With unstable market, new cooling measures and new property rules, more developers are thinking of backing out en bloc sale which they had acquired earlier this year.
Tee Land is the first to announce its decision of drawing away from the collective sale deal for Teck Guan Ville located at Upper East Coast.
The option to purchase agreement was signed by the company in late July 2018 and the deal value was at S$60 million.
By pulling off from the deal, it will be losing its 1% deposit already paid to the vendors.
This is among the many other companies which have decided to not to go ahead with the purchase decision.
The cause of this move is the possibility of huge losses as a consequence of the new property cooling measures became effective from July 6.
Start of this month came with Lafe Corporation’s decision of cancelling the S$57 million acquisition of a 15-unit development site Fairhaven on Sophia Road.
S$5.7 million will be forfeited on pulling off from the deal entered into in March. Total lost will be S$8.5 million which includes the transaction fees and taxes (Stamp duty amount S$2.3 million paid on contract) apart from the lost incurring due to the decision of moving away from the deal.
The new cooling measures of July, aimed at curbing the uncontrolled price increase in the private home sector, caught many large developers unprepared.
Developers were making huge deals due to an upward trend in the real estate market. But their calculations went wrong after cooling measures effects and there seems no positive hope in the near future.
The developers were expecting higher returns in their new projects by charging higher than current prices per square foot (psf).
In addition to this, there is an information that the authorities notified some developers that they will have to limit the number of homes on their en bloc sites.
This change in the building rules by authorities will require developers to build larger units with lower psf price to keep home prices affordable to the buyers.
Developers are also required to enter into an agreement in which they assure that the project will be completed as well as all units will be sold within five years.
Looking at the current situation and sentiments of the housing market, this seems to have very low chances of success for the bigger projects.
The new cooling measures followed by uncertainties in the private housing market has raised fear among the developers.
Many of them are showing reluctance in going ahead with their current deals seeing the increased chances of loss.
If they don’t go ahead, they will not only suffer from the loss of deposits depending on the contract clauses but will also face the risk of decreased reputation.
As a result of this, the property seller may not be willing to transact with them in future.
So, they have to carefully decide if they should back out from the deal or should take a risk of loss due to the lower psf price.
Developers are also facing a key question if it makes sense to bear a loss of 5 to 10 percent deposit since they will have to arrange another 5% for ABSD which is non-remittable that is effective from July 6.
Apart from these problems, the companies may also have to face the questions from the minority shareholders on the effects of the forfeiture on the bottom line.
Looking at these situations, it is very likely that the developers will go through the tough times facing the dilemma of choosing a less damaging option.