by SUSAN TEO
Since the booming years of 2005 to 2007, en bloc deals in Singapore's real estate industry have not able to return to former levels. At its height in 2007, more than $12 billion worth of sales was closed with approximately 6,652 units being sold. The ensuing economic crisis in 2008 to 2009, unsurprisingly, witnessed a dip in transactions to under $1 billion. In the subsequent period of 2010 to 2011, the economy improved and collective sales picked up to reach about $2 billion.
In spite of the recovery, figures for 2012 suggest that collective sales may experience another slide. Year-over-year figures reflect a dip in transactions.
"Between January and June this year, the total transaction value of residential en-bloc properties fell to about S$250 million, from almost S$1.6 billion in the same period last year" (Wee Leng).
Property analysts have suggested various reasons for the low activity. These include the cooling measures rolled out by the Singapore\'s Government. In December 2011, an additional buyer's stamp duty (ABSD) was implemented. For developers, this means they have to pay a 10% ABSD if they fail to sell all units in the redeveloped site within three or five years of land acquisition. (ABSD is compulsory for residential land purchases, but developers are given a remission period of three years for projects with below 5 residential units or five years for projects with 5 or more units. During the stipulated time-frame, they will have to sell all units, or be subjected to ABSD with interest). Below is an illustration on what this entails for developers.
Impact on developer's profit (Simplified): -
Cost
-
Land = $70 million
-
Construction Cost = $30 million
Revenue (Selling Price)
-
Price = $130 million
Gross Profit Margin
-
Revenue – Cost = $130 million – $100 million = $30 million
-
or $30 million / $100 million = 30%
But do note that developers usually borrow for land purchase and construction. In other words, they may only stump up $30 to $40 million of the $100 million required for the development.
Hence their equity is only
-
Equity = $30 million
With an investment of $30 million (borrow $70 million), the return on equity is:
-
Return on Equity (ROE) = Gross Profit / Equity
-
ROE = $30 million / $30 million (Gross Mark-up) = 100%
With an additional ABSD of 10% being imposed on developers for exceeding 5 years in the sale of all units, the developer's returns will become (For simplicity, we did not include the interest on ABSD):
New Gross Profit Margin
-
$30 million (Gross Margin) – $10 million (10% ABSD) = $20 million
-
$20 million / $100 million = 20%
New Return on Equity will be:
-
$20 million / $30 million = 66.67% (This is a huge drop of returns compared to the 100% previously)
Hence developers will bid for sites only if they think they can complete the development and sell all units within three or five years to avoid the ABSD, or if they can price in this ABSD and pass on the cost to the consumers.
However, because of the extra time required to pull down the existing developments on the acquired land, this causes developers to balk at en-bloc purchases. The ailing economy and the latest round of cooling measures implemented in October could serve as other deterring factors. Increasing Government Land Sales prices, escalating development charge rates and construction costs are the remaining factors.
Yet, en-bloc sales volume for the third quarter of 2012 showed signs of picking up – numbers surpass that for the first half of the year.
"On the collective sales front, nine transactions worth about $1 billion were concluded in 3Q2012. This value is higher than the total 15 deals worth $960 million concluded in 1H2012" (Tan).
The third-quarter residential transactions include: Chateau Eliza at Mount Elizabeth sold for S$92.2 million; Green Lodge at Toh Tuck Road sold for $191.9 million and Thomson View Condominium sold for $590 million. The exorbitant selling price of the latter is believed to have been propped by the upcoming Thomson MRT Line. However, these sales were closed before the new cooling measures were introduced this year. Together, with the sluggish economic outlook, one wonders if the impetus of the en-bloc activity will taper off. However the development of MRT lines could have an offsetting effect. Analysts have predicted more en-bloc sales of properties near upcoming MRT lines.
1. Amy Tan, “Property Briefs: Home”,
The Edge Singapore 8 Oct 2012, Print
2. Wee Leng, “Residential En-bloc
Market on the Decline”, Channel NewsAsia 29 Jul 2012, Web
<http://www.channelnewsasia.com/stories/singaporelocalnews/view/1216442/1/.html>
3. Inland Revenue Authority of
Singapore, “Remission (for ABSD)”, Web
<http://www.iras.gov.sg/irasHome/page.aspx?id=12822>
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