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They pick up prime lots and build luxury homes in order to hedge - risks and raise profit margins

Burnt by the slump in their industry over the past few years, many construction groups are turning to property development as a way to hedge risks and boost profit margins.

Major contractors such as Chip Eng Seng and Straits Construction have diversified into a wider range of development work: from buying land plots to building residential projects to marketing and selling the finished units.

By not limiting themselves to their traditional contract-based work of designing and building homes, such firms are lifting profits and riding on the recovery in property development.

Chip Eng Seng, for one, has snapped up four collective sale sites in the past two years. Although construction still makes up two-thirds of the group’s revenues, two-thirds of its profits now come from development, managing director Raymond Chia said.

‘We first branched into development as a way of portfolio management, because contracting and property have different risks.

And right now, for us, property is more profitable than contracting.’

To reflect its greater emphasis on property development, Chip Eng Seng recently rebranded its real estate arm and signed a joint venture agreement with Lehman Brothers to develop a luxury project on the Venus Mansion site at Cairnhill, which it bought in April.

Straits Construction’s property arm, Hoi Hup, has launched eight residential projects since 2004, the most recent being The Bale at Telok Kurau.

Another contractor, Koh Brothers, will launch two condominiums at the beginning of next year. They will be built on prime collective sale sites that it has picked up during the past six months:

Hilton Towers at Leonie Hill and Alocassia Apartments on Bukit Timah Road.

The group’s real estate division, started in 1993, now contributes 30 to 40 per cent of revenues, said executive director Francis Koh, adding that the diversification ‘has given us very good income and is very profitable’.

‘Turnover in the construction industry has fallen since the late 1990s, and only started to pick up recently. But when construction volumes are down, our property development side will help out.’

Some of these contractors are not new to the business of property development, having dabbled in it as early as the 1980s.

However, increased competition and fewer jobs in construction - thanks to the property downturn in recent years - have led them to expand their development business.

These companies would rather pour their resources into property development, which is rallying as the property market turns around, than wait for the five-year slump in the construction sector to end.

Hoi Hup property manager Bridget Tan said: ‘The construction cycle is still in the midst of recovery, so we have switched more to development for now because the property market is picking up.’

Lured by the current upswing in the high-end residential sector, contractors are also becoming more ambitious in their property activities, acquiring prime sites on which to build luxury homes.

Over the past year, construction groups have purchased several collective sale sites in Districts 9 and 10: Hoi Hup bought Cairnhill Gardens and Kim Yam Mansion; Evan Lim & Co, The Esquire at Mt Elizabeth; and BBR Holdings, a site at St Martin’s Drive.

But instead of competing head-on with developers, some construction firms have also found it lucrative to cooperate on development projects.

Chip Eng Seng has co-developed several residential projects with NTUC Choice Homes, while Koh Brothers teamed up with developer Heeton Land to buy and develop Hilton Towers in March.

These partnerships also allow the contractors to spread their capital over a larger number of projects. Their construction business benefits from each project they are involved in.

One main advantage that construction firms have over developers is their ability to build more cheaply, they said.

‘We can control the construction costs very well as we have lobangs (contacts),’ said Ms Tan of Hoi Hup.

However, lower costs might not always translate into lower prices for the finished units.

‘We don’t want to spoil the market, so although we price competitively against the big boys, we still go by market rates, or price our units only slightly cheaper by 1 or 2 per cent,’ said Ms Tan.

Source : Straits Times - 31 Jul 2006

Are you likely to make the grade? Here are eight reasons you may - not be deemed loan-worthy

For anyone whose financial circumstances have turned nasty, downsizing his home seems like a sensible thing to do - yet it could create an even bigger nightmare.

That is what happened to Johnny (not his real name), whose wife lost her job a year ago after her employer relocated its factory out of Singapore.

Johnny found a buyer for their five-room HDB flat early this year, and soon after put $500 down for an option to buy a three-rommer.

‘He didn’t know he was not eligible for an HDB loan, and his property agent never advised him of the risks when he sold his flat,’ says Mr Dennis Ng, a spokesman for www.HousingLoanSG.com, a mortgage consultancy portal.

Johnny had gone to him for help with a bank mortgage application.

Every financial institution he applied to rejected his application after finding out that he had been late in paying his credit card debts, says Mr Ng. They did checks with the Credit Bureau, the body formed in 2002 to collate information on how credit-worthy consumers are.

