The Additional Buyers Stamp Duty (ABSD) for Singapore real estate has only intensified over the years; and was further increased in April 2023. But the impact of ABSD is not uniform – some property owners or buyers are impacted more (or less) than others. To investors interested in real estate, here’s how the stamp duties could impact your portfolio:
What is the ABSD?
The ABSD is an added tax on residential property purchases, designed to discourage multiple property ownership and apply downward pressure on home prices. The ABSD rate is a percentage of the valuation or purchase price of the property, whichever is higher.
ABSD rates, after the last cooling measures in April 2023, are as follows:
For property developers, this means a developer pays 40% of the land price as ABSD, upon purchasing a land parcel. If the developer completes and sells every unit within a five-year time period, the developer can claim ABSD remission (this means a remission of 35%, as 5% is non-remissible)
How does this impact your portfolio?
We can expect to see the following effects going forward:
- Married couples are likely to take out separate mortgages for different properties
- Greater reluctance to surrender rental assets, due to replacement costs
- Higher demand for dual-key or larger residential units
- Weaker outlook for some developer-related equities
- Diminished interest in prime region properties
1. Married couples are likely to take out separate mortgages for different properties
Colloquially referred to as a “Sell One, Buy Two” strategy, this involves decoupling an existing residential asset, and having each spouse buy a separate home. For example:
A and B are married, and jointly own a single property. If they were to purchase a second property, they would incur the ABSD.
As an alternative, A and B sell their current property. They now have a property count of zero. They then use the sale proceeds to purchase two properties, one under A and one under B.
This does mean added risk, as instead of two co-owners sharing the weight of one mortgage, they now have a separate mortgage each. However, they both own only a single property, so neither has to pay the ABSD.
Usually, this will be one larger property to reside in, and one smaller property to rent out; but some couples do the reverse, staying in the smaller unit and renting out the bigger one to maximise rental income.
This is not feasible for every couple, as it’s important that each spouse can bear the full cost of a mortgage on their own.
As a loose rule of thumb, each spouse should purchase a unit that costs no more than five times their annual income, and does not have monthly recurring costs that exceed 30% of their monthly income.
Nonetheless, it’s best to consult a financial advisor before using this method. Insurance policies may need to be revised, as greater coverage may be needed. The family would have gone from one to two home loans, significantly increasing the amount of leverage in their shared portfolio.
2. Greater reluctance to surrender rental assets, due to replacement costs
If you already own a second or subsequent residential property, you may want to revise any plans to liquidate them. Consider that, if you were to sell a second property, then attempting to buy another one in future will cost you 20% more (at current ABSD rates).
For some investors, the new ABSD rates can mean another rental asset is no longer feasible; and parting with their additional properties might mean a permanent end to rental income (barring drastic policy changes in future).
We also expect that investors will be more reluctant to accept en-bloc attempts, for the same reason. Fewer people will accede to a collective sale, if the replacement property would involve ABSD – especially foreigners, who would pay 60% ABSD on replacement units.
3. Higher demand for dual-key or larger residential units
One way around the ABSD is to purchase a dual-key unit. These are single units that are subdivided into two – an arrangement that allows a landlord to live in one sub-unit, while renting out the other. It’s sometimes also favoured by extended families, where parents can live in one sub-unit as the children live in the other.
Dual-key units do tend to be more expensive, on a price-per-square-foot basis. However, the savings from not having to pay ABSD may more than justify the cost.
There may also be a change to an old trend, of buyers purchasing side-by-side condo units to house extended families. Given the higher ABSD rates, it could make sense to simply purchase the largest viable individual units.
In light of these, we expect both owner-occupiers and owner-investors to favour larger residential units among their assets.
4. Weaker outlook for some developer-related equities
The higher ABSD rate makes it much riskier for developers to attempt larger, more profitable projects. This has to do with the ABSD deadline.
In order to claim ABSD remission, developers must complete and sell all units within five years. There is no exception made for project size. A boutique project with 20 units has a five-year deadline, but so does a 1,000+ unit mega-development.
As such, developers are likely to go for smaller land parcels, and commit to smaller, safer projects (which also mean lower potential returns).
For larger land plots, its more likely that developers will now collaborate, forming consortiums rather than going it alone. This also means splitting profits, which again diminishes the outlook for some residential-related companies.
Bear in mind that this is accompanied by rising interest rates, higher labour and material costs, higher Land Betterment Charges (LBCs), and higher commissions paid to property agents. Despite the property boom between the end of Covid and 2023, it’s likely that developers will see narrowing margins going forward.
5. Diminished interest in prime region properties
The Core Central Region (CCR) has a higher percentage of properties purchased by foreigners, or by landlords for rental purposes. We have begun to see dips in the CCR over the past year, likely in response to the ABSD impacting foreigners and landlords.
Note the dip in average CCR prices, up till July 2023:
Over the past year, CCR condo prices have dipped from an average of $2,556 psf to $2,446 psf.
Meanwhile, notice that in the OCR, where most buyers are focused on own-stay use, prices have still managed to rise. Upgraders, such as those moving up from HDB properties or smaller condos, are largely unaffected by ABSD measures; they still just have one home, even if they’ve moved to a bigger one.
Given that ABSD has been with us since 2011, it is clear by now that it’s not truly a “temporary” measure. ABSD rates have only gone up with time, and there’s a miniscule chance of them going away. Investors may need to rethink the viability of multiple residential properties going forward, and consider alternatives in commercial or foreign real estate. For more help or questions on these issues, reach out to us at Single Digit Millionaire.
