The en bloc effect

The phrase “en bloc” gets the pulses of Singaporeans going, not least, for the prospect of a massive windfall

Francis Kan

SINCE May last year, up to 16 private residential estates were put up for en-bloc sale, with others in the works. And, just this past week, two sites at Bukit Timah Road were launched. Owners of freehold development City Towers set a reserve price of $355 million, while Six Avenue Centre, a mixed-use development, carries an indicative guide price of $90.5 million.

En bloc trends have become conversation fodder among real estate pundits. Analysts believe the spate of deals will spur the market’s recovery in the short term, with demand for new homes coming from buyers with freshly lined pockets from such sales.

Indeed, a report from American bank Morgan Stanley notes that collective sales have displaced some 1,500 homeowners from seven projects, each with an estimated average of $1.8 million. The firm’s September 2017 report states that with leverage, this adds up to $13 billion of potential capital inflows. That sum, more than the entire value of developer sales in 2016, could return to the property market.

This knock-on effect has made folks bullish. Global commercial real estate company Colliers International expects average private home prices in Singapore to rise 5 per cent annually this year and through next year, before moderating to 3 per cent annually in 2020 and 2021.

According to Colliers’ October 2017 report, this would bring the total price increase in the next four years to 17 per cent — roughly in line with the aggregate 15 per cent GDP growth that Singapore is likely to experience from 2017 to 2021.

The impact of collective sales is leading a long-awaited upswing this year for the residential real estate market.

It comes after a lacklustre few years, during which demand has been curtailed by restrictions on home-buying and economic uncertainty.

In October alone, the Urban Redevelopment Authority (URA) reported that the private residential property index for Q3 2017 increased by 0.5 per cent — the first rise after almost four years of decline. That same month, resale transactions also surged, with 1,461 non- landed private residential units resold, up 18.7 per cent from the previous month, according to SRX Property estimates.

Another big factor that could push prices up is the current drive for collective sales among owners in ageing residential developments. These en bloc transactions happen when 80 per cent of the owners of a condominium agree to sell their property to developers, allowing the latter to redevelop the site.

The upswing in the private residential market is further underpinned by a local economy, which grew 3.5 per cent last year, more than double the earlier forecasts.

Historically, home prices here have strongly correlated with gross domestic product growth, although this has been tempered by property cooling measures in recent years.

Mr Tan Tee Khoon, executive director and head of residential (project marketing) at real estate consultancy Knight Frank observes that private residential property market has become more upbeat as prices lift from the doldrums.

“Vacancy rates for unsold units continue to head south,” he says. “Amid positive sentiments, we look forward to a frenzy in 2018 as developers line up their developments to debut, particularly in the CCR (central core region).”

POTENTIAL SPOILERS

Still, a few factors could yet cool en bloc fever and hamper recovery in the broader market. For starters, potential sellers might start to over-value their properties. Ms Tricia Song, head of research at Colliers International, says: “With new records of land prices achieved, we envisage owners may raise their expectations and become unrealistic.”

Among potential buyers, rising development charges (DC) — a fee that real estate developers have to pay the Government to enhance the use of a site — could also deter more collective sales, as they drive up the cost of acquiring sites.

The Ministry of National Development revises DC rates twice a year, based on an assessment of land values, taking into account recent land sales and other property transactions.

DC rates as of September for non- landed residential use increased by an average of 13.8 per cent compared to March, the highest average increase since September 2007.

TOO MANY UNITS UP FOR SALE?

The rush to redevelop sites could also create an oversupply of residential units in the next few years, potentially dampening price increases over the same period.

In October, URA warned that redeveloped sites, from en-bloc sales sold or awarded in 2016 and up to mid-October last year, could yield about 9,300 units. Most of these could be launched in the second half of 2018 and 2019, analysts estimate.

With another 7,400 units expected from government-issued sites, there will be a total supply of 16,700 units. The bulk of that number could be up for sale in the next one to two years, said a URA report on real estate statistics for the third quarter of 2017.

In November, the Monetary Authority of Singapore (MAS) also cautioned against being too bullish, saying that en bloc fever and rising land prices could pose risks to the market’s stability.

Its 2017 Financial Stability Review noted that slower population growth could spell considerable uncertainty over the market’s ability to fully absorb existing vacancies and new supply. In the medium term, an insufficient demand for completed housing units could also place downward pressure on prices and rentals.

MAS urged prospective homebuyers to consider the subdued rental market and further interest rate hikes, which could curb their debt-servicing ability.

Despite the risks, analysts believe that en bloc sales will carry on at least into this year, boosting prices in the short-term. Ms Song reckons the rise will continue through this year and into the next, with more sites launching in prime districts.