Perks used by property firms in Singapore to entice buyers of luxury apartments are under scrutiny after a bank sued a developer for allegedly conspiring with borrowers to inflate about S$182 million of home loans.
With Singapore's real estate market on the slide, developers regularly try and court potential home buyers by offering incentives ranging from small cash rebates to discounts on cars, rather than cutting the sales price.
United Overseas Bank says a unit of Indonesia's Lippo Group took this practice to an extreme by giving buyers at a development in the wealthy enclave of Sentosa Cove furniture vouchers worth as much as S$2.4 million ($1.8 million) for each flat they bought.
Buyers are meant to disclose such incentives when applying for a loan, but UOB claims it granted mortgages, worth an average of S$4.8 million each, on 38 flats in the development unaware of the discounts.
Now 37 of those 38 mortgages have defaulted, and the loans are estimated to have been worth far more than the actual purchase prices of the apartments.
The case is raising concerns that other banks may have granted mortgages on other properties, unaware that the buyers have received similarly generous incentives.
"All the market-watchers are definitely paying attention to this lawsuit because it will set a precedent to how banks can be protected in case of a property market collapse," said Christine Li, director of research at consultancy OrangeTee.
Lippo Marina Collection Pte (LMC), the developer being sued, denies all liability and will defend the lawsuit vigorously, said a lawyer at Premier Law, which is representing them.
LMC says in its defence that it was not involved in the process of the purchasers applying and receiving loans from UOB.
LUXURY
The Marina Collection, a block of 124 sea-facing apartments with 40 private yacht berths, was launched for sale in 2007.
While it initially enjoyed strong sales, interest started to dip in 2009 after the financial crisis and when Singapore's government began to bring in measures to cool the property market, UOB says in its lawsuit.
Singapore's private home prices dropped 4 percent in 2014 and fell for the fifth consecutive quarter in October-December, according to flash estimates from the Urban Redevelopment Authority (URA).
Developers trying to sell units in a downturn often prefer to offer buyers incentives rather than slash prices, for fear of upsetting people who have already bought units in the same development.
Property industry experts say furniture vouchers are usually just cash rebates developers give buyers to spend on furnishing their new home, though the buyers may often just pocket the money.
UOB says it was approached between 2011 and 2013 to provide the loans and alleges many of the buyers it granted mortgages to were in fact fronts for seven people, who are also named in the lawsuit.
The bank has since had to record bad debts of S$166 million related to the project, a source with direct knowledge of the matter said. It is claiming undisclosed damages and costs from LMC and the seven individuals.
An analyst at Nomura said it expects more cases like this, given the prevalence of such incentive schemes.
"It will not be a surprise if banks decide to move against other developers, especially if more home owners were to default on their mortgages as a result of higher interest rates," Nomura's Min Chow Sai said in a research note on Jan 8.
Developers currently only have to provide sales information, including such discounts, on a voluntary basis to the URA, which publishes a summary of sale prices for residential developments. From 2015, such disclosures will be mandatory.
"Developers may have to relook whether it is worth their while giving indirect discounts or rebates, instead of giving direct discount off the listed prices," said Lee Liat Yeang, a real estate partner at law firm Rodyk & Davidson.
