Raising the bar for Collective Sales: Who are the winners and losers?

It is reported in the Business Times and the Straits Times today that with immediate effect, potential buyers, interested parties, developers or real estate agencies acting on behalf collective sales committee are required to consult the Land Transport Authority (LTA) and submit a Pre-application Feasibility Study (PAFS) on traffic impact to ascertain the number of units they can build, before submitting an Outline Application or Development Application to URA for the redevelopment of a collective sale site.

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Will this new measure derail the enbloc boom?

There is no doubt that this new measure is going to create an additional hurdle and process for the developers/owners to acquire/sell collective sales sites going forward. But let’s not forget the key fundamental that has led to the resurgence of enbloc trend so far, which is developer’s shortage of landbank. Will a developer put on hold its collective sale acquisition plans and run the risk of doing no business over the next few years? Probably not, when they have their families and staff to feed.

What is the true cost of this new measure to developers?

With so many old developments gunning for enbloc now, the current collective sales market is a ‘buyer’s market’. Developers have a lot of options to choose from. As the Business Times article rightfully pointed out, the cost and responsibility of engaging a traffic consultant to assist in the PAFS submission and approval could ultimately shift to real estate agencies marketing the sites and the owners of the collective sale sites. Owners probably wouldn’t want to be ‘penny wise, pound foolish’ in this instance, when they could potentially reap millions in profit by spending a small sum of money to prepare a traffic impact assessment to for potential buyers.

So what is the true cost of this measure to developers? Probably zero (and comes with a free TIA report)!

Are there winners and losers from this policy change?

Of course, there are!

Collective sale sites located in landed estates with only a 2-way road (single lane each way) are at high risk of facing restrictions in the allowable number of new units in redevelopment. This is, in fact, nothing new as the government had already introduced measures in the past to curb the intensity of developments in some landed areas such as Telok Kurau, Kovan, Joo Chiat and Jalan Eunos.

Typically, such developments are small in land area and they come with limited facilities. Hence, developers tend to keep the unit size as small as possible in order to keep price quantum attractively low but yet selling at a high per square foot price. To do so, developers need to be able to build as many units as they can at the smallest possible size to achieve their business objective.

In the event that developers are not allowed to build to the highest potential number of units, this means that developers have to build less units that are bigger in sizes (in order to maximise the GFA) and sell at a higher price point. It would probably be difficult to attract buyers in such a scenario and the risk to developers will be significantly higher.

So what will the developers do?

It will be business as usual, but developers will now probably chase for better located collective sale sites that have better access to public transportation, MRT and located along multiple-lane roads or near expressways (in general). Such sites have a better chance of clearing the LTA on traffic assessment impact requirements. With a re-direct of resources towards such sites, the chance of collective sale success for sites with better traffic access seems to be higher with this new policy.

It will be interesting to observe the outcome of some of the collective sale tenders over the next few months to assess whether this policy change has any effect on developer’s strategy.

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Bloomberg says Singapore’s Property Market is set to sizzle! Are you excited?

Singapore’s Property Market Is Set to Sizzle

What an attention-grabbing headline from Bloomberg. How do you feel after reading the headline? As a homeowner, you may be feeling good that you are sitting on a property that looks set to increase in value the next year. As a home seeker, you may be rushing to hunt down your dream home before prices are set to increase.

Yes, that is the power of media and herd instincts.

Putting the psychological impact of the article aside, let’s take a look at some of the salient points in the article:

  1. Singapore’s residential and office market has passed its inflexion point, embarking on an exciting recovery journey
  2. With brighter economic prospects and improved market sentiment in the next two to three years, developers are increasingly sourcing land sites to ride the wave of growth for the rest of the decade
  3. Home prices could rise as much as 10 percent next year, according to analysts from Morgan Stanley, BNP Paribas SA and UOB Kay Hian
  4. With housing-affordability much better in Singapore, there may be a surge in demand next year
  5. Singapore’s property market has largely turned the corner, underpinned by a brightening economic outlook

Read full article here.

