Heated land sales have prompted Singapore’s central bank to scrutinise bank financing for property development more closely through a new survey of banks last month. The Monetary Authority of Singapore (MAS) is said to have sought information from banks on their exposures and details of loan facilities granted for each project, such as key covenants and loan-to-value (LTV) ratios.
While it is not unusual for the MAS to collect data from banks to monitor their lending practices from time to time, this survey has set some market watchers pondering whether it may be a precursor to a new cooling measure.
If the government decides to tighten the screws on development loans to take the steam out of land prices, that would indeed spell bad news for developers.
The logic behind this is clear: if developers buy land at higher prices, they would have to sell their projects at higher prices too to preserve their margins. One way to prevent prices from spiking up too quickly is to temper developers’ land bids, thus nipping the problem in the bud.
While there are existing LTV limits on housing loans to homebuyers, there are no specific limits for bank loans to developers. It is believed that by having prudent LTV limits for land or development loans, developers will be less aggressive in their land bids.
If such a new measure does pan out, it will mirror the policy of the Hong Kong Monetary Authority (HKMA), which not only has LTV limits on development loans but also lowered the caps further last June to rein in the city’s red-hot property market. But due to various reasons, Hong Kong has seen limited success in tempering land bids and home prices despite the tightened LTV limits and mortgage rules.
Singapore’s market, however, is a different kettle of fish. Such LTV limits on development loans may well prove effective here, just as previous macro-prudential measures addressing residential buying demand have reined in home prices and the growth of households’ mortgage loans in the last four years.
Caps on development loans could hurt foreign developers too; BT understands that those that acquire development sites in Singapore have typically sought bank financing here.
Such a new policy may, however, unintentionally weed out marginal players that rely heavily on bank borrowings. The larger companies, especially the listed ones, are able to obtain alternative funding more easily such as bonds, medium-term notes and unsecured loans.
Other than reining in property prices, it’s worth pondering if there are other reasons to justify any form of financing curb for developers.
Though the LTV limits on land cost are said to have gone from between 70-80 per cent on average to above 80 per cent in some cases, banks’ exposure to the property sector is not excessive for now.
As at November last year, building and construction loans accounted for 12.6 per cent of total non-bank loans while housing and bridging loans accounted for 16.4 per cent.
Among the three local banks, building and construction loans made up 15-23 per cent of their gross loans while housing loans accounted for 22-27 per cent as at Sept 30, 2017. DBS’ annual report 2016 stated that a majority of loans extended for acquisition and/or development of real estate as well as for general working capital have a LTV of below 80 per cent.
Admittedly, banks are generally comfortable lending to the property sector, which though cyclical, enjoys a high level of transparency and cashflow visibility. The local banks are all too familiar with the sector and its attendant risks, having been in the property business themselves before the MAS rules barred banks from “non-financial business” and capped their property holdings.
Some market players argue that existing safeguards on bank lending to the property sector suffice. Under the Banking Act, banks’ total exposure to the property sector is capped at 35 per cent of total eligible assets; there are also restrictions on exposures to single counter-party groups to prevent concentration of risks.
On the whole, banks’ asset quality remains healthy, based on the MAS’ Financial Stability Review published in November. The results of its annual industry-wide stress test showed that banks have strong capital and liquidity buffers to withstand shocks.
Meanwhile, the asset quality of housing loans remains strong, with both loans in arrears and non-performing loans still low. MAS’ stress test results also indicated that the banking system can withstand a 50 per cent drop in property prices over a three-year period.
As for developers’ balance sheets, it should be noted that high net gearings are still largely confined to a few small to mid-sized developers, which are unlikely to pose a systemic risk even if they go under in the worst-case scenario. Given rising interest rates, developers will have to contend with higher financing costs in the future.
We may not be told the findings of the MAS survey. For now, it may not seem necessary to stipulate limits on development loans yet.
But given how home prices can easily become a hot political issue, it is hard to gauge how fast prices will be allowed to move before actions are taken to rein them in.
Adapted from: The Business Times, 25 January 2018