Sky@Eleven: Possible defaults from deferred payment scheme (DPS)?

An international brokerage house recently reported that SPH may cut its dividend payout by 10 cents (or 36%) in 2009 as 100% of SPH property project, Sky@Eleven was sold 100% under deferred payment scheme.

This means that buyers typically put a 10%-20% down payment and would only seek bank funding nearing the TOP (end 2010) date. The average price sold during the launch was about $975. The highest price sold during the launch was $1,200 PSF. The project was sold out completely within 30 hours of the soft launch and the public weekend launch had to be cancelled immediately.

SPH would receive total revenue of more than $600M from the development and development costs would be within $200M.

A last check online showed that Sky@Eleven changed hands @ $900 PSF for a 2,713 sq feet unit. More than 90% of the units this year changed hands above $1,000 PSF, meaning if the seller was the 1st buyer, he would have still made money, up till Sept 08.

There is definitely cause for concerns as the last few transacted price can possibly be even lower than the initial launched price. If the market were to worsen further, we can even see the price falling below $800 PSF. This would mean that buyers who have bought Sky@Eleven (SE) at $1,000 PSF might simply realized a paper loss of 20% and forfeit their down payment. Afterall, they can purchase a new unit at a cheaper price immediately and property market might offer bigger bargains upon SE’s TOP.

Buyers who are reluctant to realized the paper loss may be forced to do so as banks would be valuing SE @ $800 PSF and would only be willing to grant a $640 PSF loan. The buyer might not be able or willing to cough up additional $160 PSF or $440,000 additional cash for a typical 2,713 sq feet unit.

What happens to SPH then? Is there any cause for alarm?

Personally I still feel that based on the last transacted price of $900 PSF, we should not be rushing to sell our SPH shares. Considering buyers who eventually default and forfeit their 20% (typical down payment) deposit, SPH can still price SE at $780 PSF and together with the earlier 20% deposit forfeited by buyers, they are still able to receive the same sales proceeds even after the buyers default. (Though there might not be ready buyers)

Alternatively, SPH can price SE at an even lower fire sale of $700 PSF to entice bargain hunters. The price would be a steal for a luxurious, district 11 freehold property. They would still be earning a cool $500M revenue from this project at this price, after adjusting for forfeited deposits (assuming 100% buyers default, 20% deposit forfeited and the project is sold 100% @ $700 PSF). They can also rent it out and wait for market recovery before selling it off above $800 PSF. The silver lining is that SPH core business is not property development and does not have other properties selling under DPS scheme. The land is freehold and construction costs are not highly leveraged.

Thus, SPH have a lot of flexibility to price and generate alternative income from this project, though I cannot say the same for other developers.

I have personally called and checked the selling price of a new property project, Lucida (2 Suffolk Road) today, which is located beside United Square. This freehold development by Novelty Group is selling its apartment at above $1,000 PSF. A 1066 sq ft 2-bed room unit is going for 1.2M.

The rental prospects of district 11 are still good, with the Novena medical centre and Singapore reputation as a medical hub. Hence I am still cautiously optimistic in SPH Sky@Eleven project.

I will be getting the 2 bedroom apartment at Lucida it if it falls to $650,000!