government as they stand to gain revenues from both the Qualifying Certificate extension charges and the ABSD.

As mentioned above, due to my lack of circle of competence, I try to avoid in property stocks or listed companies involve in construction activities. These companies are highly cyclical in nature and their growth are always impacted by unpredictable government policies. If investors are not careful, they may end up losing monies in these counters. When the market is bearish, property sector tends to be affected as well. Those who thought that current condition present a window of buying opportunity but I would be cautious about it because in reality, this is not how the market works.

The matter of fact is that retail investors stand a very low chance of building successful wealth from the stock market because the playing field is not level. The market is dominated by the Big Boys, so called the “Whales” and unless you swim with them, chances are that you would not be making money consistently from the stock market. But what if you can spot the turning point of the market trend before the rest? What if you can spot the Big Boys’ movement and make money with them?

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Updated: February 19, 2016 — 4:30 pm

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