 

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Source: Bloomberg

 

Do you agree?

Well, at this point in time, SPK agrees with the article that there are a lot of positive signals in the market that are pointing towards a rising property market for at least the next year. Improvement in economy and job market, wealth creation through collective sales, positive sentiments driven by stock market highs and news headlines, herd instincts, family formation/upgrading and an extended period of low and competitive mortgage rates are probably to stir buying interests in property. But nonetheless, it is important to watch out for red flags in the economy and the market.

Property cycles are getting shorter these days and it is important to ride the cycle at the early stage and not ending up being the one without a seat in a game of musical chair.

The Curious Case of Sing Holdings: A classic case of “Buy the Rumor, Sell the News”?

Sunday evening – Sing Holdings and Wee Hur announced that Parc Botannia sold 230 units on the first weekend of launch

Monday evening – Sing Holdings’ share price surprisingly fell by 4% whilst Wee Hur’s share price rose almost 2%

The Curious Case of Sing Holdings?

Well, probably not. It seems more likely to be a classic case of “Buy the Rumor, Sell the News”. Let’s take a look at Sing Holdings’ share price movement. Prior to the recent run-up in Sing Holding’s share price since July, its share price was hovering around S$0.35 and for the past 4 months, its share price shot up by over 40% to close at S$0.495 last Friday.

 

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Sing Holdings 1-year share price chart

 

It is likely that investors had already priced in a strong sales performance at Parc Botannia prior to the actual launch. The eventual announcement on Sunday probably brings little surprises to the investors and was probably just to validate the guided sales price given by Sing Holdings and the confirming the strong buying interests at Parc Botannia (which was probably expected). Without many positive surprises to push the share price further up, investors might have taken this opportunity to take profit, in particular for those investors who bought the shares in July at S$0.35 per share.

Then why did Wee Hur’s share price increase?

Let us take a look at Wee Hur’s share price chart below.

Wee Hur
Wee Hur 1-year share price chart

Wee Hur’s share price had remained pretty stagnant at around S$0.24 for most of the year and it was only recently, in October, that Wee Hur’s share price started to trend higher. As at last Friday, Wee Hur’s share price closed at S$0.28, gaining around 17% since the run-up in October. In comparison to Sing Holding’s share price performance, Wee Hur’s shares would not be as overbought as Sing Holdings and it probably means that investors might not have priced in the full impact of Parc Botannia’s launch as optimistically as they had done so on Sing Holdings’ shares. This is probably why Wee Hur’s shares manage to see some gains today.

As a value investor, SPK tends to ignore the short-term noise in the market and focus on the long-term value of a company. From this perspective, SPK still believes in the long-term value of Sing Holdings base on his earlier analysis of the company. There might be a possibility of profit taking to continue for the next few days, but for those believers in Sing Holdings’ value, this might be a good chance to accumulate! But, DYODD please! (DO YOUR OWN DUE DILIGENCE)

Keep Calm and Carry On Investing!

 

Strong take-up at Parc Botannia over the weekend. Sing Holdings on track to hit jackpot?

What a weekend!

 

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Parc Botannia Showflat (Source: EdgeProp)

 

Parc Botannia saw a total of 230 units sold on its first weekend launch. That works out to be around 92% of the 250 units released for Phase 1 launch and 31% of the total units in the project. The average price of the units sold was around S$1,270 psf. It was reported that the buyers were mostly locals and popular units included 1-bedroom, 2-bedroom and 4-bedroom units. According to the EdgeProp, over 500 cheques were received as expressions of interest prior to the launch weekend and units had to be sold by balloting due to overwhelming demand.

Construction costs fully funded. Financial risks of developers reduced significantly.

SPK estimates that the 230 units sold would translate to a total sales revenue of approximately S$225 mil. The progressive payment from buyers of these 230 units would probably be sufficient to cover the construction costs, marketing costs and professional fees of around S$200 mil to S$230 mil.

