Sunday, October 18, 2015

The Effects of Qualifying Certificates Regulation on Bukit Sembawang Estates Limited

Do you know of the Qualifying Certificates Rules set for Developers?

When I purchased Bukit Sembawang Estates Limited (Read my previous post), it didn't occur to me that this was a major thing. I heard about it but my overconfidence "stop" me from finding out more. Thus, this was my mistake.

Nevertheless, over my course of work, I had to research into this topic and realise THIS IS A BIG ISSUE FOR DEVELOPER COMPANIES LISTED ON SGX!

So what is a Qualifying Certificate and its conditions?

Any developers with "foreigner" shareholders are required to have a Qualifying Certificate for its developments. Developers solely with Singaporean Shareholders are exempted. Thus, all listed developers are considered to be developer with foreigners and their developments will require a Qualifying Certificate.

Developers whom purchase the land from Government (a.k.a Government Land Sales) are also exempted. This is most probably to protect developers whom intent to develop ECs - more time is given to them.

Directly as per the source by Rodyk & Davidson LLP:

"The salient conditions of a Qualifying Certificate are as follows:-

(1) The Housing Developer shall within five years from the date of the Qualifying Certificate (or five years from the date of the Collective Sale Order for a collective sale deal approved under the Land Titles (Strata) Act) complete construction of the whole housing development and obtain the Temporary Occupation Permit or Permits (TOP) for the whole housing development.

(2) The Housing Developer shall sell all dwelling units in the housing development within two years of issue of the TOP.

(3) The Housing Developer shall not, at any time, lease or let out any unsold dwelling units in the housing development.

(4) The Housing Developer shall not, without the prior written approval of the Controller, enter into any arrangement to sell, assign, transfer, sublease or dispose of the residential property or any part of it in its vacant or undeveloped state (other than a mortgage or a charge).

(5) The Housing Developer shall not permit or allow any sale, assignment, transfer or disposal of its shares without the prior written approval of the Controller up to and until the date of issue of the TOP for the whole housing development or the date the Housing Developer has sold all dwelling units in the housing development, whichever is the later."

However, a developer can request for an extension but at a huge cost:

- 8% on the purchase price of the unsold unit for the 1st year of extension;
- 16% on the purchase price of the unsold unit for the 2nd year of extension;
- 24% on the purchase price of the unsold unit for the 3rd year of extension.

Do note that the whole article is quite informative - do click on the link above to read about it. If the link is broken, you can get the softcopy from me.

My Opinion

During the time of establishing these regulations of Qualifying Certificates (believe to be 2011), housing prices were sky high.

This was also partly contributed by the developers trying to increase their land bank by putting up en-bloc sale for big older apartments/condos/landed housing around. As the bidding heats up, the cost price of the en-bloc sales increases as well. Thus, when the development start to sell, the company tend to market it as a luxury condo and  sell at a higher price - pushing up the prices around the development as well.

Therefore, I believe Qualify Certificate are used to curb developers demand for land bank and the purchase of en-bloc condos/apartments. With the demand going down, supply of en-bloc sales goes down as well.

In addition, with the implementation of MAS regulations - such as Loan to Value, ABSD and Total Debt Service Ratio - this has curb the demand from the ultimate buyer, the public. This has been very true as the Property Purchase Index has fallen 7 quarters continuously as of Jul 2015 (Read here).

But There Is Still Some Loop Holes...

As of every new regulation, there will be loopholes.

Listed companies can choose to delist (Such as Popular Holdings and SC Global) or sell its unsold units to a parent Singapore Company or a subsidiary (Hiap Hoe) - Read it here.

However, this still requires significant amount of cash and fees. But as of some instances, it maybe cheaper than the cost of extension.

Anyway, if the listed developer will to delist, this will may be a good news for the shareholders. Normally the expected delist share price will be at least 15% higher than the price at that point in time.

The articles here and here spoke of the possibilities that some mid-tier developer such as Ho Bee and Wheellock may be requesting for to delist soon (Note that the articles are during April 2014... it has been over 1 year already).

Bulk sales are also getting popular as big funds, such as Blackstone, see value opportunities in the Singapore Property Market (Read here). Blackstone has specifically bought from Bukit Sembawang Estates Limited - Thank you.

Here is also an article at the start of 2015 by Square Foot Research Pte Ltd on the number of unsold units by various developers.

My Additional Thoughts of Bukit Sembawang Estates Limited 

It was my mistake not to check more carefully on the company. But I stand on my views in the previous post and find it super amazing that a developer of such scale do not have any debt.

Even with the Qualifying Certificates issue, I still hold on to my "biased" view because:

1. Land Bank

(This fact has not been confirmed) Land Bank for Bukit Sembawang Estates Limited seems to be split into 2 sessions - Land from Seletar Hills Area/Sembawang Area and Residential Apartment Sites. This appears in the annual report as per pictures below.

Land from Seletar Hills Area/Sembawang Area

Residential Apartment Sites


For those that don't know, Bukit Sembawang Estates Limited was a rubber plantation company in Singapore and owned huge plots of land.

Company Structure

If you drive along Ang Mo Kio Ave 5, you will be able to catch the scene below - Yes, the place is still a rubber plantation.

Rubber Plantation Scene

Therefore, what I am trying to imply is that, the land from Seletar Hills Area and Sembawang Area seems to be Bukit Sembawang Estates Limited's own land bank from its previous rubber plantations, which was purchase very long time ago and may not be subjected to the Qualifying Certificate regulations (I emailed Bukit Sembawang Estate Limited already for confirmation). The price then will have been very cheap and the margins will be super high. In addition, part of these lands have yet to be developed and still remains as rubber plantations - More opportunities for developments in future!

On the other hand, those Residential Apartment Sites seem to be subject to Qualifying Certificates regulations.

2. Freehold Land

The company seems to hold only 999 year leasehold land or freehold land. This factor will be able to stabilized the price of any units being sold there as buyers will be willingly to pay more for freehold units or 999 year old units. Any discount will not be drastic and profit margins can be kept.

3. Innovative deals

Although the company does not seem like a delist candidate yet, but it has been selling its unsold units in bulk to Blackstone Fund recently at a decent price. Thus, this could be an innovative way the company intent to treats its unsold units. 

In addition, the company could still have the opportunities to sell the unsold units to a parent or subsidiary to "escape" the Qualifying Certificates regulations.

4. "Special" Shareholders

Look closely at the shareholders and you will find very "special" shareholders holding a significant stake in this company - a whooping deem-interest of about 25%.


Top 20 shareholders

Significant Holdings

With these information, I still feel the company is a value stock and do not regret holding them. However, with the recent surge in share prices, I may not add more holdings to my portfolio at this current point.

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