How to spot condominiums with en-bloc potential

Eunosville potential en bloc

En bloc fever is upon the Singapore non-landed residential condominium/apartment market again.

Looking for a development with en-bloc potential? Have a fear of missing out?

Going by how land prices have moved in the past, and how developers have bidded, the potential for more en-blocs remains strong.

This en-bloc cycle isn’t the first, the last time the en-bloc fever hit the property market was in the period 2005-2007.

At that point of time, 12,710 en-bloc units were sold with a total value of S$22.3 billion, according to Ms Christine Li, Head of Research at Cushman & Wakefield.

As of writing of this post, Business Times reports that “there were 27 collective sales of residential redevelopment sites and three involving commercial or industrial redevelopment sites in 2017, bringing the total collective sales value to S$8.7 billion. This was a stark jump from 2016, when there were only three residential sites sold collectively for S$1 billion”.

For investors who are keen to jump on the en-bloc bandwagon but do not have a property that has en-bloc potential, how can they get started?

In this post, we scoured the internet and added a few of our original ideas to come up with a list of signs that investors can spot to identify apartments/condominiums that have en-bloc potential.

Rising land and property values in the area

Do you know the saying of “driving while looking in the rearview mirror”?

Investors and developers sometimes fall pray to this behavior when they approach the en-bloc market.

Looking in the rearview mirror when driving

Take a look at the chart below of a certain stock index.S&P500

Has been rising, yes?

Keen to buy into the market in anticipation that it will rise further?

I’m quite sure you’d be leaning on the fence to buy in rather than wait it out.

Let’s see what happened shortly after you had bought into the index.

It dipped.

S&P500 longerI use this as an illustration that everyone, rich, poor, tall, short, investors and developers can fall prey to “driving while looking into the rearview mirror” in their investments.

In the en-bloc market, this manifests itself by developers looking at how prices have shot up in a certain area, such as the central region, thinking to themselves that it will continue to rise, we can’t miss, and we need to enter.

And therefore these developers enter into the market and conduct an en-bloc. They have a Fear Of Missing Out (FOMO).

The key for a regular homeowner like yourself, is to spot the en-bloc potential in the area by looking at how prices have moved.

The movement in prices could portend a move by developers in making an en-bloc sale.

Developers may be thinking to themselves, “prices have risen, and while we don’t know for sure whether it will continue to rise, let’s buy into the market, tear it down and build it up, and by the time we launch the units for sale, cross our fingers and relying on our expert research analysts, prices would still have continued to rise.”

You as a regular homeowner wouldn’t need to take on the development risk. You however would need to piece 1+1 and try to anticipate the developer doing an en-bloc and ride on that potential.

In any case, a trend of rising price would result in developers keeping tabs on a certain location, and investors can use this knowledge to their advantage.

Also read: DC rates and en-bloc deals

Underutilized plot ratio

The URA 2014 masterplan has plot ratios for every piece of land in Singapore.

For example, the following screenshot of Singapore’s CBD shows the various plot ratios (the numbers with one decimal place) of different parcels of land.

URA masterplan plot ratios

Generally, apartments/condominiums where the plot ratio is underutilized has a higher potential for en-bloc.

Eunosville and Shunfu Ville en-bloc

For example, the en-bloc sale of Eunosville saw the developer paying about S$194m in government charges to intensify land use to a gross plot ratio of 2.8 (and to also top up the lease to a fresh 99 years), according to Straits Times.

Another example is Shunfu Ville, where part of the purchase price of $638 million includes a differential premium payable to the state to top up the lease for another 99 years and intensify the land use.

In these two cases (and many others in the market), the existing developments did not fully utilize the plot ratio.

Therefore the was the opportunity for developers to buy over the development, knock it down, and intensify and increase the land use by rebuilding more units than there were so that the plot ratio is maximized.

Also read: Free home reports and how they can help your property investments

Freehold condominiums

Looking at the list of en-bloc sales tracked by Edgeprop, what stands out is the number of freehold condominiums that go through collective sales.

For example, the following screenshot shows a good many developments that went through en-bloc in 2017 had a freehold tenure.

Edgeprop freehold en blocThe same situation can be found in 2016.

Edgeprop freehold en bloc 2016And also in 2007. There were too many to select so the en-bloc deals completed later in 2007 are shown.

Edgeprop freehold en bloc 2007From the above where a larger number of freehold apartments/condominiums relative to leasehold condominiums underwent en-bloc, one can infer that en-bloc developers seem to have an affinity for freehold sites.

EdgeProp’s en-bloc calculator

EdgeProp’s logit regression also pointed out that between Jan 2017 and Mar 2018, freehold projects were 1.75x more likely to go en-bloc than 99-year leasehold projects.

