The EdgeProp had written a piece of article relating to spotting the next en bloc. An interesting piece of article, which I thought I should share with everyone here:
For readers who are lazy to read the full article, let me summarise the article for you here:
- Important factors to spot potential enbloc properties are
- Number of units
- Plot value enhancement
- Premium of new sale/ resale prices over the collective sale price
- Factors such as tenure (freehold versus leasehold) and location (whether the property is located in the Central Region or Non-Central Region) were statistically insignificant at 5% level
Kudos to the EdgeProp for the hard work in crunching the data and statistics to derive the conclusions. But to let everyone understand the logic behind the factors that contribute to successful enbloc sales, I would use some scenarios to illustrate:
1. Plot Value Enhancement
As defined by the EdgeProp, enhancement refers to potential plot ratio enhancement. When the plot ratio in the prevailing master plan is higher than the development’s existing plot ratio, the land can be redeveloped into higher GFA although development charge is payable.
Why is it that a development with potential plot ratio enhancement a better choice for enbloc? What about old developments with plot ratio higher than allowable plot ratio?
We illustrate the impact of plot value enhancement in the scenarios below:
- Scenario 1 – A condominium with baseline plot ratio lower than allowable plot ratio (opportunity for value enhancement)
- Scenario 2 – A condominium with baseline plot ratio same as allowable plot ratio (no opportunity for value enhancement)
- Scenario 3 – A condominium with baseline plot ratio higher than allowable plot ratio (no opportunity for value enhancement)
Other than plot ratio differences and size of the existing development, we assume everything else to be the same, for the sake of this study.
Under Scenario 1, the existing development has a plot ratio of 2.4, base GFA of 72,000 sqm and 360 units. Assuming that the fair value of the land is S$995 mil. If the developer wants to build to the proposed plot ratio of 2.8, he has to pay a development charge of S$76 mil to enhance the use, which means after factoring in this DC, the developer will probably offer a lower price of $919 mil to the residents for enbloc purchase. But nonetheless, as the development was underbuilt and there are lesser units to share the proceeds, and hence each resident receives S$2.55 mil from the enbloc.
Under Scenario 2, the existing development has a plot ratio of 2.8 (which is same as allowable plot ratio), base GFA of 84,000 sqm and 420 units. Assuming that the fair value of the land is the same, at S$995 mil. The developer doesn’t have to pay development charge since it is not intensifying the use of the land. Hence, the developer will be willing to pay S$995 mil to the owners. But because there are more units to share the proceeds, each owner will only receive S$2.37 mil, i.e. S$0.18 mil lesser than the owners in Scenario 1.
Under Scenario 3, the existing development has a plot ratio of 3.2 (which is already higher than the allowable plot ratio), base GFA of 96,000 sqm and 480 units. As the old baseline plot ratio is higher than allowable plot ratio, the developer can still build up to the baseline plot ratio without paying DC. Developers would be willing to pay 14% more or S$1.14 bil because of the high plot ratio, but this higher amount will be shared among more owners and hence, each owner only receives S$2.37 mil, same as Scenario 2.
Conclusion: Always look for an old development with baseline plot ratio lower than allowable plot ratio.
2. Age of property
It is a widely known fact that older properties are better choices for enbloc, due to high cost of maintenance from wear and tear, lower approval threshold among owners to carry the enbloc, etc.
We illustrate the impact of age of property on enbloc value in the scenarios below:
- Scenario 1 – A condominium remaining tenure of 50 years
- Scenario 2 – A condominium remaining tenure of 65 years
- Scenario 3 – A condominium remaining tenure of 80 years
Other than tenure differences, we assume everything else to be the same, for the sake of this study.
Under Scenario 1, the developer is willing to pay S$995 mil for a fresh 99-year lease for the land. As the development only has a remaining tenure of 50 years, the developer needs to pay S$221 mil to upgrade the lease to a fresh 99 year. Hence, after deducting this amount, the final amount that the developer can offer to the enbloc sellers would be S$774 mil and each owner receives S$1.84 mil.
Under Scenario 2, the development has a remaining tenure of 65 years and hence the developer needs to pay S$135 mil to upgrade the lease to a fresh 99 year. After deducting this amount, the final payout to the enbloc sellers would be S$860 mil and each owner receives S$2.05 mil.
Under Scenario 3, the development has a remaining tenure of 80 years. The developer needs to pay only S$52 mil to upgrade the lease to a fresh 99 year. After deducting this amount, the final payout to the enbloc sellers would be S$943 mil and each owner receives S$2.24 mil.
Common sense, isn’t it?
But hope that you would have noticed that the change in remaining tenure vs enbloc sales proceed is not linear. Comparing Scenario 1 and 3. Remaining tenure for Scenario 1 is 30 years less (or 37.5% less) than the remaining tenure for Scenario 3, but in terms of the enbloc proceeds, each owner gets only S$0.4 mil lesser (or 18% lesser) than the owner under Scenario 3. Where is the profit opportunity? Older developments tend to exhibit an accelerated decline in prices when their remaining lease falls below 60 years, due to restrictions in CPF drawdowns and hence smaller pool of buyers for such properties. Hence, there is a chance of an investor to ‘arbitrage’ by getting an old unit at a significant discount to a nearby newer project, and in the event of enbloc, getting back a decent sum of money! Return on capital will be high due to smaller investment outlay but do take note of the restrictions in CPF drawdown and higher risk.
Conclusion: Look for older properties that are selling at significant discount to nearby newer projects
3. Number of Units
The number of units eventually determine how much each unit gets to share, based on the share value, but it might be better to use metrics such as land area per unit etc, as a basis to compare across different developments.
What should we do if all these information is not readily available?
Probably the easiest way is to go to a development and take a look at the common area sizes and facilities/amenities! Let me illustrate the logic behind this using the scenarios below.
- Scenario 1 – A condominium that is very efficiently built (180 sqm GFA per unit)
- Scenario 2 – A condominium that is optimally built (200 sqm GFA per unit)
- Scenario 3 – A condominium that is luxuriously built (220 sqm GFA per unit)
Internal unit area assumes the same and the differences in GFA is attributed to common areas/facilities. Other than this difference, we assume everything else to be the same, for the sake of this study.
Under Scenario 1, average GFA per unit is 180 sqm (or 140 sqm of internal unit space + 40 sqm of common area). This efficiently built development would have 467 units and each unit gets S$1.84 mil from the enbloc sales.
Under Scenario 2, average GFA per unit is 200 sqm (or 140 sqm of internal unit space + 60 sqm of common area). This optimally built development would have lesser units (420 units) because of more common space and each unit gets more, or S$2.05 mil from the enbloc sales.
Under Scenario 3, average GFA per unit is 220 sqm (or 140 sqm of internal unit space + 80 sqm of common area). This luxuriously built development would have even lesser units (382 units) because of even more common space and each unit gets S$2.25 mil from the enbloc sales!
Conclusion: The higher the land area per unit ratio, the better it is for enbloc profit potential. A simpler way is to look at the size of the common area of a development, the bigger it is, the better for profit opportunity!