_Unlocking the Collective Sales Deadlock

It appears that the market characteristics that were in play in 2022 would likely remain, say Chia Mein Mein and Leonard Tay.

February 03, 2023

The Deadlock

An article with the headline “En bloc deadlock to continue in 2023” published by The Business Times on 20 December 2022 envisaged that many residential collective sale sites would be unsold in 2023, mainly due to the mismatch in prices between buyers and sellers.¹ It appears that the market characteristics that were in play in 2022 would likely remain. Perhaps, it might be even more challenging given the pessimistic turn that the economic outlook has taken, rising inflation and interest rates, and employee layoffs in the technology sector affecting the labour market.

At the end of 2016, the unsold inventory of private residential homes reached a low of 28,557 units which contributed to the trigger that started the en bloc cycle of 2017/2018. This time round, the unsold inventory shrunk to 21,612 units by the end of 2021.

The private home market was undersupplied and worsened by the COVID-19 outbreak in 2020 when developers were averse to acquiring land amid lockdowns and economic recession. Construction delays further compounded the situation with hardly any acquisitions of land parcels that year. Nonetheless, demand for homes remained strong during the pandemic and developers have been trying to make up for lost time by competing at government land sales (GLS) tenders.

Although developers are still hungry for development land, the collective sale cycle of 2021/2022 which continues to prevail in 2023, was very different from that of in 2017/2018 due to lower success rate, higher development risks and higher sellers’ expectations.

Lower Success Rate

Of the number of private residential site sales in the 2021/2022² cycle, the estimated success rate was about 30%. In contrast, the estimated success rate in the 2017/2018 cycle was about 60%.2 Moreover, sites sold in the 2017/2018 cycle averaged above 120,000 square feet (sf), while those in 2021/2022 were under 85,000 sf.

Higher Development Risks

Clearly, the operative market dynamics are different between the two periods as the risk of development have increased in the post-pandemic era. Developers face increased challenges including higher construction costs, government intervention with cooling measures, payment of non-remissible Additional Buyer’s Stamp Duties (ABSD), as well as having to sell out their projects within five years to avoid paying more ABSD.

Another dampener was a revision in the definitions of gross floor area to include air-conditioner ledges. The changes affected developers’ saleable area and margins for condominium projects.

Additionally, with higher interest rates, developers had to consider whether some homebuyers would adopt a watch-and-wait approach until economic uncertainties played themselves out. Given the increased risks and compressed profit margins, there appeared a preference toward smaller sites where the capital outlay was more manageable.

Higher Sellers’ Expectations

At the same time, sellers’ expectations remain high as prices of private residential homes reached new benchmarks.

The URA price index rose 8.6% year-on-year in 2022, with a cumulative total of 24.0% from the most recent trough at the start of the pandemic era in Q1 2020 to the current Q4 2022.

Sellers also find difficulties in securing replacement homes similar to their previous ones due to the limited new products in the market and the overall increase in private home prices. This challenge for sellers is especially pronounced in this current en bloc cycle.

As such, there is an evolving and widening gap in price expectations between developers looking for development land and projects that have achieved more than an 80% agreement to sell among residents.

So how can this deadlock be unlocked?

Smaller Sweet Spot

Perhaps, to overcome the challenges in the current collective sale market, a combination of factors must align so that the chances of success can move from the “impossible” to the “probable” territory.

Any potential collective sale site must possess attractive real estate attributes such as being a popular neighbourhood, close proximity to Mass Rapid Transit (MRT) station and panoramic views. Its location within an existing residential enclave could draw upgraders attached to the area if there are new products available. The size of the existing residential project and its absolute cost are further considerations.

In the 2021/2022 cycle, the average selling quantum among sites sold was just under S$180 million as compared S$260 million in the 2017/2018 cycle, which was substantially higher.

Therefore, sites with a development potential of S$200 million or less, where up to 200 new units can be built together with attractive attributes, will continue to remain appealing to developers.

The exception to this was the collective sale of Chuan Park, the only large site transacted in 2022, currently pending the approval of the courts.

Therefore, developers can turn to the private collective sale market for a variety of locations, tenures and sizes, especially unique large parcels with exceptional attributes that cannot be found in the GLS Programme. GLS sites which only offer 99-year leasehold plots are typically located in suburban locations.can limit choices for developers.

It also helps if the prospective collective sale site is in a location that has not had any new land plots for the development of private homes in quite a while.

En Bloc Opportunities in Core Central Region (CCR)

Although most of the residential collective sale sites sold in 2022 were situated in the suburban areas, there are possible en bloc options in more central areas that developers can consider.
The CCR offers some possible en bloc options given its appeal to wealthy foreign buyers relocating to Singapore. Developers might be drawn to prime higher-end collective sale parcels as more foreign high-net-worth buyers proliferate the Singapore market. The prime residential market could pick up in tandem with the relaxation of global travel rules.

