IT IS more than a month since the introduction of the additional buyer's stamp duty (ABSD). I am still scratching my head on the whys.

Some buyers have held back their decisions thinking that perhaps prices might fall while others have stepped away for now because their cash-on-cash returns drop if they have to pay the ABSD. We have also read about buyers not exercising their options for Bedok Residences, Archipelago and The Palette.

On the flip side, some sellers have withdrawn their intentions to sell their residential investments because they would not be able to reinvest their cash into another residential unit without having to incur the ABSD.

The secondary market, already quiet in 2011, will be reduced to a whimper in 2012. The number of units sold by developers is also expected to be lower, as some investors wait out for lower prices or look for alternative sectors to invest into.

In explaining the rationale for the ABSD, Tharman Shanmugaratnam, Deputy Prime Minister and Minister for Finance and Manpower, said in a Dec 7, 2011, press release: 'We have always had open markets and must keep them that way. However, the reality is that investment flows into our property market are now larger than before, and unlikely to recede as long as interest rates remain low. The additional buyer's stamp duty should help cool investment demand, and avoid the prospect of a major, destabilising correction further down the road.'

Minister of State for Manpower and National Development Tan Chuan-Jin reiterated at the Redas 52nd Anniversary Dinner on Dec 27, 2011: 'Given volatile equity markets and a worsening economic situation in Europe, our small property market is attractive to foreign funds. The latest measure is a targeted and measured move to moderate such investment demand in order to avoid the need for a major correction down the road.'

The need for moderating investment inflow seems to contradict several tenets that have brought Singapore its success. The last I checked, on the Economic Development Board's website, Singapore held a string of accolades including the top spot 'for having the most open economy for international trade and investment', as ranked by the Global Enabling Trade Report 2010 published by the World Economic Forum.

Now, where and what are the sources of 'investment flows into our property market' and 'foreign funds'? And what is the exact cause for concern to the government that this lopsided ABSD is applied to foreign investors specifically targeting the residential segment and not any other asset classes? Furthermore, there were certain exclusions and permutations which now add complexity to our otherwise rather simple and clear tax system.

We begin by looking at foreigners' purchase of residential units with caveats filed in 2011. Do note that we are limited to the data provided by the Urban Redevelopment Authority's Realis (Real Estate Information System). For purposes of this article, I have assumed that permanent residents (PRs) who purchased homes in Singapore are neither a source of 'foreign funds' nor inward investment flow. Although we know there are PRs who are active in their home countries and who have invested in Singapore's residential properties, let us take it that these PRs' monies are considered local. We narrow our focus on the transactions by foreigners and by companies.

Foreign purchasers

With Singapore's push to develop its trust and fund management services capabilities, the bulk of residential transactions under company name is due to foreign purchasers. Our experience shows that Singaporean investors purchasing properties through companies are few and far between but foreigners, especially those who are planning their wealth transfer in Singapore, are more amenable to invest in properties via trusts, foundations, offshore companies or Singapore entities. There were also foreign private equity funds that invest into Singapore's residential properties such as the collective investments made through the private banks on behalf of their clients.

In 2011, foreigners accounted for 4,939 transactions (or 17.3 per cent of the total for that year) while company-registered purchases accounted for 704 units (2.4 per cent). In comparison, the number of units purchased by foreigners in 2007 was slightly higher at 5,038 (13.1 per cent) while company transactions were much higher at 2,681 units (7.0 per cent). The recent sharp drop in company transactions was caused by government policies restricting the loan-to-value ratio for residential properties purchased under company names and a pullout of real estate funds post-Lehman crisis, for example Wachovia, Citadel. With the introduction of 10 per cent ABSD for residential units purchased under company name, we can expect the numbers to drop further in 2012.

Note that 5,038 residential units (13 per cent of total units) were purchased by foreigners in 2007 at a time when the foreigner population was 1.005 million (22 per cent of total population) while in 2011, foreigners purchased 4,939 units (17 per cent of total units) and the foreigner population is 1.394 million (27 per cent of total population). Foreigner population in our midst increased 39 per cent between 2011 and 2007 but yet the number of units purchased by foreigners remained steady despite a small increase in percentage terms.

There is no easy way of correlating these data points as there are foreigners who purchased homes in Singapore and who do not live in Singapore. On another hand, foreigner population includes those on dependent passes, student passes, etc.

In order to address the concern about funds inflow, we need to examine the dollar value of residential purchases made by foreigners.

In absolute value terms, foreigners accounted for $10.2 billion of investments into the residential segment in 2007. Adding on the value of transactions made by companies, the total is $18.2 billion. In contrast, against a weak external environment, the investment inflow by foreigners in 2011 accounted for $8.5 billion while company transactions accounted for $1.9 billion. The total is less than $10.4 billion. In fact, the total in 2010 was higher at $12.7 billion (foreigner and company).

Elsewhere in the Singapore real estate scene, funds also flowed into office and retail segments as well as en bloc sales of residential projects. In 2007, $11 billion worth of block deals were inked in the office and retail segments versus $7 billion in 2011. En bloc sales of residential projects totalled $12 billion in 2007 versus the paltry tally of under $3 billion for 2011. Those tracking the market since the 2007 peak will remember that the bulk of these transactions was due to foreign funds and insurance companies.

Developers from Malaysia and China also featured strongly in the en bloc and Government Land Sales arena.

We saw a lot more foreign monies buying into Singapore in 2007 than in 2010 or in 2011. In terms of the number of residential units, 2007 also saw more purchases by foreigners and companies than in 2010 or in 2011.

The analysis generated more questions than answers. Were we similarly concerned about foreign investment inflow in 2007 as compared to now? What is the current stock of residential properties owned by foreigners and is foreign ownership growing at a pace that we should be concerned?

Where is the evidence for foreign money that is anticipated to flow in? Will the total value surpass the $20-40 billion that we saw in 2007? Should we be concerned that the foreign monies may disrupt other real estate segments such as industrial or office?

Should we be concerned that foreign monies may come in strongly on other asset classes - debt, equities, etc? Why did we not curb foreign purchasers with other methods, for example limiting the loan-to-value ratio for their second-home purchase? Are we making Singapore less of a home for the high-skilled foreign families, say biotech researchers, who have been contributing to our economy and now want to buy a home for themselves to settle down for the long term?

Will we maintain our position in the eyes of international investors?

The writer is founder of real estate agency International Property Advisory (IPA). He is also the author of the book 'Real Estate Riches'

Source: Business Times