Johnny lost his $500 option money as he could not complete the flat purchase. If it had been a private property, the cost would have been a more painful 1 per cent of the agreed purchase price.

Still, the consequences for Johnny were more severe than the lost option money. He had to complete the sale of his five-room flat and move out.

Mr Ng advised him to appeal to the HDB to grant him a loan, but does not know the outcome.

If Johnny had applied for in-principle approval for a bank loan before paying the option money, or even before he sold his five-roomer, he could have spared himself some agony.

Still, Mr Sazali Sarwan, a senior associate director of realty firm PropNex, says he has encountered cases where even after in-principle approval had been given, the loan failed to be granted later.

The reason: The bank learnt that the home buyer had just been sued for non-payment of some debt or, worse, for bankruptcy.

Something as seemingly innocuous as rolling over the debt on your credit cards can jeopardise your loan application.

‘Many people have the misconception that it’s alright to roll over their debt. To a bank, it is a strong sign that the consumer is a risk,’ says a banker who declined to be named.

Mr Ng says things can turn really nasty if the downgrader is unlucky enough to meet a real estate agent who persuades him to not just put down option money but also exercise the option to buy at the same time.

‘The agent says, ‘There’s another potential buyer who is also very interested in this flat. You have to exercise the option right away to make sure it’s yours.’ ‘

In such a case, the buyer of an HDB flat could suffer a loss of up to $5,000 as he would have to forfeit the money to the seller.

He could also get sued by the seller for failing to complete the buy transaction.

The irony is that he wanted to downgrade his home in order to obtain cash to pare down his debts, instead of living beyond his means.

A bad credit history is a prime reason for failed mortgage applications, but it is not the only one. Below are seven others and they are by no means exhaustive.

Says Mr Ng: ‘Many people are unaware of the danger of not getting a loan approved first before they commit to buying a property.’ Unstable income

AFTER 10 years in the navy, James (not his real name) decided to give up a regular, assured income to pursue his passion. He became a tennis coach and opened a sports shop.

When he applied for a mortgage, a bank rejected him because he did not have a track record of steady income as a self-employed person, says Ms Annie Lim, the managing director of Global Creatif Financial, a mortgage consultant.

Banks may also be stringent with other self-employed people in sales jobs, for example, she adds.

Your education level matters too. Combine a low education with only a short stint at your latest job and you become a prime candidate for bank rejection.

But it cannot get worse than being a contract worker. If you don’t have a permanent job, your chances of securing a mortgage are low, says Mr Sazali.

If you have a stable income, the bank’s loan limit could still render your application unsuccessful.

The bank will evaluate you on the basis of how much debt - including the intended mortgage repayment - you have compared with your income, or what is known as the debt-servicing ratio.

Different banks have different tolerance levels, and the maximum ratios allowed range from 30 per cent to 60 per cent, says Ms Lim.

Property type

IF YOU are buying a two-room HDB flat, you will have a hard time getting a mortgage.

As far as Mr Sazali knows, only Hong Leong Finance would consider giving you one. To other financial institutions, the loan amount is too small to be of interest.

Many banks require a minimum loan of $100,000, but a two-room flat costs only around $110,000, he says. So buyers either pay in full with cash and Central Provident Fund (CPF) savings, or switch to a bigger property.

It’s not easy get a ‘yes’ reply to your application to refinance your mortgage and ‘gear up’ - borrow more money on your property than what you currently owe the bank.

You cannot gear up for executive condominium units and HDB flats, but it is possible for private properties, subject to certain criteria, says the banker.

If you apply for a mortgage to buy an office or shop unit, do not bet on any success if you base your repayment plan on the use of your CPF savings.

Starting from this month, CPF savings cannot be used for the purchase of commercial properties.

Sometimes, it is not clear whether a bank views a property as being residential or commercial.

That is how you might find yourself receiving a letter of rejection for your mortgage application.

For example, you might be eyeing a unit on the second level of a shophouse, or a Soho (small office, home office) unit.

You apply for a big loan of, say, 90 per cent of the purchase price. Your application will be rejected if the bank considers the unit a commercial one, for which it grants a maximum loan of 70 or 80 per cent, says Mr Ng.

He knows someone who bought the second-floor unit of a conservation shophouse in Tan Quee Lan Street, off Beach Road.

Though he meant it for family accommodation, some banks he approached considered it commercial property.

It is not just the maximum loan quantum that is different but also the interest rates.

