• Crackdown on re-issue of OTP for property purchase
In a bid to encourage home buyers to exercise financial prudence in the purchase of a home, the Controller of Housing (COH) announced on Sept 28 that the Option to Purchase (OTP) a property will expire three weeks after the Sale and Purchase Agreement (SPA) and copy of the title deeds are delivered to a potential home buyer. Under the new ruling which takes effect on Sept 28, home buyers will risk forfeiting 25% of their booking fees if they commit to new property purchases without securing the necessary finances upfront.
“The three-week validity period for the OTP is put in place to encourage purchasers to exercise financial prudence and commit to purchasing a property only when they have the financial means to do so,” says COH in a circular, as it has observed instances when the OTP was re-issued multiple times to the same purchaser for the same unit, which lengthened the option period significantly.
“The need for greater financial discipline in making property purchase decisions is especially pertinent given the current economic situation, where workers are facing uncertainties in the labour market,” adds COH.
According to Lee Liat Yeang, senior partner of Dentons Rodyk’s corporate real estate practice, buyers have three weeks from the date of receipt of the SPA to sign it and exercise the option. “Lawyers need to send the SPA to the buyer within two weeks of the OTP, which means the time-frame for the buyer is actually about five weeks from date of option,” he explains.
With effect from Sept 28, developers will no longer be able to reissue OTPs to a potential home buyer for the same unit within 12 months after the expiry of the prior OTP.
“The COH’s latest move is to remove the excess fluff in the sales process,” says Alan Cheong, Savills Singapore head of research. “An excessive number of OTP re-issue cases can potentially lead to an over-reading of the price index. However, I am confident that the COH is still pro-business and would let genuine cases through the door.”
URA had switched to recognising new home sale transactions based on options issued by developers with effect from May 25, 2015. “At that point in time, the spirit behind the change was to enable more up-todate sales status to be made available,” says Eugene Lim, ERA key executive officer.
Savills’ Cheong agrees: The URA new home sales figures for each month are made public by the 15th of the following month. “Back then, they didn’t think that developers would re-issue OTPs in great numbers,” he says.
However, with property cooling measures that included hikes in additional buyer’s stamp duties (ABSD) and changes in market conditions since 2013, some buyers required more time to dispose of their existing property, points out ERA’s Lim. “As the authorities were silent on the ‘re-issue of OTP’ until [Sept 28’s circular], market [players] took a pro-active approach to help buyers who needed more time to exercise the OTP. The authorities have finally made it clear that there would be ‘no more re-issue of option to purchase from Sept 28’.”
Developers have been willing to provide more time for buyers to exercise the OTP for two main reasons. First, the buyer would need to pay stamp duty on the purchase when exercising the OTP. “If the buyer is seeking to sell an existing home but has not managed to do so at the time they are required to exercise the option, the buyer would be liable for higher stamp duties in the form of ABSD,” says Karamjit Singh, CEO of Showsuite Consultancy.
The second reason is cash flow. “Under mortgage rules, a buyer cannot borrow from banks for the first 25% payment towards the purchase of a home, hence the buyer would need sufficient cash and/or CPF funds,” continues Singh.
HDB owners who are planning to upgrade to private homes may qualify for a refund of ABSD paid for their new purchase, if they sell their HDB flat within six months from receiving the keys to the new private flat, which could take years — depending on the stage of construction, adds Singh.
Those who wish to sell their HDB flats and use the proceeds towards the purchase of a private property may be affected. “The HDB upgrader will now have to come up with almost 40% cash and CPF within three weeks if they want to buy a private residential unit,” comments Lee Sze Teck, director of research at Huttons Asia.
The new COH directive would “remove a thin layer of demand for new homes from the segment of purchasers who clearly do not have the capacity to make the second payment — amounting to 15% of the purchase price — within 12 weeks of the purchase, and pay for stamp duties”, says Showsuite’s Singh. “Such purchasers should therefore defer their purchases until a time they are financially ready in terms of their equity position or a sale of their existing homes.”
The Real Estate Developers’ Association of Singapore (Redas) said in a statement that it is “heartened” by the flexibility to extend the validity period of the OTP for up to 12 weeks from the OTP date to allow genuine buyers more time to exercise the OTP before it expires.
“With strict TDSR [total debt servicing ratio] in place, we understand that most buyers do exercise financial prudence for their property purchases before they take up the OTP and buy only within their means,” according to Redas.
The new COH guidelines do not apply retrospectively, as preexisting commitments towards re-issuance of options between developers and buyers made prior to these new guidelines are not affected.
As such, Singh does not expect this new directive to affect new home sales, especially in the affordable mass-market segment. A case in point is last weekend’s successful launch of Penrose condominium by Hong Leong Holdings, he says. Out of the 566 units in the development, 341 units were sold as at Sept 27, representing 60% of the development.
According to Singh, “Hong Leong Holdings practised a strict ‘no-reissue’ policy. This means all the buyers would be required to exercise their options within three weeks of being served the Sale and Purchase Agreements”. The registration of interests, bookings and signing of booking documents was carried out digitally using Showsuite’s digital booking platform.
“Buyers are very prudent nowadays,” says ERA’s Lim. “All recognise that property is a medium- to long-term investment. No one walks into the showflat to buy a unit they cannot afford. Before COH’s circular, it was not illegal to ‘buy time’; with the rule now clearly stated, the market has to comply.”
Whether sentiment and pace of sales at upcoming launches will be affected remains to be seen. “Demand is still driven by very attractive bank loan rates with Sibor at an all-time low; as well as significant liquidity from past few years’ collective sales with beneficiaries looking for property investments,” Lim adds.