What would Sing Holdings do next?

With the construction costs and fees fully funded, Sing Holdings is now in a very comfortable position to hold on to the remaining inventories at Parc Botannia. There is little pressure for Sing Holdings to launch the remaining units in the near future. A typical strategy would be to hold back the inventories in view of rising prices going forward and launch the phase 2 at a later stage with higher prices. SPK would expect Sing Holdings to do so to maximize its profit from Parc Botannia and there might probably be more upside to SPK’s RNAV estimate of S$0.885 to $0.935 per share if Sing Holdings gets the timing right.

Congratulations to Sing Holdings and its shareholders!

Is CapitaLand ready to jump on the enbloc bandwagon?

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Singapore property giant – CapitaLand announced its earnings for the quarter ended 30th September 2017 yesterday. From reading the announcements and presentation by CapitaLand, one question came to SPK’s mind – “Is Capitaland ready to jump on the enbloc bandwagon?”

Let SPK share some of his personal insights and key takeaways from CapitaLand’s results below:

1. CapitaLand is running out of landbank and sales inventory in Singapore

Take a look at the CapitaLand’s Singapore property sales performance this year in the table below:

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Amidst the improvement in market sentiments, CapitaLand has performed credibly in the past few quarters, selling more than a hundred units of its existing property inventory every quarter.

Despite the improvement in sentiments and better sales, CapitaLand has continued to come out with marketing strategies, such as deferred payment scheme, rental rebate scheme and discounts from list price. This was probably because a significant number of units in its inventory are big size units with high price quantum. These units are still difficult to sell under current market conditions. CapitaLand might be using this window of opportunity to clear its inventory of ‘difficult-to-sell’ stocks and avoid further ABSD.

So, what is left for CapitaLand to sell in Singapore?

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As at October 2017, CapitaLand has only a remaining 141 residential units in its Singapore sales inventory. Majority of them could probably be sold out within a quarter or two if we use its past sales performance as a gauge, although some of the units may remain difficult to sell.

In its sales inventory, the majority of the unsold units (38%) are the remnant units in Sky Habitat and CapitaLand has recently introduced a 5% rental rebate, on top of the 15% discount off list price to buyers, which makes the pricing looks attractive at around S$1,400 psf. Hence, it is expected that sales of Sky Habitat will continue to remain strong and this project should sell out rather sooner than later.

You might be wondering what is the big issue even if CapitaLand does not have anything to sell. In an ideal scenario, CapitaLand would probably be better to just sit patiently on its cash hoard, bid for land at realistic prices and wait for one day when the market cools and it can then buy land at a reasonable price and start selling again.
But in reality, considerations are always different. Without new project sales, CapitaLand’s earnings will drop, at a time when other developers are going report strong earnings from new launches. This might result in a drop in Its share price and shareholders may also lose confidence in its management. Hence, replenishing its landbank might seem more urgent than before with its earnings at stake.

2. A Change in the tone of management’s forward-looking outlook guidance

Let us take a look at the written outlook guidance from CapitaLand’s management:
Feb 2017

“CapitaLand expects the impact of property cooling measures to continue to weigh on the residential market. Nonetheless, the Group will continue to selectively source for new sites to stock its residential pipeline.”

Apr 2017

“CapitaLand expects the property cooling measures to continue to weigh on the residential market. Nonetheless, the Group will continue to selectively source for new sites to stock its residential pipeline.”

Aug 2017

“CapitaLand expects the property cooling measures to continue to weigh on the residential market. Nonetheless, the Group will continue to source for well-located sites to build its residential pipeline.”

Nov 2017

“The Group expects residential property market sentiment to improve, underpinned by increased buying volume and a rise in home prices. The Group will continue to adopt a disciplined approach and source for well-located sites to build its residential pipeline.”

 

Yes, after many quarters of concerns on the impact of government’s cooling measures, the dark cloud has finally dispersed and management is now more optimistic on the Singapore residential market!

