Singapore property investors: Can a 99 year lease-hold condominium go en-bloc?

Singapore property investors: Can a 99 year lease-hold condominium go en-bloc?


Contributed by www.PropertyBUYER.com.sg Mortgage Consultants

What should you buy? A 99 year property or a FH/999 year tenor property?

Are you looking for yield or are you looking for overall capital gains + Yield?

Assumes that a 99 year property gives a yield of 4% while that of a Free Hold property gives 3%.

Is it still worth it? What if the fall in your property value more than offset what you earned in rental?

Say you make 20k a year in rental for 10 years (making 200k) of a $1m property and after 10 years the property value falls from $1m to $800k. Not to mention interest costs, your efforts would have come to nothing.

Let’s look at how Singapore land authority determine the value of a 99 lease hold property.

According to SLA’s leasehold land premium calculation and valuation of 99 years lease hold land.



(Adapted from SLA’s Differential Premium valuation calculation)

As you can see, 99 year lease hold land depreciate less during the first 33 years, still fetching at least 80% of a similar Free Hold land it drops off very quickly after 60 years.


How much is a 99 year old lease property worth?

Under normal circumstances, without any Singapore government policy impetus, a 99 year lease-hold property will continue to lose value until it reaches zero.

If a development (or a condo) wants to top up the lease of a lease-hold property back up to 99 years, it is still subject to SLA’s chief valuer’s valuation of the value of the proposed upgrade.

Can en-bloc happen to a 99 year lease hold condominium?

In case of an en-bloc or simply just a top-up of lease, you would have a difference in values between the existing property and the proposed new one.

So this is how SLA calculates the differential premium.

• Differential Premium = The proposed new property value – existing property value.

Under the new ruling in 2007, Singapore government takes 75% of the additional value created (Differential Premium) from the proposed upgrade or development, while the stake holders take 25% of the additional value.

Due to the depreciation of the 99 lease hold properties, the differential premium becomes higher.

When the Singapore government takes 75% of the differential premium, this means that most of it will end up as tax or fees while the stake holders only stand to gain the 25% of the additional value created from an en-bloc or top-up of lease.

And this top up of lease of a 99 years land is not a given. It is entirely subject to approval.

So are you saying that 99 year lease hold condominiums cannot en-bloc?

En-bloc activity for 99 years lease hold properties can still happen.

Scenario 1 – Top up of lease to 99 years + tear down and build a new condo: -
For example, a 99 years lease hold property was sold at $900 per sq feet per plot ratio (psf ppr). The price differential between this property and the free hold property in the same vicinity is very small when new. Say the Free Hold property was $1000 psf ppr.

30 years later, the Free hold property price is $2500 psf ppr.

• At 30 years old, SLA’s valuation rates the 99 year property at 85.4% of a Free hold equivalent property. Assuming that the market also rates the property similarly.

This means that the equivalent 99 year old free hold property is rated at $2500 x 85.4% = $2,135 psf ppr.

Say you want to top up the lease to 99 years and build a new condominium on it’s existing site, the top up value would be $2500 x 96% = $2400 psf ppr. (But 99 years leases top-up is subject to case-by-case valuation by the SLA)

Considering that you would already fetch $2135 psf ppr. If you were to tear down the building to re-build a new condo, you are likely to get $2400 psf ppr and cost of building psf ppr could be $300 to $600 psf ppr. That would mean that the cost already be $2435 or $2735 psf ppr.

So in this case, there is absolutely no impetus for the developer to build or to make an offer to the residents for en-bloc.

The only ways an en-bloc would happen to the 99 years condo are: -
• The 99 year lease hold building is in a very bad condition. The price being sold on the market is much less than SLA’s valuation of 85.4% of a Free Hold equivalent. This type of anomaly or price distortion makes en-bloc possible.
• 99 years top-up of leases is approved. (There is no guarantee)

Scenario 2 – Top up of lease to 99 years + tear down and build a new condo + Doubling the plot ratio: -

For example, a 99 years lease hold property was sold at $900 per sq feet per plot ratio (psf ppr). The price differential between this property and the free hold property in the same vicinity is very small when new. Say the Free Hold property was $1000 psf ppr.

30 years later, the Free hold property price is $2500 psf ppr. But if you double the plot ratio, that means that you could build double the sq feet of space on the same plot of land. That would mean that the potential price now is $2500 x 2 x 96% = $4,800 psf ppr.

• At 30 years old, SLA’s valuation rates the 99 year property at 85.4% of a Free hold equivalent property. Assuming that the market also rates the property similarly.

Now, with an existing property on the old plot ratio = 85.4% of $2,400 = $2,049.60.