These are higher by one percentage point or more for commercial units, so you might bust the maximum monthly repayment a bank will allow based on your income.

‘Bad’ locationPROPERTIES in red-light districts cost relatively less but they can provide high rental yields.

However, do not count on getting a bank loan easily, or one with ‘normal’ rates.

As an article in this newspaper today says, you can expect to be turned away by many banks if your intended purchase is in Geylang or other red-light districts.

Fallen value

LET’S say you are among many people whose homes have fallen sharply in value since their purchase during the past 10 years.

Assume the value of your home has fallen to $500,000 now and your outstanding loan is also $500,000.

You are not happy with the higher mortgage interest rate that your bank is charging and you want to switch to another bank.

Be prepared for disappointment, as the new bank will say that the loan amount cannot exceed 80 per cent of the valuation, says Ms Lim.

Short leaseFANCY that old apartment in Chinatown?

Such properties go cheap as the remaining lease is relatively short, but banks worry that the property value will dwindle over time.

That is why your loan application might be rejected when you want a repayment period longer than what banks will agree to, says Mr Ng.

He cites the case of a businessman-investor who wanted a loan to buy a bungalow with only 41 years of lease left.

The man wanted to repay the mortgage over 20 years but the bank refused. The maximum it agreed to was 11 years.

Properties with a lease of less than 60 years come with another disadvantage: The CPF withdrawal limit - the maximum you can withdraw from your CPF savings to repay the loan - is far lower than for other properties.

Instead of 132 per cent of the purchase price or the valuation, whichever is lower, the limit can be as low as 42 per cent.

The exact figure depends on your age and the remaining lease of the property, says Mr Ng.

Under-declarationBE TRUTHFUL in whatever information the bank asks for in the mortgage form - or your application could be jeopardised, says Mr Bryan Ong, a senior associate manager of PropNex.

For example, if you own three properties, do not declare only one.

‘If you are not upfront with the bank, and it discovers something about you, it may not give you the loan,’ says Mr Ong.

Ms Lim agrees, saying that sometimes clients think they can get away with not revealing certain information - or worse, providing misleading information.

Multiple investmentsIF YOU have a few investment properties and are collecting rental on all of them, it might seem that you are in good shape.

But in assessing your debt-servicing ratio, as described earlier, many banks apply stringent criteria to assess how much they will lend you for the next property purchase.

Banks will not consider any rental income you declare unless the tenancy agreement is stamped - that is, stamp duty has been paid on it to make it a document recognised by the law, says Mr Ong.

And as little as 70 per cent of the rental income will be deemed yours by the banks as they know you have expenses such as income tax on the property, he says.

In addition, based on the tenancy agreement, the bank will consider only rental income that is assured for at least nine months more, based on the length of the outstanding tenancy, he adds. The criteria differ from bank to bank.

Source : Sunday Times - 30 Jul 2006

Recently launched projects have almost sold out even though some - units have topped $3,000 psf

PRICES of luxury homes may be surging to new highs but they are still selling like hot cakes, with recently launched high-end projects almost completely sold out.

City Developments (CDL) has sold about 95 per cent of its Oceanfront @ Sentosa Cove since the 257-unit waterfront condominium was launched two weeks ago, while its ultra-posh St Regis Residences is left with only about 30 of the 100 units released for sale.

Oceanfront is fetching more than $1,400 per sq ft (psf), up about 3 per cent from its original launch price. The 174-unit St Regis is averaging between $2,600 and $2,700 psf, with some units hitting highs of more than $3,000 psf.

Another CDL project, Residences @ Evelyn in the Newton area, has had more than 70 units taken up out of the 106 units released in late May at an average price of $1,240 psf.

At Keppel Land’s 157-unit Ritz Residences on Devonshire Road, which it started selling in April, about 80 per cent of the 117 units released so far have been snapped up at an average price of at least $1,400 psf.

Other luxury projects are expected to come on the market soon, such as Hong Leong Holdings’ 85-unit Tate Residences on Claymore Road and CapitaLand’s Scotts HighPark next to the Newton MRT station.

CapitaLand said it would launch its 73-unit development within this quarter. Market-watchers have suggested that the project will be priced in the region of $1,300 psf.

Despite their soaring prices, high-end homes remain good investments: Both the capital values and rents of such properties have risen steadily.

Average capital values of luxury apartments went up by 4.6 per cent in the second quarter this year to hit $1,580 psf, while those of prime freehold condominiums climbed by 3.2 per cent to $910 psf, according to a report released last week by property consultancy DTZ Debenham Tie Leung.