One reason for this is that developers will not be required to pay any lease upgrading premium to top up the lease from, for example, 60 years to 99 years.

Considering that most projects that undergo en-bloc are more than 30 years, the lease upgrading premium may amount to a significant sum for developers.

This amount can be avoided if the project going through a potential en-bloc is freehold in nature.

Also read: Improving Singapore residential market according to Propertyguru’s survey

Many housing choices in the vicinity

There will be a higher chance of an en bloc going through if there is a greater availability of housing in the vicinity.

For residents of the development that may potentially en-bloc, many of them can look around the immediate area for alternative housing, increasing the chances of them going through with the dea.

Low amount of land released by government land sales (GLS) in the area

En-blocs generally happen because developers are hungry for land.

The availability of land is key to the survival of property development companies because it is a raw material for developers to generate revenue, much like flour is raw material for an F&B outlet to produce food to sell.

Since 2013, the amount of land released by the government through GLS tenders has fallen.

This can be seen in the following chart by Colliers.

Colliers low gls supplyWith a reduction in government land supply, Colliers note that the supply is inadequate to meet the strong take-up (demand).

Therefore, with limited GLS offerings, developers are turning to developments with en-bloc potential.

Development is old in age

According to EdgeProp, developments that are older in age have a higher chance of going through en-bloc.

For example, between Jan 2017 and March 2018, the average age of properties that went en-bloc was 31.6 years.

There are a multitude of reasons for why older developments undergo en-bloc, one of which is that older developments require more money to upkeep.

More money has to be spent by the Management Corporate Strata Title to perform maintenance and CAPEX (for larger repair and upkeep) works.

Ultimately, it is the owners paying these monies.

Another reason could be that over time, surrounding plots of land have had their plot ratios lifted and been redeveloped.

If the said development isn’t utilized (because of the passage of time), there is a chance for a developer to en-bloc it.

In addition, the government could have slated the area for rejuvenation and over time, the character of said development is not in line with surrounding buildings.

Also read: The RES exam is getting more difficult to pass with only a 30% passing rate

Few or no resale transactions in the development

One sign that can spell an impending en-bloc sale is the lack of resale transactions in the development.

If there are recent transactions, some buyers would have to pay Seller Stamp Duties (SSD).

If the developer hoping to buy the development on an en-bloc basis, the developer would have to fork out a higher price to ensure none of the owners have negative proceeds.

This would result in a higher price to be paid to present owners, which means developers need to be more aggressive in their underwriting, which is risky.

If the last resale transactions were many years back, none of the owners would need to pay any SSD, and this would be less taxing and onerous on the developer in raising capital to pay off the present owners.

Also read: 8 Hullet condo in the heart of Orchard Road at Somerset (1BR from S$1.8xx)

Rejuvenation of surrounding area

Another reason that may increase the potential for en-bloc of a project is the rejuvenation of developments in the surrounding area.

One of the ways en-bloc help the government is through the renewal and rejuvenation of a neighbourhood.

The risk of development is undertaken by a private developer, they engage the residents, coordinate the activities required to carry through the en-bloc and ultimately help the government renew the neighbourhood.

There is no financial risk to the government at all.

One example of an en-bloc that took place near an area that is slated to be renewed is that of Raintree Gardens.

Sited beside a reserve site and a residential plot that is subject to detailed planing, there is a high chance that URA’s planners will look to develop the area over the coming years/decades.

Raintree gardens URA masterplanFor Raintree Gardens that is older and less well-built, it would look a little out of place once the surrounding areas are built up with swanky and spanking new condominiums over the next 5 to 10 years.

To the West of Raintree Gardens is Kallang which has been earmarked by the government for rejuvenation.

Given it’s riverside position, there is likely to be substantial financial gain for a developer to buy it en-bloc and tout it as a riverfront development as the entire area becomes rejuvenated.

Low number of units in development

According to PropEdge’s logit regression model, smaller developments have a higher success of en-bloc.

For example, between Jan 2017 and March 2018, projects with less than 50 units made up for over half of all succesful en-bloc transactions.

It is not difficult to see why projects with fewer number of units are more likely to undergo en-bloc.

With fewer stakeholders in a decision, it will be easier to achieve the desired 80% to go ahead with an en-bloc.

For other matters such as the consultant’s calculation of en-bloc proceeds, developer’s calculation of how much to offer, cost of engineering and building works etc., these can be done much quicker than a larger project with, for example, more than 500 units.

Also read: Life Sukhumvit 62 – a piece of Bangkok at S$1xxk for 1BR


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