Enbloc sales: Dream or reality?

In a changed market, there is little, if anything, to be excited about

Several articles have been published in the media and by property analysts in recent months about the frenzy surrounding enbloc deals and the increasing values of these collective sales.

Some of these are really bullish about the potential for such transactions this year.

I cannot see where the excitement is because I understand the hurdles to enbloc deals have increased.

Several things have changed since the last peak of the enbloc market in 2007. The most obvious one has been highlighted by some of the articles: The average size of residential enbloc deals last year was about $50 million and only one exceeded $100 million. In comparison, more than 20 of the 200 residential enbloc deals in 2007 exceeded $100 million in value.


There are several reasons for the current lack of interest in large enbloc offerings – that is, those over $100 million in value – even though many developers are actively building up their land banks.

From the developers’ point of view, the economics of an enbloc deal are less attractive today than in 2007 because of the following reasons:

a) The Government Land Sales (GLS) programme was at a record high in 2010. And, given the seemingly-insatiable demand from property investors and upgraders, the GLS will be at least as high in 2011. Developers participate in the GLS as it is a straightforward way to purchase 99-year leasehold land. It is hassle-free compared to the process of purchasing from an enbloc sale (unless there is 100-per-cent agreement from the owners of the enbloc development).

An enbloc sale requires clearance from the Strata Titles Board and the subsequent relocation of the existing owners of the project. Developers do not want to risk their investment cashflow being delayed by potentially lengthy appeals. The Land Titles (Strata) Act was last amended in the middle of last year to improve enbloc rules, making the process more transparent but more onerous.

b) From January 2009, planters within a residential unit and bay windows in all developments are not exempted from gross floor area (GFA). Based on this rule change, the uplift from the enbloc development’s current plot ratio to the new buildable GFA is more limited compared to that during 2007.

For example, Tulip Garden was sold enbloc for $516 million in mid-2007 (although the buyer did not follow through the following year). At that time, developers were betting on launching new projects at Farrer Road upwards of $1,600 per sq ft. Additional profit margins for the developers could be derived from the sellable GFA of bay windows and planters (exceeding the plot ratio limit).

Today, without the additional GFA, developers would have to launch at higher prices in order to maintain their 15- to 20-per-cent profit margin. As a comparison, Tulip Garden is asking for $650 million in the current 2010 enbloc exercise.

c) Development Charge (DC) rates have gone back up to just below 5 per cent of the peak levels of March 2008. Average DC rates for September last year are 2 per cent below those of September 2007, 53 per cent above July 2007 and 114 per cent above March 2007.

Given the last few months of strong sales, particularly when looking at prices achieved in the mass market residential segment, I believe DC rates will increase in March this year, possibly exceeding those of March 2008 in many of the sectors.

d) Construction cost estimates, according to RLB, a global property and construction consultant, are higher in Q3 2010 than in Q3 2007.

Developers now face higher costs from the DC impost and with less strata area to sell, even as market prices are about the same as those in 2007 for the Holland Road stretch.

For developers to view enbloc deals as economically viable investments, the reserve/asking prices cannot go too high up. Enbloc sellers need to be realistic if they want to achieve a win-win deal for themselves and the developers.


However, the biggest dampener to the fever of the enbloc market is the drastically reduced access to financing. This point has escaped the discussion of all the recent articles.

In 2007, there were many sources of financing – debt funds, hedge funds, etc. Developers could also choose to partner with investment banks such as Lehman Brothers, Goldman Sachs, Wachovia or hedge funds such as Citadel, etc. In addition to getting senior debt at up to 70 per cent of the price of the land and construction, developers/investment funds may also avail themselves of another 20 per cent more in junior debt, mezzanine financing or convertible bonds, and so on.

A lot depends on the credit standing of the developer, but it does mean that, to buy Pine Grove enbloc, a top notch developer could require as little as $170 million, or about 10 per cent of equity.

Today, we are left with simple, senior debt (normal straight loans from banks) and the lending ratio may be capped at 60 per cent – which means the developer wishing to buy Pine Grove enbloc would need to invest well over half a billion dollars of equity. And, on top of that, the developer has to put up even more cash for development charges and construction costs, which are now also subject to lower loan limits.

Most real estate consultants will only look at the developer side of the equation. But we cannot forget that the lenders play a big role. Without credit and financing, the real estate market can at best stroll at a leisurely pace. And for the enbloc market to continue to grow actively, we need financial institutions and debt funds, especially the non-bank lenders, to regain their appetite for real estate risks.

Otherwise, the success of large enbloc deals such as Hawaii Tower, Pine Grove, Pandan Valley, Tanglin Park and Tulip Garden will remain a dream.

By Ku Swee Yong,f ounder of real estate agency International Property Advisor (IPA), which provides services to high-net-worth individuals.

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