It added that monthly rents of high-end homes in prime residential districts have also increased, by 5.5 per cent in the three months from April to June to average $12,500.

This leasing demand is being driven by companies - especially those in the fast-expanding financial and services sectors - hiring more senior expatriates, DTZ said.

‘Similarly, prime rents are expected to continue to increase, with new completions in the high-end segment and lifestyle-driven developments taking the lead.’

Foreign buyers continue to account for a large proportion of the strong demand for luxury homes, making up 45 per cent of all purchases at the highest end, where prices exceed $1,115 psf, said property consultancy Colliers International.

The proportion is even higher for selected top-tier residences.

At St Regis, 65 per cent of the buyers are foreigners; the figure is said to be 80 per cent for Far East Organization’s Orchard Scotts.

Source : Sunday Times - 30 Jul 2006

Family forfeits $22,000 in booking fees for condos in Geylang - red-light area after banks reject loan application

PROPERTY experts will tell you that one of the most important considerations when buying a piece of property is - location, location, location.

If that property you are eyeing happens to be in a red-light area, this cannot be more true.

And for good reason: You may well be unable to get a bank loan for it.

First-time home buyer Lim Chuan Jer and his family learnt this lesson the hard way - and are now $22,000 poorer.

Mr Lim, 30, his younger brother and their widowed father had intended to buy one unit each at the Atrium Residences condominium in Geylang Lorong 28 earlier this month.

To secure the three freehold units, they put down $91,000 collectively - or 5 per cent of the units’ total selling price - as booking fees.

But Mr Lim started hitting brick walls when he approached banks for financing. He needed a 30-year loan of $400,000 on his unit but was turned down by no fewer than seven banks, including DBS Bank and Standard Chartered.

Only finance companies Hong Leong Finance and Sing Investments and Finance said yes.

This, despite Mr Lim earning more than $50,000 a year as a product manager with a publishing company and having a clean credit history, he said.

‘I had no problem getting a car loan previously, so I didn’t think that it would be a problem getting a housing loan from the banks. It never occurred to me that the location was the problem.’

He added that the condominium was located in the residential zone of Geylang, under the Urban Redevelopment Authority’s Master Plan 2003.

The family had chosen Geylang because it is in the east - near to where they live in a terrace house at Siglap currently - and yet close to the city centre. Prices of private apartments there, which average $500 per square foot, are also about 10 to 15 per cent cheaper than those in nearby areas such as Katong.

Because of Mr Lim’s experience with the banks, his brother, 27, and businessman-father, 60, decided not to go ahead with their purchases as well.

This meant that the three of them ended up forfeiting a quarter of their booking fees amounting to $22,000.

The family’s fear was that they would find it hard to sell their units in future, should financing also prove to be a problem for their potential buyers.

Banks contacted stopped short of admitting that they discriminate against any one location, saying only that the location of the property is among several factors they consider when reviewing mortgage loan applications.

The Monetary Authority of Singapore said it does not intervene in banks’ commercial decisions on lending, which are based on their own range of internal credit evaluation criteria.

But industry experts note that banks may also have concerns about selling off such properties in the event of customers defaulting on the loan, resulting in repossession by the bank.

Said DBS Bank: ‘We do not offer financing for properties that are of potentially higher credit risks to us as the current and future value of the properties are subject to several other factors like the condition, type of business and location of the property and its surroundings.’

Six other banks including local players OCBC Bank and United Overseas Bank and foreign banks Citibank Singapore and Maybank Singapore, said the borrower’s ability to repay the loan is a key factor.

OCBC Bank’s head of consumer secured lending, Mr Gregory Chan, added that the bank will consider financing properties in Geylang ‘as long as they are used for a lawful purpose’ and the application meets its credit evaluation and guidelines.

Generally, banks do not finance properties located in the even-numbered lorongs between Geylang Lorong 2 and 28, which is known as the red-light district, said lawyer Lie Chin Chin of Lie Kee Pong Partnership and Ms Angeline Lim, senior marketing director of realtor ERA.

In these cases, home buyers would go to finance companies or pay cash, said Ms Lim, who has sold several properties in Geylang.

But it is prudent for home buyers to do their homework before they sign on the dotted line, said Mr Dennis Ng, spokesman for www.housingloansg.com, a portal that provides analysis of housing loans.

