The Rise of Enbloc Sales

How Times Have Changed!

A property agent recalls the time when some owners were so hostile to the idea of a collective sale that one of them set his dog on him. That was 15 years ago, when he made his 3rd visit to the owner to try to get him to agree to a collective sale for an apartment building in which he owned several units. The man got upset, opened the gate to his house, and unleashed his dog.

Homeowners are much more receptive these days. So much so that they are often the ones pushing their sites to market in very short timeframes.

There is a greater sense of urgency, and the 80 per cent minimum consent is achieved faster nowadays – usually in less than 3 months, and even at times, within weeks.

Previously this could have taken 8 or 9 months, or even up to a year. This round, owners are more united. They want to get into the action and launch their sites quickly, out of concern that developers would not have unlimited funds.

Just last month, 9 collective sites were launched, including the landmark Pearlbank Apartments, Derby Court near Novena, Kismis View at Upper Bukit Timah, Riviera Point in the River Valley area, Parkway Mansion in Katong, Vista Park at Pasir Panjang, and 11 Balmoral Road.

Why the change in sentiment? One reason could be that owners who missed out during the last cycle in 2006/2007, want to make sure they don’t miss this one.

Another reason to jump onto the enbloc bandwagon is that for some buildings that are ageing, it may make more sense financially to sell the site than incur rising maintenance costs and huge expenditures. Older developments on 99-year leasehold sites also face the prospect of declining values as the balance of the land tenure shortens.

With the market heating up, there is also the fear that the government may increase the number of sites in the Government Land Sales (GLS) Programme for the first-half of 2018, or that fresh cooling measures may be introduced, if property prices spiral up again.

Back in the 2006/2007 cycle, people just thought the property boom would keep on going. They held back, and the thinking was that the longer they dragged, the better the price they could get.

Now, people are more prepared to compromise, so as to move faster. They know the market will not always go up.

Another difference between the last collective sale boom in 2007 and the present one, is that the previous cycle was fuelled by the high-end sector whereas the current run-up is led more by mass-market projects. This reflects the fact that sales volumes have now gravitated towards the mass market due to affordability.

An Alignment of Market Forces

There are also other factors at play, helping to drive the collective sale fever. The biggest one is probably the surprising pick-up in new private home sales from February 2017 onwards, set against a backdrop of depleting land banks among developers, dwindling stock of unsold units, and a rosier economic outlook.

Given the small number of sites on the Government Land Sales (GLS) Programme in late years, bids by land-hungry developers at the state tenders have risen dramatically. This has led to bullish bids for the collective sales sites too. It is this sudden rise in land values that has made viable again, those enbloc sales sites that could not succeed in the last 10 years.

The government tightened GLS supply because of concerns of an oversupply, with the cooling measures weighing down on home buying. However, the market picked up this year. Developers sold 9,460 new homes in the first 10 months of 2017, after three consecutive years of selling 7,000-plus units a year in the primary market.

Some attribute it to a sentiment boost after the authorities unveiled tweaks to the property cooling measures in March. But those on the ground attribute it more to pent-up demand, that had been waiting in the wings.

With such healthy sales, developers’ stock of unsold units has shrunk. The inventory of unsold, uncompleted private homes with planning approvals fell to 16,031 units in September 2017, from 20,577 units a year earlier, and down from the peak of 43,473 units in mid 2008.

Given the diminished inventory, developers have an incentive to start buying land again.

For the year to date (as of 5 December 2017), around SGD$8 billion of collective sales across all property segments have been sealed, significantly up from just slightly over S$1 billion in 2016. In the peak year of 2007, the figure stood at S$11.5 billion.

On the flip side, bidding high for land comes with risks for developers.

The redevelopment of en bloc sites as well as supply from GLS sites could potentially yield about 20,000 new private homes (including ECs or executive condo units). These units will enter the supply pipeline and likely be made available for sale in the next year or two.

