Getting the ‘real’ in real estate

Source : Business Times - 14 Feb 2009

New interest-absorption schemes offered by developers through banks are attracting the smart money

JUDGING by the response to the recently launched Caspian and Alexis, real estate remains a key element of the typical Singaporean’s wealth-management strategy.

While cash is still king, real estate - like gold - is something tangible to hang on to. And recent downward price adjustments are making it an increasingly attractive asset class. What is making new launches even more enticing is that investors are cottoning on to the fact that new interest absorption schemes (IAS) offered by developers through banks are very much like the former deferred payment scheme (DPS).

At the recent launch of Alexis, units were not only offered with IAS but did not come at higher prices, typically 3 per cent more. Buyers, said mostly to be Singaporean investors, homed in. The project was almost fully sold in less than a week. Considering the depth of the economic downturn, this would seem to defy logic. So, could real estate be where the smart money is migrating to now?

Looking at yields from stocks, bonds and even fixed deposits, and comparing these with IAS, which is essentially an interest-free loan on almost all new property, the argument for putting your money, or at least some of it, into real estate is compelling - especially if you subscribe to the notion that real estate values always rise in the long run.

This last point is what differentiates property buyers now from those who bought in the run-up to peak prices in 2007 - they are more realistic.

Certainly, few buyers today would be hoping to make a fast buck. Indeed, prices may actually have some way to go before they hit bottom.

Reality appears to have set in, with investment horizons now longer than the time it takes to flip a property. The only danger is that if the recent surge in sales has more to do with IAS and less with the fundamentals of the market, recent experience is just another round of speculation, albeit a tiny one.

Does IAS encourage speculation? Some believe that unlike DPS, IAS is much more stringent insofar as terms go. A purchaser who is offered the IAS has to take out a loan with a bank, which will carry out credit checks before granting the loan. In addition, the purchaser has to make progress payments, part of which may be disbursed from the bank loan, to the developer. This amounts to 60 per cent of the purchase price of the property before the temporary occupation permit (TOP) is granted, including 20 per cent at the downpayment stage.

With DPS, as little as 10 per cent of the purchase price was payable by the purchaser before TOP.

Given that a buyer has to commit to a loan and make progress payments, the authorities do not believe IAS encourages speculation.

Hopefully, then, what the market is experiencing now is the realisation that real estate is fundamentally a safe asset class - not a flash in the pan brought on by speculation.