Deep diving into the Singapore enbloc scene (Part 1)

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How has the enbloc market in Singapore evolved so rapidly during the year?

The first successful enbloc only took place in May this year, when Lum Chang bought One Tree Hill Gardens and BBR bought Goh & Goh Building. Nothing much to shout about back then as the transactions were small in size and final prices came in lower than the asking prices of the enbloc sellers.

The Game Changers

What might have been the game changer were the next 2 enbloc transactions – Rio Casa and Eunosville. Why were these transactions significant? Firstly, these are 2 big transactions of S$500 mil and above and secondly, the sellers received much more than what they asked for. Hence, these transactions might have triggered the herd instinct of developers who were still sitting on the sideline, and the greed of private property owners who were hoping for a windfall.

The Perfect Storm

Here comes the perfect storm. Private property owners rushed to form collective sales committee and get the enbloc process going, and developers competing to grab whatever properties that are available for collective sales. Enbloc momentum seemed to pick up rapidly in September and October, with the conclusion of 9 enbloc cases during the 2 months.Enbloc1Hotspots for Enbloc: District 19 and 15

For the year to date, the enbloc craze has created a potential 2,721 millionaires (assuming that STB approves all the enbloc cases). Popular districts for enbloc are District 19 (particularly Hougang and Serangoon area) that has 5 successful cases of enbloc with 950 owners profiting from it. The other enbloc hotspot is District 15 (Amber, Meyer Area) that has seen 3 condos acquired via enbloc with 247 households making their money from it. Prime districts 9, 10 and 11 have not yet seen a spillover in the enbloc interest. There were only 3 enbloc cases in the prime districts and these are relatively small in size with value below S$100 mil.

Developers’ Insatiable Appetite for Land

Despite the pressure to sell all units within 5 years after acquiring a land to avoid paying the additional buyer stamp duty, developers have continued to exhibit good appetite for large development sites. Out of the 17 enbloc cases, 8 of them have land area that are more than 200,000 sq ft. Risk management seems to be secondary to the developers at this stage as the majority of the developers went in on their own without partners to acquire the sites and these aren’t small sum of money. Sim Lian Group went in alone to acquire Tampines Court at a whopping S$970 mil.

The last enbloc cycle in 2007 was quite a different case from today’s. Back then, developers tend to form consortium to jointly bid for large enbloc sites, such as Farrer Court (Capitaland, HPL, Morgan Stanley, Wachovia), Gillman Heights (Capitaland & HPL) and Minton Rise (Kheng Leong & Low Keng Huat). Such a trend has not yet happened during this round of enbloc cycle.

Freehold or Leasehold? It doesn’t matter

Out of the 17 developments sold enbloc to date, 10 are freehold sites and 7 are 99-year leaseholds. The acquired freehold sites tend to be smaller in size and located in either prime districts or exclusive areas. Developers also tend to exhibit good appetite for 99-year leasehold sites that are big in size. What is the attractiveness of large leasehold sites? Large sites would give developers a lot of room to create innovative real estate products. Nowadays, lifestyle is what consumers are looking for. Developers can create a lot of lifestyle facilities within a large plot of land that will make their product more interesting and marketing will be a lot more easier. Moreover, cost of a 99-year leasehold site is relatively lower than a similar freehold site and that reduces the capital burden on developers, or, for the same amount of money, developers can invest in a bigger leasehold land rather than a smaller freehold land in a similar location.

 

In our next enbloc posting, we will provide more review on the key players and transaction prices of the successful enbloc cases.

Stay tuned!

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Kopi Talk – URA’s request for en bloc tender details intrigues market

URA’s request for en bloc tender details intrigues market – The Business Times

http://www.businesstimes.com.sg/real-estate/uras-request-for-en-bloc-tender-details-intrigues-market

Kopi Talk

Well, it is anyone’s guess on what is URA’s real intention to request for more details. URA’s fundamental objective is to ensure a stable and sustainable property market, planning for long-term sustainability and facilitating development and business needs. All these requires carefully planning and manoeuvring around the policies to ensure fairness to all stakeholders and stability to the property sector, banking sector and economy of Singapore.

An ill-planned policy move driven by the recent enbloc craze could lead to a pro-long downturn in the property market with multiple knock-on effects, such as, affecting Singapore’s reputation as an open and fair economy and foreign developers losing confidence in Singapore as a fair and open market, developers and construction firms going into a downturn and affecting employment, rising property bad debts within the banks and affecting financial stability, and decline in consumer sentiments and ‘wealth destruction’ from declining property prices that might ultimately affect consumer spending, with knock-on effect to retail sectors etc.

The above points are just to illustrate how bad things can get if the government decides to implement an ill-planned measure just to counter a temporary trend in the market. But let’s not overthink on this issue. It could well be the case of URA doing more due diligence to prevent against instances of money laundering, or like what some analysts say, using the data to plan for the coming GLS.

Keep calm and carry on!

How to look for enbloc profit opportunities?

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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:

https://www.edgeprop.sg/property-news/how-spot-next-en-bloc

For readers who are lazy to read the full article, let me summarise the article for you here:

  1. Important factors to spot potential enbloc properties are
    1. Age
    2. Number of units
    3. Plot value enhancement
    4. Premium of new sale/ resale prices over the collective sale price
  2. 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:

  1. Scenario 1 – A condominium with baseline plot ratio lower than allowable plot ratio (opportunity for value enhancement)
  2. Scenario 2 – A condominium with baseline plot ratio same as allowable plot ratio (no opportunity for value enhancement)
  3. 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.

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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:

  1. Scenario 1 – A condominium remaining tenure of 50 years
  2. Scenario 2 – A condominium remaining tenure of 65 years
  3. 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.

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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.

  1. Scenario 1 – A condominium that is very efficiently built (180 sqm GFA per unit)
  2. Scenario 2 – A condominium that is optimally built (200 sqm GFA per unit)
  3. 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!

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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!

 

Happy enbloc-ing!