As at September 2017, 17,178 units (including ECs) with planning approvals remained unsold. When the additional 20,000 units complete in the next three to five years, the stock of private homes will rise.

Recycling & Urban Rejuvenation

Notwithstanding the impact on supply, it can be argued that en bloc sales are a good way of recycling land and spurring rejuvenation. For ageing buildings, the cost of a major refurbishment may be too prohibitive for owners to stomach. Moreover its design may not be energy efficient.

Interestingly, the current enbloc sale mania has even piqued the interest of owners of relatively new developments. In general however, newer developments would not gain much, if anything, from a collective sale. The site would likely have maximised its plot ratio already and being relatively new, prices on an individual unit sale basis are relatively high, so there is not much premium gain.

Industry experts stress the importance of reasonable pricing. Owners need to strike a balance between getting the 80% quickly and going to market at a realistic price so as to attract bidders. Over the last two years, over 20 developers have clinched at least one residential site – either at state tenders or through private-sector deals like collective sales.

Another 15 developers are still looking out for residential land here. Once every developer has replenished enough land to last a couple of years’ of development, they will be more reluctant to pay high prices.

The current en bloc boom is expected to last till around the end of 2018. But if asking prices go overboard, then developers may just focus on GLS sites, which will cream off some demand for collective sale sites.

Other factors that could bring a premature end to this en bloc boom include a big jump in the GLS programme, an economic downturn, hikes in development charge rates payable, or new cooling measures by the authorities.

History of Collective Sales

The principle behind en bloc sales is that individual owners in a development can get a higher price for their units by grouping to sell their site together to a developer who wants to redevelop the land.

While there had been cases previously of neighbours joining forces to sell to a developer, the first en bloc sale through public tender managed by a property agency was for Cosy Mansions in the East Coast area in 1994.

This heralded the start of a boom that lasted till 1997. It was triggered by widespread increases of plot ratio in the DGPs (Development Guide Plans) exhibited by the Urban Redevelopment Authority (URA) from 1993 to 1997.

DGPs are detailed plans for each of Singapore’s 55 planning districts, specifying land use, building height, plot ratio and other design & planning details. When a DGP was finalised, it was gazetted as the new Master Plan for that particular area. When all the 55 DGPs were completed, they were gazetted as Master Plan 1998.

As Steven Choo, adjunct associate professor with the National University of Singapore’s Department of Real Estate, explained: “With the DGPs, you can now see very clearly where the market potential is, how different areas or districts have been earmarked for higher development potential compared with previous versions of the Master Plan.”

The increases in plot ratios – i.e. the ratio of maximum gross floor area to land area – presented an opportunity to unlock the redevelopment potential of the land. Land values escalated as a result.

In fact, even before the release of the DGPs, a key change had already been made that allowed developers to build more floor area. This was the change of the measurement of intensity of residential use, from the previous persons per hectare population density system, to the present plot ratio method, from 1 Sept 1989 onwards.

The greater clarity of the plot ratio system allowed developers to better assess development opportunities and potential.

At that time, however, the local property market was still in the throes of the major recession of the mid-1980s. In the early 1990s, liberalisation of rules governing Housing and Development Board resale flats and the use of Central Provident Fund savings to repay housing loans, helped to propel a recovery in property prices.

The en bloc wave that started in 1994, ended in 1997 when it was cut short by the Asian Financial Crisis. The succeeding waves were:

1999-2000: This happened when legislation was introduced to allow en bloc sales so long as 80 or 90 per cent consent was secured from owners, based on the age of the development. Prior to that, unanimous consent was required.

2005-2007: This was fuelled by Singapore’s plans to become a global wealth management hub, and by plans for the Integrated Resorts, that put Singapore back on the radars of international investors. This wave ended with the global financial crisis.

2010-2013: This cycle was brought to an end by the cooling measures, before the present wave began last year.

Source: The Business Times . 9 December 2017