Time for CapitaLand to act?

During the last enbloc cycle, CapitaLand (under former CEO, Mr Liew Mun Leong) was one of the big players in the market, snatching up 2 big plots of HUDC sites (Farrer Court and Gillman Heights) with its joint venture partners. Will CapitaLand under Mr Lim Ming Yan adopt the same strategy to build up its landbank, and creating wealth for enbloc owners?

Maybe SPK is reading too much into it. But let’s watch this space closely.

 

Investment Idea – Is Wee Hur also a good investment if Parc Botannia sells well?

weehur logo

A reader asked SPK this question – “You have recommended Sing Holdings. But what about Wee Hur Holdings Ltd? Wee Hur is also the developer (partner with Sing Holdings) and main contractor of Parc Botannia.”

 

A very valid question. Let SPK answer this question below:

1. The impact of Parc Botannia’s profit to Wee Hur will not be as significant as it will be to Sing Holdings

Wee Hur is also a SGX-listed company and it is also a partner (together with Sing Holdings) in the development of Parc Botannia. However, Wee Hur holds only a minority stake of 30% in the project. Based on SPK’s estimates in the earlier post, Wee Hur’s share of profit from Parc Botannia would work out to be around S$44 mil to S$52 mil.

But let’s not forget that Wee Hur is also the main contractor for Parc Botannia. Assuming that the construction contract is valued at S$155 mil and Wee Hur makes a profit margin of 13% (base on its past construction margin) from the contract, then Wee Hur would probably make an additional profit of S$20 mil from the construction job. Hence, total profit that Wee Hur could potentially derive from Parc Botannia is estimated to be around S$64 mil to S$72 mil.

Looks decent, isn’t it? But if we compare this potential profit against Wee Hur’s current book value of S$345 mil, this potential profit from Parc Botannia can only lift Wee Hur’s book value by 19%~21%, to S$409 mil~S$417mil.

In contrast, the impact of Sing Holdings’ potential profit (from Parc Botannia) to its book value is more significant. We have mentioned previously that Sing Holdings book value could potentially jump 40% to 47% because of Parc Botannia. This is also due to Sing Holdings’ smaller book value base as compared to Wee Hur.

2. Wee Hur’s core business is in the risky construction business

Wee Hur’s construction arm contributed the bulk of the company’s revenue and profit in the last financial year. SPK is not an expert in construction but based on reports and observations, the construction industry has already become a cut-throat business, with the entry of low-cost China construction companies. In addition, exposure to raw material price fluctuation could add another layer of risk to the construction companies. With their thin margins, there is little buffer or room for error and an increase in costs could result in losses to the construction company.

Recently, news reports also mentioned that the construction sector continued to be hard-hit by sluggish demand and delayed payments, with little relief in sight.

construction

Considering the lack of upside and yet the higher risk involved in Wee Hur’s business, it would seem that Sing Holdings might be a better choice to invest in, isn’t it?

 

IMPORTANT NOTICE

The information and opinion contained in this blog posting above is based solely on the personal analysis of Singapore Property Kaki (“SPK”) and is for general information purposes only. SPK assumes no responsibility for errors or omissions in the contents of this blog posting. In no event shall SPK be liable for any special, direct, indirect, consequential, or incidental damages or any damages whatsoever, whether in an action of contract, negligence or other tort, arising out of or in connection with the use of the content in this blog posting. SPK reserves the right to make additions, deletions, or modification to the contents at any time without prior notice.

Happy reading!