Assuming that building cost would be $400 psf ppr to $800 psf ppr (higher for bigger buildings)

So SLA calculated the differential premium is $4,800 psf ppr (assuming the case-by-case valuation agrees with this value)

So the cost is $2,049.6 and potential value is $4,800 psf ppr.

So the differential premium is around $4,800 psf ppr - $2,049.60 = $2,750.40.

And under the new role in 2007, the Singapore government takes 75% of the $2,750.40. So the cost payable to the Singapore Government is $2,062.80.

So the cost of the renewal of the 99 year condominium is: -

$2,062.80 (payable to the Singapore government) + $2,049.60 (Existing value of condominium) + $800 (Construction cost) = $4,912.40

The cost of building, topping up the lease as well as paying the differential premium of 75% came up to $4,912.40, there is no value to be had from en-bloc in this case.

Given the high development charge of 75% for change of use or for Differential premium, it is unlikely that en-bloc can happen.

Unless there is a change of the Singapore government’s share of the differential premium from 75% to a more reasonable level.

SUMMARY OF 99 YEARS LEASE HOLD EN-BLOC POTENTIAL
So in conclusion, the capital value of a 99 year lease hold property is better obtained from increase in property prices around the property rather than waiting from any en-bloc or top-up of lease.

This would likely hold true until such time that government policies would change making residential property renewal profitable and happen.

What would you do if Singapore property agents tell you again, "En-bloc" potential indiscriminately? As a Singapore property buyer, the choice is yours. Buyers beware.

Invest in Singapore Property: Building under construction payment schedule

Payment Schedule of BUC properties

The below is a typical payment schedule for the Singapore Property Buyer. (This is not indicative of all cases)

1% of the purchase price
Option to purchase.

4% of the purchase price – 14 days after Option to purchase.
Exercise option

Payment of Stamp Duty (~3%)
28 days from option to purchase

15% of the purchase price
12 weeks after exercising option to purchase.

If the property that you bought is an uncompleted Condominium, then you will have to pay progressively as the building achieves various milestones.

10% of purchase price – Timing depends on speed of construction
Notice of foundation work completion.

10% of purchase price
Notice that reinforced Concrete framework of the unit has been completed.

5% of the Purchase Price
Notice that the brick walls of the unit have been completed

5% of the purchase price
Notice that the ceiling of the Unit has been completed.

5% of the purchase price
Notice that the door and window frames are installed and the wiring and plastering have been completed.

5% of the purchase price
Notice that the car park, roads and drains serving the housing project have
been completed.

25% of the purchase price
Payable 14 days after notice of vacant possession and the Temporary Occupation Permit of Certificate of Statutory Completion n respect of the unit (or a certified copy thereof)

A certificate by the qualified person engaged by the vendor that the building and all roads and drainage and sewerage works serving the Housing project have been completed and that the water and electricity supplies, and gas supplies (if any) have been connected to the unit.

15% of the purchase price
On Completion date. Of which 2% is payable to the vendor (i.e. the developer) and 13% is payable to the Singapore Academy of law as stakeholder.
Whether you can afford the condominium or not, buying a condominium under construction can be a good way to gradually put up the cash for buying a property.

Smoothing out Funding of a Private property
In the case where you have the earning capacity, but you will need some time to recover after the initial 20% downpayment. The Singapore home loan installment will be lesser at the earlier stages, this enables you to save up and build up your cash reserves as there may be many other costs associated with owning a private property.

If you are Singapore property investor, if your view is that the property market will pick up in a few years, buying a property under construction is similar to buying shares on “Contra”, except that this “contra” gives you several years of holding “option”.

Many speculators like this feature which gives them the chance to finance a property cheaply and flip the property for a profit.

Genuine Home Buyers can get burnt buying a Property Under Construction

Due to the ease of financing, holding on to a Building under construction during the early stages can be rather cheap. This means that speculators can easily get in and bid up the prices for genuine buyers, creating a squeeze on the prices.

This means that such buyers will tend to end up paying a higher price due to cheap singapore home loans.

How to profit from Property Under Construction?

Due to the presence of speculators, when the pressure mounts and when they cannot turn a profit flipping the property and cannot lease the property out and starts to default. You can then stand on the side lines to punish these greedy speculators and pick up the properties cheaply.

Invest in Singapore Property: Singapore Property Investor Update

Singapore Property Investor - Buyer Update July 2009 and Re-emergence of Dishonest Singapore property agent
www.PropertyBUYER.com.sg (We Research, you Save)
Refinance Home Loan Mortgage or Get Home Loan

Contacts: -
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Email: loans@propertyBUYER.com.sg
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OUR READERS ASK US TO WRITE MORE ON PROPERTY INVESTOR UPDATES

Since the last time we wrote about the property market coming back to life.

