Singapore Residential Sector - OCBC Investment 2020-02-07: A Qualifying Certificate (QC) Relief

CAPITALAND LIMITED (SGX:C31) UOL GROUP LIMITED (SGX:U14)

Singapore Residential Sector - A Qualifying Certificate Relief

Relaxation of Qualifying Certificate (QC) regime a slight positive.
Major developers under our coverage to benefit.
Additional Buyer's Stamp Duty (ABSD), which is more onerous than QC, remains in place.

The Singapore Land Authority (SLA) and Ministry of Law jointly announced on 6 Feb 2020 that publicly listed housing developers with a substantial connection to Singapore can be allowed exemption from the Qualifying Certificate (QC) regime. The changes will be implemented with immediate effect and reflected in legislation later this year.
Under the previous QC regime, a developer that is not considered a Singapore company is required to complete a project development within five years and to dispose all units within two years of completion. This is to ensure that developers build and sell the residential units in a timely manner, and do not hoard and speculate in residential land. Failure to meet these requirements would subject the developer to extension charges amounting to 8% of the land purchase price for the first year of extension (pro-rated by the number of unsold units), 16% for the second year and 24% for the third and subsequent years. The QC regime does not apply to land bought from Government Land Sales.
This QC regime change may also have taken into consideration the potential delay in construction projects due to the temporary reduction in foreign labourers especially from China in light of the coronavirus situation.
We expect the major developers under coverage (CapitaLand (SGX:C31), City Developments (SGX:C09) and UOL Group (SGX:U14)) to be able to quality under this new QC exemption.

Prior to this change in legislation, publicly listed housing developers that have at least one foreign shareholder will not be considered a Singapore company and thus subjected to the QC regime. With this change, publicly listed housing developers can now apply for exemption from the QC regime on the basis that they have a substantial connection to Singapore.
The applications will be assessed according to the following criteria:
1. incorporation in Singapore,
2. primary listing is on the Singapore Exchange and principal place of business is Singapore,
3. the chairperson and the majority of the company’s board are Singapore citizens,
4. a significantly Singaporean substantial shareholding interest in the company and
5. track record in Singapore.

We believe this QC regime change may also spark some renewed interest in the en-bloc market, especially if homeowners’ price expectations have come down given that the fervour seen in 2017- 2018 has mellowed. However, this potential mini-revival is unlikely to be broad-based.
The SLA and Ministry of Law announcement also highlighted that the government is not making any changes to the existing property cooling measures. This includes the ABSD (viewed as more onerous than QC) which was revised in Jul 2018, whereby developers are required to sell all units in a residential project within five years, or be subjected to the ABSD otherwise (remissible ABSD of 25% plus additional 5% which is non-remittable).
Overall, we do expect a slight re-rating on the share prices of Singapore developers who are likely to qualify for this revised QC regime. Our preferred sector picks are CapitaLand (SGX:C31) [BUY; FV: S$4.42] and UOL Group (SGX:U14) [BUY; FV: S$9.25].

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-02-07

SGX Stock Analyst Report BUY MAINTAIN BUY 4.420 SAME 4.420

BUY MAINTAIN BUY 9.250 SAME 9.250