Most home buyers are familiar with the concept of Additional Buyer Stamp Duty (ABSD) that applies to them. What is less well known is that property developers also have to pay ABSD; and this additional tax shapes several decisions. From the way developers value their properties to development concepts, the ABSD for developers has a significant – but not directly visible – effect on home buyers. Here’s what you should know about:
What is ABSD for developers?
The ABSD for developers is a tax that is levied on the price of land. This is 30 percent of the property price, which is paid in advance. It applies to any development made up of five or more units (this is practically any housing estate in Singapore).
However, developers can receive a transfer of 25 percent of the land price provided the project is completed and fully sold within five years.
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The main reason for this is to prevent land hoarding. If there was no time limit, one developer – or several developers – might plan to buy up land but refuse to build anything. Over time, this would create artificial housing shortages and drive up residential property prices.
However, there are other reasons for ABSD among developers; B. Curb the exuberance of en bloc sales and put pressure on developers to keep homes affordable (when prices are exorbitant, it is difficult to sell all units before the deadline).
While this is largely viewed as a “developer’s headache,” it can also affect home buyers and owners. Some of the factors are:
- The pricing for new launch properties
- The starting time for new projects
- Block prospects
- Innovation and development concepts
1. The pricing for new launch features
On the one hand, a deadline of five years could force developers to keep prices manageable. and it can even lead to occasional discounts. The most recent example of this was the fire sale at 38 Jervois. The remaining units were sold at discounts of up to 24 percent as the developer rushed to meet the ABSD deadline.
This is relevant to home buyers in several ways. This is the primary concern of those buying early bird discounts: buyers are often assured that they will get an “instant profit” buying during the VIP phase or earlier launch phases if the price later normalizes. However, an upcoming ABSD period may put an end to this prospect as buyers can get bigger discounts in the later stages of the launch.
There are even market watchers focusing on properties that were launched around five years ago in hopes of finding ABSD on-time discounts. When a developer only has four or five units left, it is better to dump them with little loss than to pay 30 percent of the land price.
We should point out, however, that discounts and perks aren’t just for home buyers.
Very often it is the larger players in the real estate market who can really take advantage of such advantages. Remember that the developer must evacuate any remaining units. Even if one or two are not sold, it means there is no ABSD remission. Therefore, larger players often receive discounts who agree to buy up all of the remaining units at once.
ABSD-related fire sales are most devastating for the earliest buyer groups as the transaction amounts can be significantly lower than the amounts originally paid. If anything, it’s probably better to motivate agents to move the units so the developer can keep their price (and reputation).
2. The start time of new projects
A common question is why developers would start new projects even in the seemingly worst of times. The final example of this would be properties that started near the circuit breaker time. After all, HDB has postponed the introduction of BTO apartments due to Covid-19.
(Some of the launches near the breaker time, like Kopar in Newton and The M, sold well anyway; but that doesn’t change the fact that launching near the height of the pandemic in Singapore was quite a risk. )
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Before that, we also saw projects that started shortly after the cooling measures. The Woodleigh Residences were restarted in May 2019 at a price that was around 10 to 15 percent below the original start in October 2018.
The first start had not gone so well, it was probably too close to the new cooling measures that were passed in July 2018 (buyers tend to wait immediately after the cooling measures if prices fall).
If you’re wondering why developers don’t just plan their launches further away from these events, the answer is often related to the ABSD deadline. Few developers have the luxury of waiting, and this sometimes translates into real estate launches even during troubled times.
One potential danger is that home buyers may choose to transact in an uncertain economy because they do not want to forego an essential location.
3. Block prospects
One of the puzzling elements of ABSD for development is that a minimum of five units does not take size into account at all. Treasure at Tampines, with over 2,200 units, has to be completed and sold in five years. MeyerHouse, which has only 56 units, is also given the same five-year period. Hence, developers are not convinced to buy large plots because of the risk involved.
This is detrimental to some home buyers, especially those who choose to buy a home in large developments. This is unfortunate as larger developments tend to offer better affordability.
Outside of unit prices, consider maintenance fees when it comes to affordability: the smallest units at MeyerHouse have maintenance fees starting at $ 1,300 per month, while Treasure at Tampines has the lowest fees starting at around $ 150 per month.
Granted, these two examples are at the very end of the spectrum – but the general principle applies throughout. Smaller developments do not have the same economies of scale that the broader market may not benefit from.
4. Innovation and development concepts
Aside from a few standout examples (like The Interlace and the fun Savannah Condopark), a common complaint is that Singapore condos all look the same. Buyers have started to notice that developments are not unique and are generally cookie-cutter versions of one another.
For example, even if you’ve never owned a condo, you can probably cross off a list of facilities that fit thousands of condo developments: pool, BBQ area, gym, tennis court, etc. At this point there is so little differentiation that it is enough to Simply use your EZ-Link as a condo pass to get the news out.
This is not for lack of originality; It’s just a matter of time. Developers who choose radically new concepts are taking a huge risk.
ALSO READ: 6 tips to maximize your profit from selling your HDB apartment
Remember that during this period architecture firms are brought to pitching, developing the concept, creating marketing plans, building the show flat, building the development and selling all units – all within 5 years. As such, developers are encouraged to play it safe and adhere to established standards.
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It’s also worth considering that ABSD has increased over time – it used to be only 15 percent (a long time ago in 2011), and complete remission was possible. Doubling the rate was a criminal offense and has significantly reduced developers’ margins.
Together with rising land costs (increased competition from foreign developers) and construction costs, the current margins are no longer as high as they used to be.
With lower margins, of course, it becomes increasingly difficult to take a risk on a multi-million dollar project. This means a smaller budget, which also keeps them from new innovations or concepts.
This does not mean that ABSD is bad for developers or should be removed.
It has an important role in the Singapore private real estate market and landhorters would have a serious impact on the market. However, it may be time to tweak the rules slightly.
A simple change could be to vary the ABSD remission based on the number of units remaining. That is, a developer with five percent of the units remaining could achieve greater remission compared to a developer with 50 percent of the units remaining. This could be further modified to accommodate different development sizes so that boutique, medium and mega developments are not all subject to the same deadline.
The government has shown a certain flexibility in the face of Covid-19 and granted developers extensions due to logistical problems. Varying the length of ABSD deadlines based on the circumstances and the nature of the project can also help avoid awkward start times.
This would also help smooth out the boom-and-bust cycle of en bloc sales. Right now, for example, we’re facing a resurgence of the 2017-style en bloc fever as the last tranche of condos from that era has largely been completed and sold. Five years later, we’ll likely see another onslaught as developers rush to land for the next few projects.
Finally, a more flexible approach could lead to better diversity and innovation in housing, which would benefit home buyers.
This article was first published in Stackedhomes.