The press has been flushed with lots of positive news. All these news of

property market coming back to life is fueling latent demand. Singapore is

one of those rare markets where there is ample liquidity in the market. The

liquidity is not evenly spread out.



What this means is that, the lower end of the condominium market is

supported by affordability and pricing while towards the Mid-luxury and

luxury segment, it is supported more by sentiment and investment yields.


Are Developers taking this chance to clear stock?

“Developer sales of new private homes in June hit 1,825 units - topping the

previous peak of 1,723 units homes sold in August 2007 at the property

market peak.” (Source: The Business Times, http://business.asiaone.com/Business

/My%2BMoney/Property/Story/A1Story20090716-155174.html)

There is still ample property supply in the pipeline, developers are using this

opportunity to try to clear as much stock as possible.


Is this the lowest point?

Some market analysts are positive that the market has reached it’s lowest

point while some pointed out that external demand is still not picking up fast

enough. There is indication that the Singapore government is doing all it can

to stimulate the Singapore economy. Just in January 2009 alone, M1 money

supply increased by 6 billion dollars to around 82 billion dollars.


Singapore Dishonest Property Agents are again active

The market is red hot, some property agents are again touting En-BLOC as

bait. The 2nd more common trick is. It's near the MRT, got rental potential.

This appeals to greed in property buyers. These dishonest property

agents are also trying to raise the prices at the last minute even after prices

have been agreed with the property buyer. Be careful not to let greed dictate

your decisions, talk to many agents, not just 1 or 2 and cross correlate their

stories.


BE CAREFUL OF SUB-SALE ACTIVITIES

And also be careful of sub-sale activities. If you are seller, you must also be

careful and keep tabs on the market. Agents are making this change to press the seller and sell them low and re-sell to you at

high prices.

How to avoid this?

The best is to also post your own advertisements on a free property listing site such as ours at

(http://www.PropertyBUYER.com.sg), it's totally free. When buyers come in, you can also

try to establish the market price and not simply belief what the agent tells

you.

How Dishonest Property Agent trick the Property Buyers

They typically try to create a sense of urgency. They may arrange for group

viewings to create the impression that a property is HOT. These are just

some of the many ways in which they cheat.

Then they agree on lower prices and then once you agree on the prices,

then they raise the prices. They claim that the seller wants to raise rates.


COMMON REASONS FOR CHANGING SELLING PRICE: -

• The seller really changed their minds and raised the price. (Not so

common)

• The agent hasn’t yet met the Seller’s asking price that you agreed with

the agent.
o The agent tries a lower price to tempt you so as to know

your BASELINE price.
o Then the agent tells you a story about the seller wanting

more to try and get you to raise prices.

• The agent pushes for a higher price than what the seller wants. Tells the

seller he will try to maximize prices for the seller.

o In fact, the agent already got you to bite. Then he/she goes to

the seller and ask for more commission, because you agree to

higher prices.

• The agent pushes you for a higher price. For example Seller wants

$900,000, agent asks you for $980,000. Then Agent asks his friend to

buy from owner at $900,000 and immediately re-sell to you at $980,000.

The agent makes $80,000 just like that.

What we at www.PropertyBUYER.com.sg think on recent developments?

We still maintain a cautious outlook. Despite all the huff and puff,

Singapore’s unemployment rate is expected to get worst in 2009.


The

resident population employment is at 4.8% in Mar 2009 and getting higher

while the overall unemployment is 3.3% in Mar 2009.

(Source: Singstat.gov.sg)

While the Unemployment is going to hit different segments of the property

market in different magnitude, when we have an unemployment rate hitting

4.8% (for residents. Meaning Singaporeans + PR) and looking to get worst

at least in 1 or 2 quarters. We cannot be so sure it will not impact on the

general market.


Even expatriates and other non residents, they are not spared from the

recession with the unemployment rate of 3.3% in Mar 2009 and steeply

rising.


External Demand – Via US Economy

Singapore's external demand is still unstable at best. Many of Singapore’s

exports go to the USA. And US consumers make up 70% of the US

economic consumption.

Even while US Federal Reserve bank of New york's Timothy Geithner has

indicated that the US is out of the Financial crisis, but unemployment figures

are still high. Jobless rates are about 9.5% in June 2009, an increase of 7.2

million from Dec 2007.



(Source: Bureau of labour statistics, USA.)

The US unemployment is still looking to breach the 10% mark. This means

that until the US unemployment rate recovers, Singapore’s exports are

not going to see drastic recovery.


