Commercial en bloc in focus as cooling moves crimp home deals

Following the cooling measures in 2018, commercial collective sales surpassed residential en bloc sales by value this year, a trend which is expected to continue into 2020.

According to data by JLL, approximately 40 sites were launched for collective sale this year, as at Dec 13.

Five sites totalling some S$461 million were sold, of which only one is a wholly residential site – apartment block Sophia View which sold for S$9.28 million in June. A row of apartments and shophouses along Phoenix Road was scooped up for S$42.6 million in July by a subsidiary of Qingjian Realty (South Pacific) Group.

The remaining three sites were Min Yuan Apartments – which is being developed into a hotel by Fragrance Group – as well as two commercial sites.

Tan Hong Boon, executive director (capital markets) at JLL Singapore, said: “Notably, these sites are small and non-residential sites are more receptive by developers and investors, primarily due to the hefty increase in Additional Buyer’s Stamp Duty (ABSD) since July 2018.”

In the first six months of this year, three sites were sold and the two bigger commercial sites, Realty Centre and Selegie Centre, accounted for nearly the majority of total volume at a collective S$268 million.

Among the 40 or so sites launched this year, Riverside Piazza near Clarke Quay, which had a tender closing date of Dec 19, has entered into private treaty negotiations, while Katong Plaza – which had the same closing date – has received an expression of interest from a prospective buyer.

JLL highlighted that sales volume hit a high in 2018 in the current collective sale cycle, with transaction value totalling S$10.836 billion. Still, the bulk – or some S$10.396 billion – was chalked up prior to the cooling measures which were implemented in July 2018.

With the cooling measures in place, developers’ appetite for residential redevelopment waned, resulting in a slowdown in residential collective sales.

Only two of 40 sites – representing around 3.2 per cent of the total sales tally – sold before July’s cooling measures in 2018 were non-residential sites, by JLL’s count.

Post-cooling measures, volumes deteriorated and the ratio flipped. With just three sites worth S$440 million sold in the rest of 2018, some 93 per cent of the value came from non-residential sites, the consultancy estimates. Golden Wall Centre and Waterloo Apartments were sold for S$276.2 million and S$131.1 million respectively. The third was the residential site Phoenix Heights, which sold for S$33.1 million.

A similar story played out in 2019, with a higher proportion of commercial collective sale sites sold.

Tricia Song, head of research for Singapore at Colliers International, said: “In 2019, non-residential deals gained favour with developers as residential development took a back seat on the punitive cooling meassures.”

Meanwhile, investments in the hotel sector have also risen year-to-date amid buoyant visitor arrivals and a tightening supply pipeline, she pointed out.

“Despite the higher proportion of commercial collective sale sites sold, this is by no means an indication of the rise of commercial collective sales,” said Mr Tan.

“Overall, we have not seen much success in commercial collective sales either, with the main activity being in shophouses and office/mixed use building transactions.”

The main challenge includes getting collective sale owners’ to agree on “reasonable” pricing as well as the apportionment method for the distribution of the gross sale proceeds, especially among the various property uses, he pointed out.

Going into 2020, analysts expect that the residential collective sales segment will remain somewhat muted as developers remain cautious.

For next year, Mr Tan reckons that sales value in general will be significantly lower from the heights climbed in 2017/2018, with less residential collective sales deals likely to close vis-a-vis non-residential sites.

“Smaller residential collective sale sites of up to S$200 million may find takers as demand for residential units remain steady,” he said.

“There are still small to mid-sized developers who continue to look out for land. Demand for large residential collective sale sites will remain subdued because of the higher risks from the lengthy collective sale process and the contraints of the five year ABSD remission period.”

While more commercial, or non-residential sites, could be launched for tender in 2020, the first step to a potentially successful sale would be to convince developers that what collective sales owners are asking for is “economically viable”, Mr Tan highlighted.

Ms Song expects residential collective sales to “continue to take a back seat at least till mid-2020” as developers work on selling off their existing inventory.

Developers could also turn their attention to government land sales (GLS) as a means of shoring up landbank, she reckons.

Where commercial collective sales are concerned, Ms Song thinks that sales could pick up – especially in Singapore’s office sector – as cross-border real estate investments strengthen amid growing confidence in the underlying fundamentals.

“Incentives to redevelop older CBD office buildings in the form of higher plot ratios, rising rents, coupled with tight vacancies and a light supply pipeline, should continue to drive more investments into the office sector,” she added.

Wong Xian Yang, Cushman & Wakefield’s senior research manager, does not expect a flurry of en bloc activity in 2020 akin to 2017 and 2018, given the gap between buyer-seller expectations as well as market conditions.

However, he expects there could be “pockets of activity in the market” if the pricing and location prove attractive. The supply in the surrounding district could also be a deciding factor.

He said: “We could see more interest in 2021 if developer sales maintain their current momentum and GLS supply remains low. Unsold inventory could come down to around 24,000 to 26,000 (residential) units by the end of 2020 if the current developer sales momentum sustains. This could prompt developers to rev up land banking activities in 2021.”

For commercial sites, Cushman & Wakefield’s director of capital markets, Christina Sim, singled out the “proximity to MRT stations, a reasonably good size plot with the possibility of building high floors, and good supporting amenities” as attractive attributes.

The real estate consultancy will soon be putting up High Street Centre at North Bridge Road for sale as it awaits the green light from the relevant authorities on a possible partial rezoning to “hotel use and partial commercial”, and a top up to the lease for a fresh 99 years.

Lee Nai Jia, the head of research for Knight Frank Singapore, also still sees demand for commercial sites, as long as the site is in line with the buyer’s requirements.

He said: “Investors seeking wealth preservation will look for prime sites or choice developments, whilst those seeking higher yields will seek sites that have redevelopment potential and are in areas earmarked for future development or regeneration initiatives.”

Other factors that might come into play include whether the site has broader development options, or whether it is limited to its existing use, pointed out Lee Sze Teck, director (research) at Huttons Asia.

Another factor might be the plans that the government has for the area.

“For example, if the government does not allow topping up of lease for commercial buildings, it becomes one of the deciding factor for developers looking for strata sales,” Huttons’ Mr Lee added.

“Besides developers, end-users may be looking to buy a commercial building and develop it into their flagship building.”

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