Just a week ago, SPK mentioned 2 possible ‘Black Swan’ events that might hinder or derail the property market recovery – 1) Tightening measures from the government and 2) More stringent loan approval criteria from banks.
Extract from blog post – “Thumbs up or down for property market in 2018?”
Coincidentally, it was reported in The Business Times this week that the Monetary Authority of Singapore is putting more scrutiny on bank loans for property development. According to the article, MAS is collecting more data from banks through a new survey to monitor their lending practices because of the steep loan-to-value ratios on development loans in some cases.
Is the party ending soon?
The current property recovery cycle has been driven by the developers (supply side) through their optimistic land tender prices and wealth creation to enbloc sellers. Hence, the government has paid more attention to what is happening on the supply side, particularly in the enbloc market that the government has limited control over. In October, it was reported that URA was seeking detailed information on the tender results of enbloc sales from marketing agents. Now, MAS is stepping in to ensure prudent lending by banks to developers when they acquire land.
Will the current property market recovery come to a halt if MAS decides to curb lending to developers?
Let’s consider a few things first:
- Developers are flushed with liquidity and strong balance sheet after selling out most of their inventories over the past few years;
- Foreign developers are deploying their funds into Singapore;
- The current enbloc market is dominated by big developers with strong financial backing;
- We have not seen speculative lending to small or unproven developers yet;
For now, MAS is probably still in a monitoring stage and not in the stage of curbing loans to developer yet. Now that developers are aware of MAS’ concerns and possible curbs in future, it might not be surprising that developers will try to replenish their landbank and secure loans as soon as possible before MAS implements any loan curb in the future.
And what may happen after MAS curb loans to developers? Developers will have less room to leverage and their returns on equity (ROE) will shrink. This leaves developers with couple of options:
- Continue to bid at high prices, at the expense of their ROE – Cash-rich developers may do so since they have surplus cash to deploy anyway. Foreign developers who want a strategic presence here may also do so at the expense of their ROE. Moreover, lower bank loan would translate to lower interest expense and developers can earn a higher profit margin and have more room to adjust their selling price
- Bidding as a consortium – More developers (particularly mid-size ones) will group together to form a consortium to bid for the land. This helps to fill in the funding gap and mitigate risks
- Reduce their land tender price – This option will bring developers nowhere. Having considered the earlier bullish prices and new launches in the market, enbloc sellers are unlikely to accept a low tender offer for their ‘superior’ properties. Enbloc market will turn quiet again
- Alternative funding instruments – Preferred convertible notes to fund developments?
For now, SPK sees little risk that such a move by MAS will derail the property market recover. If such a move is targeted towards buyers, then it will be time to ring the alarm bell.