Will China replace US as the economic locomotive of the world?

The China (2008 estimated) GDP figures in USD (by CIA factbook) is

US$4.222 trillion. This is in contrast to the (2008 estimated) US GDP figures

of US$14.33 Trillion. The US consumers make up US$10.031 trillion of the

US GDP. The Chinese consumers meanwhile makes up less than half of

China’s GDP of US$4.222 Trillion.


Even while China is producing headlines after headlines of robust GDP

growth, China’s consumption is not going to pull us out of recession as it is

small compared to the overall global trade. Moreover, most of China’s GDP

is still export oriented, and exported to the USA.

According to Bureau of labour statistics (http://www.bls.gov/news.release
/empsit.nr0.htm)

“The number of unemployed persons (14.7 million) and the unemployment
rate (9.5 percent) were little changed in June. Since the start of the
recession in December 2007, the number of unemployed persons has increas-
ed by 7.2 million, and the unemployment rate has risen by 4.6 percentage
points.”

According to BEA, http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

The economy is still somewhat in the doldrums.

GDP in Q1, 2009 is still decreasing although at a slower rate.

“Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 5.5 percent in the first quarter of 2009, (that is, from the fourth quarter to the first quarter), according to final estimates released by the
Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3 percent.” (Source: Bureau of Economic Analysis)

However Personal consumption is increasing again.

Personal consumption is running down the inventory stock. But production is

still not increasing yet and therefore it has not yet contributed to GDP

growth.

“The real change in private inventories subtracted 2.20 percentage points from the first-quarter
change in real GDP, after subtracting 0.11 percentage point from the fourth-quarter change. Private
businesses decreased inventories $87.1 billion in the first quarter, following a decrease of $25.8 billion
in the fourth quarter and a decrease of $29.6 billion in the third.”
(Source: Bureau of Economic Analysis, USA)

This run down in inventory level is led by reduced production (Less GDP

output) and a slight increase in personal consumption.

“Real personal consumption expenditures increased 1.4 percent in the first
quarter, in contrast to a decrease of 4.3 percent in the fourth. Real
nonresidential fixed investment decreased 37.3 percent, compared with a decrease of 21.7 percent. Nonresidential structures decreased 42.9 percent, compared with a decrease of 9.4 percent. Equipment and software decreased 33.7 percent, compared with a
decrease of 28.1 percent. Real residential fixed investment decreased 38.8 percent, compared with a decrease of 22.8 percent."
(Source: Bureau of Economic Analysis, USA)

BANKS MUST DO IT RIGHT THIS TIME ROUND!!!

This month the banks are so busy that they hardly have time to entertain

Approval-in-principle. The banks are responding mostly if you have an

Option to purchase before they will process your applications.


While we understand the reasons because the market is booming and banks

are over-stretched due to staffing reasons.


But by reducing rates and then forcing the home buyers into buying first and

then getting the loan later has started to create upward price pressures.


If they lend indiscriminately when the market picks up, then the banks will be

accomplices in creating another property bubble.


This bubble is going to come haunt all of us again.


So this time, we urge all banks to act responsibly and not add fuel to fire.

Though we are still really doubtful that this is it.

Redundancy is still accelerating


WORST SCENARIO

In case this is not yet the turning point, then many people would be caught

buying into expensive property developer launches. When the market reality

sets in, banks will again over-react with some banks freezing lending

completely choking off the market. This is when home buyers get hurt again.


WHAT DO WE RECOMMEND FOR SINGAPORE PROPERTY INVESTOR?

We have no opinion about buying or not buying. People buy properties for

various reasons. There are good deals in all cycles of the property market as

well as bad deals.


Exercise your own caution and decide what fits your finances the best.

The economy is still not out of the woods, job vacancies are still dropping.

Those retrenched are still not finding work fast enough.

Singapore Unemployment Rate by Age and Education

(Source: Singstat)

Singapore Job Vacancies have dropped

This means that those who lost their jobs will take longer to find another job.


(Source: Singstat)


You can only get tricked or cheated if you become greedy. If you can control

your emotions and exercise best judgement, you will be able to protect

yourself. In case you want to refinance your home loan, or get home loan,

you can come to us.


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Invest in Singapore: Bernanke says Credit easing while job losses continue to get worse

Invest in Singapore: Bernanke says credit is easing.



The unemployment rate will continue to get worse and more jobs will be lost. However Credit is easing. Companies are running down their inventory. Increased in production activity may resume towards the end of this year as inventories need to be replenished.

