Why the hype around properties with en-bloc potential?

Rating: 4.5 (out of 5)

 

Singapore HDB overviewRecently, when Eunosville was sold en-bloc sale, it hit the news headlines. The former HUDC estate, collected a whopping amount of about $766 million.

Just like human beings, property also has life cycle. This is no secret that the demand and supply, by and large, determines the property price. Currently, when evaluate the connection between the age of a property and price, we leave out external implications such as immigration policies, inflation, infrastructure changes, demand supply etc.

Usually, a common private residential property in Singapore is a typical 99-year freehold or leasehold condo.  Let us analyze it.

Chart 1 Property Life Cycle

The launch of the property: how the property forms

First of all the land is acquired and then the buildings are designed.  The developer will launch the property in the market for sell.  Since the product is yet to be finished, people will buy the property based on the architectural design. The buyer will see the design, along with 3 D mock up and will choose the units based on their interest. Based on the design, they will see how the development will look like when it is completed.

Now that the buyer has bought the property, he will look for financing options, bank loan or mortgage, in order to pay for further instalments. He will have to pay the instalments as the development progresses. Since the project is underway, there will be no rental income for the buyer.

 

The birth of the property: how the Temporary Occupation Permit is granted

It takes couple of years for the development to be completed. Now, the property is ready to move in. Usually, there is a 10-20 percent price difference between the launch of the property and Temporary Occupation Permit (TOP). The increment in the price of the property after TOP can be listed as:

There are no chances of property being incomplete because there is no risk of the developer going bankrupt.

You will see the real property, you get exactly what you see.

The property is at your disposal, you can rent it for a steady income.

You need to remember one vital point though. At this time, the rental value is not all time highest. Since the property has been released recently, there are hundreds of units in the same development and all of them are waiting to be occupied.

 

The aging of the property: depreciation of the value

Like all living things, properties also continue to age. The facilities, sewage pipes and bathroom fittings for instance, will begin to worn out, cracks begin to appear in the walls. Taste of people change. What they liked 15 years ago, resort-themed pool for instance, will not look out of fashion for them.

The tenants will start looking for new developments, and then the rental price starts going down.

 

The bottom line: end of depreciation

The property becomes old, however, the land where property stands does not depreciate. In fact the price of the land may even go up for the entire leasehold and freehold since the government will be toping up the lease.

 

The rebirth of the property: the new development

It is no secret that Singapore is land scarce country. However, unlike Hong Kong and other big cities in the world, there is less of a limitation on airspace in Singapore. The land usage in Singapore is governed by a Master Plan, which is managed by Urban Redevelopment Authority (URA).

How much floor area can be built in a certain plot of land is determined by the plot ratio. The plot ratio is higher when the land begins to be used up. This is to intensify the land usage. But before that it is made sure that the infrastructures such as transportation and road and amenities such as schools and shops can accommodate the dense population.

Because of this, in the recent times, en-blocs sales (collective sales) are increasing. This ensures that the land is used more efficiently.

When the plot ratio is higher, the developers will be able to construct more units in the land that have acquired. This leads to a sudden increment in the value of the property.  Your property which had deprecated due aging, is redeveloped and now is ready to be sold for higher value.

 

Case study of The Bayshore and Bayshore Park

The Bayshore and Bayshore Park are adjacent developments in District 16.

Both of these developments have more or less similarly priced. The average price is between $800 and $1,000 per square feet.

The Bayshore Park got its TOP about 31 years ago, in 1986. Likewise, the Bayshore got its TOP 18 years ago, in 1999. These two developments have a leasing period of 99-years.

Smart investors are aware that based on the plot ratio the gross floor area (GFA) at the Bayshore has been maximized. For the maximum allowable GFA, Bayshore Park, on the other hand, has more room.

Chart 2 Property Life Cycle

 

The Bayshore is currently 18 years (the age of the development after it was topped) and based on the property life cycle it is under the depreciation phase. It will continue to depreciate. When the URA increases the density of residents by tweaking the plot ratio, the property may bottom out.

Contrarily, Bayshore Park has already gone through the depreciation phase, passed through the bottom of its life cycle. The property is now at the rebirth phase, it is soon going to be redeveloped.

Buying a property is an emotional process. In most cases, we think from heart while buying a property. The new property looks attractive to us, however, we should look beyond the façade, do research and find out whether it will give us profitable return.

 

Pickup in Transaction in Core Central Region

Meanwhile, transaction in the core central region pick up steam in high end development like Gramercy Park, Sophia Hills and Goodwood Grand with transaction every month. Martin Modern which is going to launch in July is also expected to test the limit in the core central region with average of $2200psf.

 

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