En-bloc Trend – What Mr Lawrence Wong’s comments could signal to the market

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Mr Lawrence Wong, Minister for National Development, made a couple of comments on the recent enbloc trend in the Parliament yesterday. Below are some of the extracts from his comments obtained from various newspaper sources:

  • The spike could be due to how more developers are keen on replenishing their land banks given the fewer number of unsold units in the market, said Mr Wong

 

  • Mr Wong said the unsold supply has dropped from about 40,000 units in 2012 to some 17,200 units as of the third quarter this year

 

  • The successful en-bloc sales last year could have also contributed to the increase this year, encouraging more owners of ageing residential projects to initiate the en-bloc sale processes to monetise their assets, added Mr Wong

 

  • Mr Wong pointed out that the collective sales may not necessarily lead to higher sale prices in the market

 

  • The developers are also required to meet stipulated conditions or face additional buyers’ stamp duty (ABSD……That will put some pressure on them to sell at reasonable price, within a five-year time frame, said Mr Wong

 

  • En-bloc sites that are taken off the market will eventually be put back into the supply in the next one to two years, thus moderating the prices, Mr Wong noted

 

  • The government continues to monitor closely the overall property market trends very closely and would take appropriate actions to maintain a stable and sustainable market, Mr Wong reiterated

 

What would be your thoughts after reading all the above comments given by Mr Lawrence Wong?

Well, it seems that the government is taking a soft stance towards the current state of en-bloc trend at this stage. In particular, Mr Wong is ‘justifying’ the trend by mentioning on the currently low unsold supply. Mr Wong was also trying to ease the concern of rising home prices by arguing that prices are subject to supply and demand and not solely on land price. In addition, Mr Wong seems to be hinting that there is still sufficient safeguard, such as the ABSD, in place to penalise developers and keep prices in check.

In summary, SPK thinks that there is one key message that Mr Wong was trying to tell everyone:

“Don’t worry. Everything is fine (for now). Keep calm and carry on (while the government is watching).”

Investment Idea – Is Parc Botannia going to be the big windfall for Sing Holdings?

Sing Holdings Limited

Sing Holdings will be launching Parc Botannia this weekend. Is Parc Botannia going to be the big windfall for Sing Holdings?  Would Sing Holdings be a company that is worth investing in?

To answer these questions, SPK shall do some analysis on Sing Holdings for the benefit of the readers here.

 

Sing Holdings will have a significant cash hoard after the divestment of Robin Residences

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Sing Holdings completed the disposal of its entire 100% equity holding in Sing Holdings (Robin) Pte Ltd on 8th September. Sing Holdings (Robin) Pte Ltd hold 29 strata units in the freehold Robin Residences.

With the completion of the divestment, Sing Holdings will receive cash of S$72.7 million. Adding on to the S$60 mil on Sing Holdings’ balance sheet, this means that the company will have a cash hoard of S$132.7 mil that is equivalent to S$0.33 per share!

 

Parc Botannia will be the potential windfall for Sing Holdings

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In SPK’s earlier post titled “Pac Botannia will be launching next weekend. How can you profit from it?”, it was estimated that Sing Holdings could potentially make a profit of S$100 mil to S$120 mil if it successfully sells out Parc Botannia at S$1,280 psf average. This would bump up its book value by 40% to 47%, from the current S$255 mil to S$355 mil – S$375mil! That would translate to a book value per share of 88.5 cents to 93.5 cents. And by the time Sing Holdings fully sell out and complete Parc Botannia in 3 years’ time, its cash hoard would have ballooned to S$233 mil to S$253 mil, after repaying its project loan for Parc Botannia!

 

What about its debt? It has S$292 million of debt on its balance sheet! A cause for concern?

Yes, on the surface, this might look scary. With a total debt of S$292 mil and a high gearing (debt to asset) ratio of close to 50%, Sing Holdings seems to be a risky investment. Even with the cash hoard of S$132.7 mil, it is still unable to cover its debt and it is still in a net debt position.

Should we be worried? Well, let’s take a closer look at its debt. Out of the S$292 mil, it is estimated (by SPK) that approximately S$215 mil was used to fund the upfront land and development costs for Parc Botannia. This project loan will be fully paid-off by the sales proceeds from Parc Botannia upon completion. As long as Parc Botannia is able to sell well, the repayment of the loan would not be of any concern. Early signs of strong demand for Parc Botannia should give us some comfort on this.