Interest rates are near ZERO, though not all may benefit from these low interest rates. US Consumer income continue to drop. Last month consumer income shrank some US$29 billion.

Even after GDP picks up, there will still be considerable slack in the economy in that there is likely to be economic growth without significant net job additions, until such time that the economy is back on a firm footing.

Invest in Singapore Properties: Protect yourselves from Rogue Dishonest agents

Singapore Property Investor: Protect yourselves from Rogue Dishonest agents
Courtesy of www.PropertyBUYER.com.sg

Contact them
Tel: 6100 - 0608 sms: 9782 - 8606
Email: loans@propertyBUYER.com.sg

http://www.propertybuyer.com.sg/contactus.php


In an article by Straits Times, April 8, 2009.

"Eric Heng Jit Siang (left) conned 127 people, mainly foreigners and permanent residents...

Heng would pose as the owner of a property seeking to rent it out, milking the tenant for a deposit on the rent, and then pulling a disappearing act.

Using both landed properties and flats he had rented, the 33-year-old conned over $242,500 in rental deposits between last April and January out of 127 people.

The court heard that he rented 10 properties across Singapore, got hold of the keys and then placed advertisements in newspapers and in train stations seeking tenants.

When people responded to his advertisements, he posed as the owner of these properties and arranged to show them the units.

When the tenancy agreement was signed - and each unit was 'rented' out to more than one house-hunter - he collected money from each of them as a deposit on the rent or the utility bill."
(Source: The Straits Times, "http://www.straitstimes.com/Breaking%2BNews/Singapore/Story/STIStory_361167.html, Esther Tan")


HOW SOME SINGAPORE PROPERTY AGENTS BEHAVE

When you go to an agent, he/she brings you to see a property. He/she

always emphasize "Bring your cheque book". This is because in the heat of

the moment, sometimes you can get influenced into making a rash decision.


A rash decision is what an agent wants. Because no matter the house is

sold or not, he/she still gets his/her commission, while if you do not proceed,

you forfeit your Option to purchase deposit of 1% of the House price.


You can pay for a property that is NOT worth that much and eventually the

bank will not loan you the full amount you want to borrow or worse, you get

cheated.

Agents always tell you, it's best for them to negotiate on your behalf. Many times,

this is the worst scenario. We will talk about that in the next article.


PLACING AN OPTION TO PURCHASE

Usually the agent will ask you to place the cheque first for an amount.


But the agent did NOT get an agreement from the seller to sell at the

particular price. The agent will then use this cheque to dangle in front of the

seller inducing him/her to sell.


WHAT IS THE PROBLEM WITH GIVING A CHEQUE?

Usually, the agent will take your cheque without asking you to sign the

Option to purchase agreement.


There is No verification of who you are writing the cheque to.

If the property is $1m, 1% = $10,000.

Giving a cheque without proper verification is like passing someone your 1

CARAT Diamond ring without checking his identity.


In case the agent asks you to write to an "Imaginery owner" of the property

which is his/her friend, the agent can cash your cheque and run if he is

crooked.


Even if the agent is not crooked, giving your cheque without proper Identity

verification of the related parties is fraught with risks.


You Could consider the following Precautions: -

* Check NRIC: Of the agent

* Check NRIC of the property owner - With documents showing he/she

is indeed the owner of the property.


* Check through the Option to Purchase agreement for unfavourable

terms. (These contracts are usually worded to favour the

agent/agency, but you can negotiate to CHANGE them)

* Make sure that the owner gives you a photo-stated NRIC together with

documents stating ownership, i.e. a Bank Loan statement showing

his/her name on the loan as owner.

* Make sure that the Option to Purchase is duly signed by the Property

owner and DATED (Don't leave the DATE empty).

* If you have to give a cheque, post date it by a few days, so in case you

want to change your mind, you can quickly stop payment.

Even all these won't stop a rogue agent or a rogue Homeowner selling his

home multiple times to multiple buyers, but at least you have a slightly better

level of protection. Because at least you are sure you are dealing with the

Property Owner.

www.PropertyBUYER.com.sg is a research focused Mortgage Advisory that do not emphasize cheap loans. We balance risks with savings based on the individual's financial situation to find the best fit Home Loan.

Not only that, we help to make sure of the following: -

* Buyer is buying at the right price (we check multiple valuations to give a safe price)

* Because all these work takes a lot of time, if you commit to get your loan through us, we can

help you to check recent transaction around that block, or the particular unit's transaction

and price history.

* We can check and verify PROPERTY Seller details.

* When bank's letter of offer is given, we can check to verify the contract
details and make sure that it is as agreed.


Tel: 6100 - 0608 sms: 9782 - 8606

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