Friday, March 11, 2011

Signs of a quieter en bloc cycle

THE residential collective sales market sprang back to life in 2010 with over 34 sales totalling $1.7 billion. This was in stark contrast to 2009 when only one deal was struck.


The trend last year was towards the sale of small and mid-sized sites outside the prime districts, unlike 2007 when many large and higher value sites in prime districts were transacted during the peak of collective sales activity. Approximately three out of four collective sales concluded last year were below $50 million while only three were above $100 million.


There were also fewer collective sales arising from prime locations last year, with the focus having shifted from the traditionally en bloc strongholds of Districts 9, 10 and 11 to mid-prime and suburban locations such as Balestier, Hougang, Katong, Marine Parade and Telok Kurau. Eighty per cent of the deals concluded in 2010 were outside the prime areas while half of the collective sales in 2007 were prime market transactions.


The trend towards the sale of lower value sites as well as sites in less prime locations seems to tie in with the take-up rate of new units sold by developers in these locations. Out of the 15,832 uncompleted new private homes units sold in 2010 (excluding executive condos), only about one-quarter were from the prime market, while the more active suburban market accounted for about half. By contrast, in 2007, the prime market which was more active then, accounted for one-third of new units sold while another one-third was attributable to the suburban market. Looking at the current supply of unsold units in projects which have been launched for sale, about half of the unsold stock is in the prime market. This shows that the take-up rate of prime residential properties in 2010 had not recovered to 2007 levels.


The higher supply of smaller sites being put up for sale in 2010 is partly due to the relative speed of garnering the 80 per cent mandate from smaller estates with fewer owners compared with larger developments. Also, being more affordable, smaller sites attracted small to medium-sized developers who found the high absolute values of larger government residential sale sites prohibitive.


The lack of larger sites sold last year is not so much due to a lack of demand for them but rather a shortage in supply arising from the extra time needed to meet the legal formalities and logistical arrangements when gathering owners' consent.


The beginning of 2011 has seen the resumption of collective sales activity with six deals closed to-date. These include the disposals of Marine Point ($100.68 million), Robin Star ($47 million), Bartley Terrace ($40 million) and Amber Glades ($118.12 million).


Although smaller sites will still remain popular due to their low absolute values, the mid-prime segment of the residential market seems more promising this year. Developers could be more interested in this market segment as the suburban market continues to be amply supplied through government land sales and the value of prime sites remains high and less affordable compared to mid-prime. Mid-prime sites which are realistically priced with unique selling points like being near MRT stations, shopping centres and good schools could see stronger interest in 2011.


The performance of the collective sale market in 2011 will be dependent on several factors. The cooling measures that were implemented by the government during the course of last year and again on Jan 14 this year will lead to developers being more cautious in purchasing residential land. En bloc sites will also continue to face competition from mass market sites offered under government land sales. The unsold stock of properties in the prime districts could also deter developers from bidding aggressively for prime sites, with high asking prices. As a result, while we expect 2011 to achieve higher than last year's tally of $1.7 billion in aggregate sales, we do not expect it to come close to 2007's $11.4 billion.


In view of the healthy collective sales performance last year, many property owners have been asking us whether it is too late for them to start the collective sale process now. The en bloc market is highly cyclical in nature. Developers would buy land or en bloc projects when they are confident of the market ahead, and especially if they are running low on their landbank. Once they have bought sufficient land, or begin to have concerns over possible slowdown in the property market, they stop buying.


As a result, the en bloc sale market moves in cycles that typically present an average window of opportunity of 18 to 24 months per cycle for sellers to capitalise on. These windows of opportunity are characterised by a healthy or buoyant market underpinned by positive economic conditions. In between spurts of activity in the en bloc sales market, there are generally few successful collective sale transactions and low interest from developers.


The early spurt of en bloc sale activity that took place in 2010 now seems to be affected by the recent cooling measures. As a result of this and fears of further measures to douse the flames of the market if it remains as hot as last year, we expect this cycle to be less spectacular with lower intensity of sales. However, from a positive point of view, this could mean a broader time window of opportunity for en bloc sellers than the typical 18 to 24 months, as we believe the market will continue to be sustained by the positive economic environment.


Owners contemplating en bloc sales would probably still have the opportunity to ride on this current wave of en bloc sales if they start early, recognising that it is a lengthy process to organise the sale. In past en bloc sales cycles, it was quite common for en bloc owners to 'forward price' the value of their development, expecting land values to continue to rise from the time they set their reserve prices to the time they find themselves ready to be marketed.


With the expected moderation in the marketplace arising from the government's cooling measures, it is now necessary for en bloc owners to rethink this bullish pricing strategy. Aggressive pricing would result in the failure of a collective sale, leading to disappointment and frustration among owners.


Under the revised en bloc rules that took effect from July 15, 2010, there are additional disclosure requirements for collective sale committee (CSC) members to make. This will allow owners to make a more informed choice as to who they want to elect into their CSC. CSC members will need to declare the extent of ownership that they or a connected person, either an immediate family member or a firm in which they have at least 5 per cent voting power, have in the development and when the purchase was made.


The new and more stringent en bloc sale rules also make it harder to restart a collective sale within two years of a 'failed attempt'. A failed attempt occurs when:


the collective sale agreement expires without obtaining the minimum 80 or 90 per cent consent within one year of the first signature,
the quorum for an EGM to discuss en bloc sales is not met within an hour of the appointed time of the meeting,
the motion for the constitution of a CSC is defeated at the EGM,
the CSC is dissolved, or
the CSC fails to start collecting signatures to the collective sales agreement within one year from their formation.
Any attempt to convene an EGM to elect a new CSC during this two-year restriction period will require higher requisition levels from owners - 50 per cent by share value or total number of owners for the first re-try and 80 per cent for any subsequent attempts. The objective of this change is to discourage repeated frivolous attempts at en bloc sales where there is insufficient level of interest from owners.


Our advice to owners embarking on an en bloc sale is therefore to ensure that there is some degree of certainty in getting the 80 per cent mandate to a market-realistic price before starting the sale process. It would hence be useful to seek the help of an experienced property consultant early for assessment of the en bloc sales prospects, and advice on the procedures to ensure a smooth ride to success.

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