HOCK LOCK SIEW
Necessary measures to keep developers on the straight and narrow
Thu, Nov 30, 2017
Lynette Khoo
DEVELOPERS' profit margins may be squeezed with rising land prices - and the government appears to worry they may compromise on two fronts, going by its recent moves and hints of upcoming measures.
Rising land prices is not the developers' only headache. They also have to sell their projects fast - within five years of the land purchase, or incur additional buyer's stamp duty on land cost.
The developers may therefore max out the number of units they can build on a site. They do this by building more small units, which can be sold quickly because their selling price is lower. The errant developers may also cut corners on construction quality to save costs - all this at the peril of homebuyers' living standards or even safety.
These may be what the government is looking to pre-empt. For instance, the Land Transport Authority (LTA) recently required developers to do a pre-application feasibility study (PAFS) on traffic impact when seeking the LTA's approval. This is on top of an existing LTA requirement on Transport Impact Assessment for sites with at least 700 residential units.
National Development Minister Lawrence Wong, in a speech at a recent dinner gathering of real estate players, also hinted that the government may wield the stick soon on developers who are found to deliver shoddy work. He spoke of targeted measures against the "black sheep" among developers.
The measures include imposing a licence condition for developers with a poor track record in obtaining Quality Mark certification for their projects. These developers may not even be allowed to launch units for sale until they commit to meeting the standards expected of them.
Festering market signs
The potential penalties on developers for poor-quality homes, coupled with the PAFS policy, clearly rain on developers' parade just when property prices are picking up. But there are festering market signs fuelling the government's apparent concerns.
In the latest series of en bloc sales, developers are said to be looking at intensifying the number of units by an average of four times the existing capacity for sites acquired this year. Marketing agents of collective sales sites have also been touting the estimated number of units to be built based on an average size of 70 sqm per unit. This average size of 70 sqm is part of the formula (allowable gross floor area/70 sqm) which the Urban Redevelopment Authority (URA) has used since September 2012 as a guide to cap the number of dwelling units for non-landed residential developments outside the Central Area. For sites within Kovan and Joo Chiat/Jalan Eunos, a larger average size of 100 sqm is used.
Though this guideline is meant to temper excessive development of shoebox units, its success has been limited. Thus, it is not surprising that the URA has recently come out to clarify in a circular that this formula sets out the upper bound of allowable units. The actual number of units that can be supported would still depend on the site context, existing site conditions and the traffic impact on the area.
Clearly, if there is a ceiling on the number of units to be built due to traffic conditions, the developer may have to build larger units. These typically take longer to sell under the current loans limit. Some marketing agents are said to have started the PAFS process early by consulting the LTA on the need for such study for launched sites, though that is not a requisite for closing an en bloc deal. The new PAFS policy could hence check the bullish pitch of marketing agents. Developers too will be more realistic in their estimates when bidding for en bloc sites.
The risk that developers may be tempted to compromise on quality to preserve profit margins can't be dismissed. Already there has been a troubling recurrence of incidents where buyers cry foul over the shoddy workmanship and design of their homes.
While the rising number of incidents could be due to the fact that homebuyers now have more avenues to voice their grouses - and to social media - there were also incidents of property defects or private settlements between developers and buyers which went unreported.
More frequent checks
Of course, the government is not oblivious to all this. It has, from time to time, received feedback on developers who do not meet the required quality standards - and it is stepping up regulatory checks on the quality of new homes.
To allow consumers to identify developers with a good track record, the government has also made the CONQUAS (Construction Quality Assessment System) scores of projects and projects with QM certification publicly available. A QM home provides the assurance that the unit has been thoroughly assessed and meets minimum standards of good workmanship.
More can be done. As contractors increasingly outsource their work, one suggestion is to have more frequent and stringent checks by independent parties so that issues can be resolved in a timely manner.
Another suggestion is to make more independent checks during the construction process where the developer and contractor are related parties. In recent years, there have been a number of such projects which saw complaints of alleged property defects or poor design.
Thankfully, the majority of developers are still too responsible to compromise on quality. But there is always a black sheep in every flock, as the popular saying goes. Even as the government rolls out new policies to regulate the industry, it should be mindful not to raise overall regulatory costs for all developers. The focus should be on the errant players.
As Augustine Tan, president of the Real Estate Developers' Association of Singapore, puts it: "Don't use a big hammer to kill a fly."
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