En bloc market: R.I.P in 2012?

Several potential en bloc deals have been launched recently as homeowners in these developments attempt to capitalise on the current record-high residential property prices. However, I believe they are likely to be disappointed as this year’s outlook for the en bloc market looks pretty dim.

In a typical en bloc deal, homeowners of a residential building agree to sell their units collectively to an interested party, usually a property developer that will tear the building down and use the space for a new project. Last year, 49 en bloc deals worth S$3 billion were sealed, a huge jump from the 36 deals worth S$1.8 billion in 2010.

But these aggregate numbers mask certain underlying weaknesses. The en bloc deals last year were overwhelmingly dominated by small deals with an average size of only about S$60 million. The largest of these deals, Henry Park Apartments, was worth only S$176 million. In my view, this highlights property developers’ diminished risk appetite to embark on large en bloc deals that normally take a much longer time to turn around.

This year, though property developers still need to replenish their land banks, especially after seeing strong residential sales over the last two years, I believe they will be much more selective in their site purchases.

The series of residential property cooling measures the Government has introduced since September 2009 has heightened the negative outlook on the residential market. Couple this with Singapore’s slowing economic and population growth and the expected ramp-up of residential supply next year, and one begins to understand why property developers would seek to reduce inventory risk.

One way the developers can do so is by turning around property projects over a shorter period of time. This minimises the risk of holding on to land inventory that could potentially depreciate in value.

This urgency to turn around projects at a faster pace would also be boosted by the recently imposed Additional Buyer’s Stamp Duty (ABSD). The new rule applies not only to purchases of vacant residential land but also to en bloc properties for housing development. But if the property developer manages to redevelop and sell all the new units within five years of acquiring the site, it will not have to pay the ABSD.

Property projects based on en bloc deals generally take longer to turn around given the additional time required to take over the existing developments and demolish them. This is especially true of large en bloc deals, as the potentially greater number of redeveloped units for sale would make it harder for the developers to sell them all within five years and thus avoid paying the ABSD.

All this naturally puts en bloc deals at a disadvantage when compared to acquiring vacant plots through the Government Land Sales (GLS) programme. With the Government still offering near-record-high supply of land for residential use, property developers are likely to prefer to replenish their land banks through the GLS programme rather than through en bloc deals.

Thus, in the Year of the Dragon, it would be wise not to put too-high hopes for en bloc riches.

By Tan Chin Keong – analyst at UBS Wealth Management Research.

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