Risk of default for units sold under DPS this year is low despite the strains emerging

According to The Business Times, strains of default for the units sold under the deferred payment scheme (DPS) have started emerging with Concordia, a China investor that bought 25 units at MCL Land's The Fernhill condo failed to pay around S$30m for 20 of those units that became due when the project received TOP recently. Concordia had bought all 25 apartments in The Fernhill in Jan 2007 at $1,410 psf. It flipped five of these units to foreigners at an ASP of nearly $2,200 psf during the same year.

We believe that the risk of default for units sold under DPS this year is low despite the strains emerging as the bulk, 4,560 units constituting 43% of the total 10,450 units under the DPS that are expected to obtain TOP this year were sold in 2005/2006 at prices lower than current market prices. We believe that the 2,540 units that will obtain TOP in 2010 poses greater default risk, since these units were bought during the top of the property cycle. For this particular case, the units were sold in Jan 2007 during the run up towards the peak.

The risk of default is mitigated further by the general practice of non-extension of the DPS scheme for subsale transactions and the legal options available at the hands of the developers to enforce the transaction. In the near term, the property stocks that have run up recently are expected to come under pressure.

At Hong Kong side, queue to buy property is building up.


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