The balance debt of S$77 mil was for the funding of the acquisition of Travelodge Docklands, a freehold 14-storey hotel located in Melbourne, Australia with 291 guestrooms. This is a stable income generating asset and hence, it should generate sufficient cashflow to service the debt and shouldn’t have much issue with refinancing as long as it continues to perform.

 

Looks too good to be true? Is it a riskless investment?

Yes, all investment comes with risks. So what is the key risk in investing in Sing Holdings? From SPK’s perspective, one key risk is the sales performance of Parc Botannia. In the event that the sales is not ideal, Sing Holdings may cut price and hence, the upside to book value will be reduced.

Another risk is the future land acquisition by Sing Holdings. After Parc Botannia, Sing Holdings will run out of land bank and launch inventory. What will it do? It needs to bid for development land at Government Land Sales and collective sales. Given the heated competition for land at this stage, it is important for Sing Holdings not to overbid for land and increase the risks of the company and shareholders. But from past trends, Sing Holdings tend to go into land bids and tenders in partnership with a main contractor, with Sing Holdings hold a majority stake. This shows prudence in risk management by the company.

 

What is the upside potential we are looking at?

Sing Holdings’ last traded price of S$0.50 per share translates to a price to book ratio of 0.78x. On its reappraised book value of $0.885 to S$0.935 per share, Sing Holdings valuation would look even more attractive, at 0.53x to 0.56x price to RNAV. Let us just assume a re-rating of the stock to 0.8x price to RNAV, and this would imply a potential profit of 43% to 50% in capital gain! Looks like a BUY, isn’t it?

 

IMPORTANT NOTICE

The information and opinion contained in this blog posting above is based solely on the personal analysis of Singapore Property Kaki (“SPK”) and is for general information purposes only. SPK assumes no responsibility for errors or omissions in the contents of this blog posting. In no event shall SPK be liable for any special, direct, indirect, consequential, or incidental damages or any damages whatsoever, whether in an action of contract, negligence or other tort, arising out of or in connection with the use of the content in this blog posting. SPK reserves the right to make additions, deletions, or modification to the contents at any time without prior notice.

Happy reading!

Kopi Talk – 2 South Bridge Road shophouses sold for S$26.5 million to Sinar Mas-link company

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A unit of well-known Singapore brand – Eu Yan Sang, has sold its 2 shophouses at 273 & 275 South Bridge to Top Global Limited, a Singapore real estate company linked to the prominent Indonesian conglomerate – Sinar Mas Group. The 2 shophouses have 999-year leasehold tenures that commenced from 1823 & 1827 and have a combined gross floor area of 10,027 sq ft. The purchase consideration of S$26.5 million is 7% below the original asking price of the vendor and this works out to be around S$2,643 psf on GFA.

Several condition precedents need to be met and the conclusion of the transaction is subject to the satisfaction of these condition precedents, that includes terms such as verification of the GFA, change of use of 2nd to 4th floor as hotel or hostel and leaseback of ground floor units to Eu Yan Sang.

Upon successful conversion of the use of 2nd to 4th floor, Top Global will asset enhance the space that will be used for its hostel business under the “5Footway Inn” brand. “5Footway Inn” is already operating in 5 locations in Singapore, in the heritage zones of Chinatown, Ann Siang, Boat Quay and Bugis. This new property will be its 6th hostel location and the 4th one to be located in Chinatown/Ann Siang area.

The investment by Top Global seems to be a savvy one. Converting the use from office to hotel/hostel does have a higher risk due to the cyclical nature of the business and poorer earnings visibility but it could potentially generate greater upside returns to the group. The leaseback of ground floor units to Eu Yan Seng would probably be the best use of the prime ground floor space (instead of using it as a lobby area) and would also help to improve the asset yield. Moreover, 999-year leasehold asset in the central area is a scarce commodity and this is a great opportunity to acquire a good asset.

A good deal for Top Global?