En Bloc Opportunities in the East

The eastern part of Singapore is an attractive area, with more than 3,000 new units possibly launched in 2023.

Some of the more substantially-sized projects lie within the Marine Parade Planning Area, around Amber Gardens, Jalan Tembusu and Dunman Road. Further east, in the Bedok Planning Area, Sceneca Residence at New Upper Changi Road/Tanah Merah Kechil Link is the only major launch with 268 units.

To put into context, Bedok is the most populous Planning Area based on estimates by Singstat at over 278,000 in 2022.³

About 62% of the homes in the Bedok Planning Area are made up of HDB flats, with almost 16% comprising some 44,000 plus 5-room or executive flat households that are in a position to upgrade to a suburban condominium.

Another 21% of residents live in private high-rise condominiums or apartments where some might be drawn to a new development along the popular Tanah Merah stretch with easy access to Tanah Merah MRT Station.

Another 16% of residents stay in landed homes, where those who are retirees might consider downgrading to more manageably sized accommodations in their golden years.

Given the demographic profile of the Bedok Planning Area, it was hardly surprising that close to 3,000 visitors were reported to throng Sceneca Residence’s sales gallery preview on 1 January 2023.

The Key Lies with Sellers/Owners

The role that the collective sale mechanism plays in recycling land in Singapore for new developments provides options beyond the GLS programme, where free enterprise is fostered to create mutual benefit for owners and developers, buyers and sellers.

However, the key for this to work in the current cycle lies with the would-be owners who band together to sell collectively. Due to the many moving parts that make up the collective sale process, there needs to be a harmony of factors that achieve the kind of delicate balance that results in a successful sale.

In the past, a collective sale was sometimes equated to winning the lottery with super-normal gains for sellers. This was especially apparent in the earlier years from the mid-1990s onwards when plot ratios in the five-yearly Master Plan were going up, adding enhancement to private land plots. However, in the Master Plan revisions over the last 15 years, increments in plot ratios have been few and far between, and so the enhancement to private land plots is limited mainly to the improvement in surrounding infrastructure (such as the development of MRT lines and stations) as well as the growth in private home prices over time as the country grows more affluent.

So while it might not be akin to striking the lottery, collectives sales still present a more lucrative windfall than selling individually, especially for owners who bought at lower prices in earlier years before each subsequent epoch of private home price increases over time.

For example, based on the price per-square-foot (psf) when Watten Estate Condominium which was successfully sold in October 2021, residents who purchased units there between 1995 and 2020 benefitted from an estimated gain of over 300% on average. The collective sale price was also about an average of 80% more than other non-landed homes in the same postal sector around the time of the collective sale.

Another example is the collective sale of Flynn Park, where owners who bought units there between 1995 and 2020 enjoyed profits of an estimated 270% when the en bloc deal was sealed, also in October 2021. And despite new projects such as Normanton Park selling within the same postal sector around that time, Flynn Park owners nonetheless reaped about 35% more on a psf-basis when measured against all non-landed sales in area.

Of course, not all residential projects that begin the collective sale process stand to gain in a similar fashion. The profits vary. Many variables are at play such as the quality and characteristics of each site, improvements to the place, growth potential due to government planning initiatives such as the decommissioning and redevelopment of Paya Lebar Air Base, and the proposals for the Bayshore precinct.

Dynamics in both the private and public home markets can be both contributing or limiting factors to the potential success of a collective sale site and whether an 80% agreement can be reached for a launch to be made possible.

Perhaps the philosophy for success is essentially embedded in the word “collective”. Taking a page from Aristotle, where the whole is greater than the sum of its parts, there is every chance of comparatively lesser housing value (even in today’s private home market) for the individual seller unless they combine to create a collective sale.

There can be strength in numbers. Even though it might no longer be the equivalent of hitting the jackpot in today’s market, an attractive windfall nevertheless is possible and beckons those who are realistic and practical about pricing their expectations within the ambit of developers’ risk profile.

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¹ Kerk, C., 2022, “En bloc deadlock to continue in 2023”, The Business Times, 20 December

² The number of estimated launches is not exhaustive due to multiple launches and relaunches, across the affected years. These are best estimates based on available data for sites that comprise residential use.

³ Singapore Residents by Planning Area / Subzone, Age Group, Sex and Floor Area of Residence, June 2022, Department of Statistics Singapore, https://www.singstat.gov.sg/find-data/search-by-theme/population/geographic-distribution/latest-data