Cashing in on en bloc fever
Published November 8, 2006
Cashing in on en bloc fever
How does one go about picking a strata unit with collective sale potential?
HO ENG JOO lists some important considerations
EN BLOC frenzy returned to Singapore last year, with sales gaining momentum in 2006. Since 2005, more than 87 collective sale sites with a value of $8.35 billion have been transacted. In the first nine months of 2006 alone, transaction value soared to a whopping $6.4 billion, compared to just $1.94 billion for all of 2005.
The surge in en bloc activity has created excellent opportunities for investors to pick up strata units in projects with the potential for an en bloc sale. In a bullish market, astute investors may hit a goldmine in a short period of time, if the en bloc sale materialises. There are many stories about how 'specu-vestors' made a quick profit on such deals. One recent example is a penthouse unit in Silver Tower, which the buyer bought at an auction for $6.12 million and sold for more than $7 million a month or two later.
However, like all investments, there are risks and uncertainties when buying apartments for en bloc sale. So, not only must investors understand the market well, they also need to consider the following:
Land value versus existing value
This is the first step in determining whether a development has the potential for an en bloc sale. When the property market is recovering, the land price would generally rise faster than the price of the existing property. This is in anticipation of a higher selling price for a new project by developers.
Consequently, the land value of a development with en bloc potential would appreciate to a level that exceeds the total value of all existing units. This would be an opportune time for owners to explore a collective sale for a better price.
Over the past 12 months, the market has seen a significant increase in land prices in districts 9, 10 and 11. As such, investors may want to consider properties located on the fringe of both the Central Business District (CBD) and Orchard Road.
Land prices in these areas have not risen substantially and owners' price expectations are still manageable. Given the positive sentiment, developers may be tempted to acquire such sites since the risk is still not too high.
Percentage of potential premium
The next important issue is the percentage of potential premium gained from collective sales. Owners may not be enticed to sell if the percentage is too low, as they also need to factor in the cost of relocation, payment for a new property and renovation costs.
As a rule of thumb, owners will feel motivated to sell collectively if the potential premium is at least 35 per cent to 40 per cent. In some cases where land value has escalated, such as in Orchard Road, premiums can exceed 100 per cent.
Another factor that investors must consider is that owners must not suffer a financial loss. That would happen if the sale proceeds of the unit in an en bloc sale are lower than the purchase price. For instance, some owners who bought their units during the peak in 1996 and 1997 may not break even today, even in an en bloc sale.
Owners who face such financial loss can lodge an objection with the Strata Titles Board. If many owners in the development are in that predicament, the possibility of an en bloc sale is significantly reduced.
Investors should also be aware of the pricing of new projects in the vicinity. This is because current owners will evaluate if the proceeds from an en bloc sale can cover a replacement property in the vicinity. If not, they may be reluctant to sell.
There are some owners who want a home of the same size as their current home. If theirs is a 2,000 sq ft apartment in an older development, a replacement may be hard to find.
Type of owner and building
Typically, smaller estates would have a higher chance of success than a large project with many owners. An estate may comprise retirees, professionals, heartlanders, overseas owners, occupiers, investors, youngsters or old folks, who might have different concerns. Before buying the unit, the investor may want to talk to the agent to understand the general sentiment, because not every owner would want to sell their property, even at a premium price.
Another gauge of a potential en bloc is the age of the property. Generally, developments built 30 to 40 years ago, such as four-storey walk-up flats, stand a better chance of an en bloc sale. Buildings with defects requiring substantial funds to rectify are also potentials for an en bloc sale.
The net sale proceeds distributed to owners in an en bloc sale would also depend on the development charge (DC) payable, which is based on the difference between the 'development ceiling' and 'development baseline'. There are some older developments built with a higher base plot ratio (or approved floor area) which may exceed the proposed development's floor area. In these cases, the DC is relatively low. Some may not even incur any DC.
Another bonus is if the en bloc site is situated next to state land. The owners can ask to alienate the land to make it part of the future development. That's provided the state land cannot be developed on its own.
The amalgamation of the state land, depending on the size, would bring down the cost for the developer. This is because the state land will be charged at the same rate as the DC, which is pegged at 50 per cent of land value. The developer will factor this in the acquisition and the 'savings' will be passed on to the owners.
Though the profit from an en bloc unit can be handsome, the risks are also high. There are investors who bought en bloc units in 1996 or 2000 (during previous en bloc booms) and are still holding on to them today. One can only imagine the interest cost, property tax, maintenance and opportunity cost accumulated over the years. The low rental, if any, would never be able to cover these high costs. These investors may have to continue carrying the burden until the next property upcycle. So investors must do careful research before buying a unit with en bloc potential.
The writer is director, investment sales, Colliers International.
Last edited by mr funny; 8th November 2006 at 11:26 AM.