Wednesday, September 28, 2011

Are you living in a 99-year leasehold condo that's nearing 30-year old? (Part 3)

Here's the third and final part of the cover story published in this week's THEEDGE SINGAPORE.

Bite-sized deals dominate
So far this year, developers seem to favour the lower- to upper-middle tier of the residential segment, with a ballpark figure of $200 million. “All the deals that have taken place this year have been below $200 million,” says Credo’s Singh.

The most recent transaction was announced on Sept 21, namely the en-bloc sale of Hong Leong Garden Shopping Centre to listed Oxley Holdings and a consortium of niche developers. The mix-use development located in West Coast was sold for $171.1 million. The 956-year leasehold site sits on a land area of 150,816sqft.

“This is the largest collective sale this year in terms of quantum price and the largest in four years in terms of land size,” says Singh. “During the last en-bloc fever in 2006 to 2007, $171 million would have been considered a small deal. How things have changed.”

According to Credo, so far this year, a total of 37 sites worth close to $2.24 billion have been sold in en-bloc deals, compared with 36 totalling $1.77 billion for 2010. “None of the deal for the big, freehold sites went through, and the 99-year leasehold sites offered for sale this year were all large,” says Credo’s Singh. “For en-bloc sale of a large project, the market outlook must be very positive. When sentiment is mixed, developers tend to prefer small, bite-sized projects.”

Location, site attributes and differential premium
The “most ideal location” for a property going en-bloc sale is next to an MRT station, says Stella Hon, head of investments at Jones Lang LaSalle (JLL). “To developers, the differential premium – which includes topping up the lease – is very important. If they are confident about the site, they would not focus on the differential premium. But if they are not so [confident], then it becomes important. It’s also a matter of timing.”

The measures introduced by the government earlier this year have also affected market sentiment and cooled the demand for residential property. With effect from Jan 14, the seller’s stamp duty (SSD) increased from a tiered rate of 3%, 2% and 1% for those who sell within the first, second and third year of purchase, respectively, to a hefty 16%, 12%, 8% and 4% for those who sell within the first, second, third and fourth year of purchase. The result has been slower sales at new project launches and a longer holding period for developments, says Knight Frank’s Loh.

The success rate of collective sales has been low this year, says CBRE’s Lake. “It’s a function of both quantum price and price psf per plot ratio,” he says. “The success rate in 2006/07 was about 90%; now, it’s probably 20%.”

The main difference is that in 2006/07, land prices escalated quickly and developers were able to meet the rise in reserve prices, explains Lake. “The reserve price is always based on forward price. And if developers don’t see any substantial price increase in the future, they will just sit tight.”

Even the large freehold en-bloc sites have failed to find buyers, for instance, Tulip Garden at Farrer Road, which was launched for sale at $650 million and later reduced to $600 million; Hawaii Tower on Meyer Road, which had a price tag of $700 million; and Brookvale Park at Sunset Way, which was offered for collective sale at an indicative price of $550 million.

But there’s no stopping the queue of collective-sale hopefuls from entering the market. On Sept 22, PropNex put up for tender at $500 million Cavenagh Gardens, a freehold site in prime District 9.

And JLL is marketing Parkway View, a 26-unit condo along Marine Parade Road for $81 million. JLL’s Hoh is also planning to launch for collective sale Faber Garden, a 233-unit condo developed by UOL Group in 1984. The project sits on a large elevated freehold site and has already achieved 80% consensus from its owners to proceed with a collective sale. In the pipeline are also two adjoining plots at Kim Keat Lane in Balestier, as well as another site in the northeast region. “All these sites are freehold,” notes JLL’s Hoh.

The rate of success for collective sales may be low, especially for large sites. And given developers’ lack of interest in large collective-sale sites, “owners’ expectations have to be tempered in order to bridge the price gap,” says CBRE’s Lake. “However, if the price premium is not large enough, there’s little incentive for owners to go through a collective-sale process. Replacement cost for owners has also gone up. Therefore, at different points of the property cycle, it may not be viable to do a collective sale.”

The [3-part] cover story, in addition to highlighting the predicaments of “older” 99-year leasehold estates, has certainly provided a good insight into the en-bloc market for 2011 thus far. Given the current state of the World economy and the sentiments in our property market, the wife and I will go out on a limb here and predict {yes, we did say we will stay away from making predictions, but we just cannot help it!} that none of the collective sales that are asking for $500 million and above will go through this year. The timing and market conditions {as we see it} are just wrong, so we really question if there is any point in rushing to sell now and be utterly disappointed with the results. And to repeatedly lower the reserve price after each unsuccessful en-bloc attempt is a sure sign of desperation {to us anyway}, which the developers will certainly exploit to their advantages in a buyers’ market.



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