En bloc sales will likely roar in Tiger year

Many property owners have been asking us: Is it time to sell en bloc? Are developers ready to buy? Should we start the process now, or wait for the market to pick up further? Are the new en bloc laws too onerous?

In 2007, there were more than 100 such deals, but 2008 saw fewer than 10, and there was just one last year. So what is in store for 2010?

We certainly do not have the answers to all of these questions.

However, it is probably safe to say that last year’s tally of one deal will be beaten this year. In fact, it could well be surpassed this month itself.

To deal with all the other questions, we have to first understand how en bloc sales work, and why at times they do not.

Developers buy land when they are confident of the market ahead and of the potential profits from the deal. So when the market outlook is uncertain – or worse, outright bad – they simply stop buying. This explains the relatively barren years of 2008 and 2009.

The unique characteristic of en bloc sales is that they follow the general property market cycles, but in a rather dramatic fashion, basically accentuating each up and down curve of the cycle.

Each typical property market cycle can be sub-divided into four – by dividing each of the upswings and downswings into two.

When the market begins to move up, in the first quarter of the property market cycle, land prices move up the fastest as developers tend to do most of their land acquisitions then. That is when the en bloc sales fever reaches its peak, as in the 1995/96, 1999/2000 and 2006/07 periods.

In the second quarter of a typical market cycle – while the market is still moving up but at a slower pace than earlier – seasoned developers start getting cautious and take their feet off the pedal. They buy very selectively, if at all.

In the third quarter, when the market starts falling and land prices fall even faster, some developers (and en bloc sales professionals) start looking for other businesses or markets.

In the last quarter of the cycle, the market begins to find a floor showing signs of stabilisation. From a developer’s perspective, that is actually the best time to buy distressed assets. But in reality, very rarely are gems available for sale then – certainly not en bloc sales, as land prices at that stage do not stack up for sellers.

So it is actually only in the first quarter of a market cycle that most of the en bloc sale activity takes place. It is during that quarter that land prices will outperform apartment prices, and rise to levels that offer attractive premiums over the total value of all the units in a particular development.

And it is precisely in this period that owners in suitable projects should act decisively to seize their en bloc chance.

So if the market takes, say, four to six years for a complete cycle, en bloc sellers in effect have an average window of opportunity of one to 11/2 years per cycle. It also means that if you miss the boat this time, you have to wait for the next one, three to five years later.

Based on our reading of the market today, we believe this year could see booming business in en bloc sales as the market emerges from the woods and recovers broadly from the lows of 2008 to 2009.

It is difficult to say just yet whether this new cycle would be short or long – that is, whether collective sale activity will last the year and even spill over to 2011. Much is dependent on the strength of the new wave of factors driving the uptrend, as the factors differ in each cycle.

At this point, we understand that owners of as many as 50 projects have recently formally started their en bloc sales processes and are gearing up to hit the market sometime in the first half of this year, some as early as this month. They range from small to large projects and are located in all major residential districts.

Many more owners are likely to jump on the bandwagon, especially if the earlier ones prove successful. Of course, it remains to be seen if all of the projects being worked on manage to secure the owners’ agreement to sell in the first place.

If the projects are priced reasonably, we believe they should have a good chance of landing a buyer this year.

The projects that were marketed last year were mainly initiated in 2007 or early 2008, which means their minimum sale prices were locked in at the market peak then.

The projects to be marketed this year have just been initiated, and many would be more aligned with the current market, although there are some seeking prices higher than at the 2007 peak.

Reacting to the sharp upturn in mass market homes last year, the Government is releasing more land sites this year. Owners should note that these would compete for developers’ interest.

But given that most of the government sites are located in suburban areas, en bloc sale projects located in more central or prime locations could still do well.

The announcement of the exact locations of new MRT stations could also help resuscitate the prospects of previously unsuccessful en bloc projects.

In terms of pricing, developers are willing to pay between $30 million and $300 million per deal. This could grow as market sentiment and confidence improve.

The writer is managing director of Credo Real Estate.