The En-Bloc Process
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From Shunfu Ville to Tampines Court, Singapore has been seeing big en bloc sales happening one after the other. This is despite property prices being depressed since 2014, so the property market must be recovering, right?
Yes, but not in the sense this question suggests. Make no mistake, developers are confident property prices will pick up, but that’s not even the main reason why they’re still buying.
Property prices are down by around 11 per cent since their peak in 2013. But since the recovery from the Global Financial Crisis (2008/9) to its peak in 2013, property prices in Singapore have shot up by around 60 per cent. This is one of the main reasons why the Monetary Authority of Singapore (MAS) refuses to unwind cooling measures just yet.
What we’re saying is, even with prices falling the past few years, Singapore’s property market is far from being in dire straits. It’s still a lucrative market, and developers can still make a lot of money from building new condos.
The main worry, for most developers, isn’t that property is going to be unprofitable. The main worry is that there won’t be enough land to build on. There are only a limited number of government land sales, and only so many viable areas up for en bloc sales.
The most honest answer would be “not always”.
En bloc sales theoretically reflect on the current or potential value of the land. After all, en blocs usually happen when the property sitting on the land becomes less valuable than the land itself, due to the emergence of amenities like train stations, eateries, and so forth.
But much like when you’re determining rental incomes and resale prices, exceptions do happen. Properties across the street from each other can have widely differing values. So while nearby en bloc sales at high prices are generally a good sign, they shouldn’t be taken as clear-cut indicators that your specific property has also risen in value.
One other thing to note is the developer’s intentions. As we’ve pointed out in earlier articles, someforeign developers, such as from China, are not based purely on profit margins. Some of these developers are engaged in a branding exercise; they want to build in capitals like New York, London, Singapore, Dubai, and others to show that they have the capability to do so.
The bids from these developers may not reflect real prices, as they’re willing to accept a lower bottom line in exchange for branding.
In terms of numbers, yes, it would be profitable for developers to make the offer. In reality, other factors interfere.
For example, an old property may be sited on prime land, such as Peace Mansions / Peace Centre (which has been almost impossible to en bloc for the past decade). But certain zoning restrictions may prevent developers from pitching an attractive enough price. If the usable space is too limited (e.g. the developer cannot build above a certain height), the price may not be as high as you hope.
There’s also the issue of emotional attachment. In some developments, the majority of residents may simply be unwilling to move. Perhaps they’re retirees who don’t want to move to a new community, for example. In these cases, the en bloc potential exists purely in theory; there’s no way to garner enough votes for it to go through.
It’s best not to gamble on en bloc potential.
It takes around one year for the transaction to be completed, assuming there are no serious interruptions. Remember that outvoted residents can still raise objections to the Strata Title Board (STB), even after the 80 or 90 per cent majority vote has been obtained. They can also still file a court appeal, if that doesn’t work. And we assure you, that’s as probable as tomorrow’s sunrise. There’s always a handful of these types.
After all this hoo-ha, and the completion of the transaction, you’ll have to wait between four to six months to get the sales proceeds.
You’ll probably need a bridging loan of some sort, if you want to move to a new place sooner.
This has nothing to do with the price.
The more available housing there is nearby, the greater the chance of the en bloc going through. Residents who don’t want to leave that specific area have nearby alternatives, so they’re more willing to go through with the deal.
There are two key reasons. The first is that many developers' land banks are at near record-low levels.
Insufficient supply by way of government land sales has only served to push demand up, analysts say. That the various properties offer a variety of locations and plot sizes only sweetens the deal for developers.
Another reason is that owners of ageing residential projects may be more eager to sell, after seeing several successful sales in 2016.
The authorities have been issuing cautionary notes about purchasing properties with expiring leases. This may also have contributed to more owners initiating the process this year to monetise their assets.
An 'en bloc' sale is often seen as a windfall for sellers, because of a "collective sales premium" that can be as high as 25 per cent, compared to selling an individual unit on the open market.
Developers stand to make a killing as well if new developments from collective sales fetch a good price - though they must time the markets and price the units to sell within five years of the award date, or face punishing taxes.
Other potential winners include the Singapore Government, which can boost its financial reserves with land sales. Over the past 15 years, the Government received $10 billion to $20 billion annually on average from land sales.
Collective sales also enable capital - through the proceeds - to be recycled back through the economy through new or resale home purchases. Sagging sectors such as construction are expected to get a new lease of life next year as new condominium projects start to be built.
There are many reasons residents may argue against 'en bloc' sales.
International Property Advisor chief executive Ku Swee Yong is concerned that frequent redevelopment may lead to "communities that are not resilient because nobody knows each other".
There is also the stress and uncertainty of finding a new home, which is complicated by the fact the the proceeds of collective sales arrive only four to six months after the date of award.
Finding a replacement apartment in a similar location and of the same size may also require some top-up, which would erode any financial gains.