‘Before you commit any cash to buying a property, make sure you get the bank’s approval for the loan first, regardless of the location of the property,’ he said.

‘I had no problem getting a car loan previously, so I didn’t think that it would be a problem getting a housing loan from the banks. It never occurred to me that the location was the problem.’ - MR LIM CHUAN JER who was rejected by no fewer than seven banks hen he approached them to finance his purchase of a Geylang condominium unit.

Source : Sunday Times - 30 Jul 2006

All things considered, analysts see no looming shortage despite some indications to the contrary

Is the supply of private homes tightening as some developers have been suggesting? Official figures released yesterday showed that the number of private homes available in projects approved for sale fell in the second quarter of this year to the lowest level in almost 10 years.

But there seems to be no looming shortage. The overall supply of private homes - factoring in a longer time horizon and planned supply as well as projects under construction - rose 13.8 per cent year-on-year in Q2.

‘These days it doesn’t take very long for projects to receive approval for sale,’ a property consultant said, while interpreting the figures. ‘If developers see strong demand, they’ll quickly get sales permission and add to the pool - so we can’t conclude there’s a shortage of homes building up.’

BT’s analysis of the Urban Redevelopment Authority (URA) data released yesterday shows that the number of unsold private homes in projects approved for sale shrank to 9,761 at end-Q2 - the first time it has fallen to four digits since Q3 1996.

The Q2 figure - which covers launched but unsold units, as well as yet-to-be-launched units in uncompleted developments that have secured Housing Developer Licence and Building Plan Approval - was 13.2 per cent lower than in Q1 this year. And compared with Q1 last year, the decline was even bigger at 21.3 per cent.

But the overall supply of private homes - which covers not just projects with approval for sale but others further back in the development stream - increased 13.8 per cent from Q2 2005 to 52,251 units at end-Q2 this year.

A further split of overall supply shows that while stock from projects under construction edged up just 0.9 per cent year-on-year to 24,711 at end-Q2, the year-on-year increase for planned projects was much sharper at 28.5 per cent.

This was particularly the case for supply from projects with provisional permission (up 27.4 per cent year-on-year to 10,701 units in Q2 2006), as well as other potential supply (which more than doubled from 2,467 units in Q2 2005 to 6,538 units in Q2 2006) from sites on the government’s reserve list that have been triggered for sale by developers, as well as other developments submitted for approval.

‘There have been a lot of en bloc sales and other land deals, so developers keen to lock in development charge rates would be busy making development submissions and securing provisional permission,’ said a property consultant.

While the jury may be out on whether there could be a private housing shortage, there was cheer all round for the property market from URA’s figures released yesterday. Its private home price index rose 1.8 per cent in Q2 from Q1, higher than the 1.5 per cent gain reported in Q1.

The latest Q2 increase is also the best quarterly showing by the index in slightly over six years.

The private residential rental index posted a 2.1 per cent quarter-on-quarter gain in Q2, surpassing its 1.1 per cent rise in Q1. The office rental index rose 6.6 per cent.

And prices and rentals for shops and industrial spaces also continued to appreciate in Q2.

Developers sold in 2,527 private homes during the quarter, up 36 per cent from Q1 and taking first-half primary market sales to 4,385, slightly higher than 4,030 units in the same period last year. The top-selling projects in Q2 were One Amber (182 units), Southbank (178), The Beacon at Cantonment Road (115), The Quartz in Buangkok (100) and One Jervois (95).

The number of private homes that changed hands in the secondary market rose 33.6 per cent from Q1 to 3,118 units in Q2 - the best quarterly figure since Q2 1999.

Market watchers attribute the surge to the wave of collective sales - which are reflected as secondary market transactions - and a dearth of new launches in the mass-market segment, which could have driven potential buyers to the secondary market.

Yesterday’s URA data also showed that a slew of private residential projects received provisional permission in Q2.

They include: a 400-unit condo at the Business and Financial Centre site; 412 apartments at One North being developed by UOL Group, Kheng Leong Company and Low Keng Huat; 610 apartments at The Centris in Jurong West; and a 322-unit condo at Meyer Road by CapitaLand.

Also receiving provisional permission in Q2 were: Singapore Telecommunications for the development of 330 apartments at 71 Robinson Road; Frasers Centrepoint to develop a 240-unit condo at West Coast Road; and Brisbane Development to build 30 strata semi-detached homes at Old Holland Road.

Source : Business Times - 29 Jul 2006