PPS not a panacea for every CDL high-end residential project

BT recently reported that Singapore-listed City Developments Ltd (CDL) may be at the preliminary stages of exploring the possibility of carrying out a third profit participation securities (PPS) exercise – this time for a portfolio of 48 apartments in three of the property developer’s completed projects in Singapore’s Core Central Region.

It is interesting to look at the merits of this latest exercise but one needs to be clear from the outset that the PPS scheme is not necessary suitable or a panacea for every CDL high-end residential project. The reason lies in the Qualifying Certificate (QC) rules.

The 48 units – at Cliveden at Grange, St Regis Residences Singapore and One Shenton – are said to have a total portfolio size of around S$350 million. The units are mostly leased. A PPS deal, if it materialises, would help CDL recycle some capital by using the proceeds for overseas expansion, for instance.

More importantly, through the PPS structure, which some observers view as a form of refinancing or even financial engineering, CDL can tide through current soft pricing in the high-end residential segment on the island.

Before we go into why the PPS structure may not be suitable for all CDL’s high-end residential projects, let’s look first at the PPS concept. This is a fixed-term instrument that provides investors both yield and capital gains play. One may expect any potential PPS exercise for the 48 apartments to be fashioned as a securitisation of the present and future cashflow from the apartments – just as CDL did for its maiden PPS in December 2014 for its Quayside Collection assets in Sentosa Cove (comprising unsold apartments of The Residences at W Singapore, a hotel and some retail space on the island) .

The vital thing to note is that under the PPS structure, there is no change in the properties’ ownership, which remains with CDL for the duration of the structure; CDL also continues to manage the assets (including the leasing). Typically, the issuer will join its co-investors in the PPS structure; together, they hold the securities which have a five-year tenor and come with a fixed coupon, and stand to reap capital gains by divesting the properties if their value appreciates sufficiently at any point during the five-year duration of the securities.

If CDL were to divest the 48 apartments outright in the current market, it would not get the price it desires. Essentially, PPS allows the issuer to buy some time in the hope that prices will rise within the five-year period. Thus PPS provides a good solution for owners of prime residential assets to tide over the current soft market assuming one is confident the market will recover.

At entry point, the draw to investors of the PPS is that since there is no change in ownership of the apartments, the 3 per cent buyer’s stamp duty and the 15 per cent additional buyer’s stamp duty (ABSD) would not be payable on the PPS transaction price for the apartments. This would be especially appealing to foreign and corporate buyers, who have been put off from investing in the Singapore residential property sector as they have to pay the maximum 15 per cent ABSD rate on their purchase price.

Four non-QC projects

Why this structure works for the Sentosa Cove project and, potentially, for the 48 units in Cliveden at Grange, St Regis Residences Singapore and One Shenton – is that these four projects are not under the Qualifying Certificate (QC) rules and hence not under pressure to be sold out by the developer within two years of obtaining Temporary Occupation Permit (TOP).

Under Singapore’s Residential Property Act (RPA), a foreign company, which by definition includes an entity that has just a single non-Singaporean shareholder and/or director, has to get a QC from the Singapore Land Authority’s Land Dealings (Approval) Unit before it may buy a private residential site. All listed property developers are deemed foreign companies. QC conditions require the developer to complete construction of the project and obtain TOP within the stipulated timeframe – since Aug 5, 2010, this has been set at five years, though prior to that, this could have stretched to seven years. The developer is also required to finish selling all units in the project within two years of the TOP date. The rules are aimed at preventing foreign developers from hoarding or speculating in residential land in Singapore.

Developers which want more time to fulfil these deadlines have to pay hefty extension charges.

QC exemption

Sites bought from the Government Land Sales (GLS) Programme and on Sentosa Cove do not require a QC. Hence it was possible for CDL to do its first PPS exercise for the Quayside Collection (including apartments) on Sentosa Cove.

CDL was not always under QC rules. Up until 5 pm, July 19, 2005, it was one of the 43 companies that had been exempted from applying for QC when buying residential land in Singapore. Others on this list included Hong Leong Holdings, CapitaLand and Keppel Land. The 43 had been exempted from needing a QC as they had made significant contributions to Singapore’s economy and were largely Singaporean. However, the authorities decided to remove this exemption to level the playing field so that this group of 43 companies no longer enjoyed an advantage over other property companies such as Wing Tai, Wheelock Properties and GuocoLand when buying residential land for development.

Nevertheless, the government made a concession to the 43 companies by allowing them to keep their then existing residential land stock without requiring QCs. The sites on which Cliveden at Grange (the former Kim Lin Mansion site), and One Shenton were developed were already owned by CDL before the QC exemption ended on July 19, 2005. St Regis Residences is on land zoned for commercial and residential use and hence does not come under the RPA; so no QC is required. Not being subject to QC deadlines for the sale of all units makes these three projects potential candidates for a PPS structure where the residential units do not change ownership and hence investors are not liable for ABSD.

Another project where CDL could potentially use PPS would be South Beach; the apartments in this development, South Beach Residences, does not need a QC as the project was developed on a GLS site. CDL developed South Beach jointly with Malaysia’s IOI Group.

However, for the CDL projects which are subject to QC conditions, PPS would not be a suitable structure for CDL to monetise some of its high-end residential in the short term, until the market recovers. One such project is the 156-unit Nouvel 18 in the posh Ardmore Park area, which CDL developed jointly with Wing Tai. The project received Temporary Occupation Permit (TOP) in November 2014, which means CDL (and Wing Tai) have up to November this year to dispose of all the units in the project. So far, they have not put the project on the market (no sales). Two other high-end CDL projects that are also subject to QC rules are the 174-unit Gramercy Park (on the former Lucky Tower site on Grange Road) and the 124-unit New Futura in Leonie Hill Road. CDL has started sales of Gramercy Park but not at New Futura. However, the QC deadlines to finish selling these two projects will only kick in during 2018, so CDL has elbow room to come up with other solutions.