Commentary: Get ready for a light collective sale season

Activity should improve next year, but don't expect next wave to be as strong as last cycle

SINGAPORE - Collective sale activities typically take place over short and intensive cycles, whenever developers' appetite for land surpasses supply. Their appetite for land surges when their inventory runs low and the outlook for the market turns positive. Both these factors are now in play on the back of stronger-than-expected new homes sales this year, despite the Covid-19 pandemic.

The staple land source comes from the Government Land Sales programme, which generates a steady stream of new residential projects each year. Whenever developers cumulatively switch to land-buying mode, as we expect to see in 2021-2022, the surge in demand tends to surpass the Government's planned supply, thereby unlocking the arbitrage for collective sales to take place.

The 2017-2018 period saw a strong bull run for collective sales, with some 70 projects successfully sold en bloc for a total of $19 billion. For every successful sale, there were more that were unsuccessful. Is now a good time to reactivate those previous collective sale attempts? What factors and best practices should owners consider in order to increase their chances of success?

Collective sale activity has practically ground to a standstill since the last set of cooling measures in July 2018, which short-circuited the surge by increasing the stamp duties that developers had to pay when acquiring residential land by 5 per cent.

In addition, the penalty imposed on developers who failed to sell all the housing units in their new development within five years of purchasing the land was raised - from 15 per cent of the land purchase price to 25 per cent.

While collective sale activity is expected to improve next year, we do not expect the next wave to be as widespread or as strong as the last cycle.

Specifically, two types of estates may need to wait this out.

Large-scale projects that are capable of yielding over 1,000 new dwelling units will still find themselves disadvantaged by the July 2018 cooling measures. Developers' risks for such sites have escalated exponentially as the rules impose the same five-year timeframe to sell the new homes irrespective of the project size.

Projects located in the mid-prime to high-end segment of the residential space, where the sale prices of new homes hover above $2,500 per sq ft, may also wish to wait out this cycle. At the moment, there appears to be ample supply of new homes in this category, relative to the size of the population that can afford them. Still, the market is cyclical and the tide will eventually turn.

Sites located a short walk from MRT stations have an evergreen appeal. Increasingly, so do sites in close proximity to enhanced park connector networks, as these have helped make cycling - which has seen a surge in popularity since the circuit breaker period - a viable alternative mode of short-distance commute.

Among the many developments that have attempted a sale, less than one in three was successful.

The main reasons for the failed attempts are unrealistic reserve prices, or the collective sale was fundamentally not viable in the first place. Some viable ones may have started the process too late in the cycle when the market was on the decline.

It may be helpful to consult experienced property consultants on the viability and timing of initiating an exercise. When appointing a property consultant and law firm, the key criteria include experience and knowledge, communication skills and fees.

More often than not, owners regard the property consultant's recommended reserve price as the key determining factor, which leads to unrealistic and seductive pitches. Do not fall for that.

On the advice of the appointed property consultant and lawyer, it is important to determine the right minimum price level, based on careful assessment of the property's redevelopment potential, marketability and level of interest from the owners. Factors affecting the value of the property, such as the development baseline, should be determined early.

Premiums may be trimmed

Although the collective sale exercise may maintain the same reserve price as previous attempts, mathematically, the collective sale premiums may be lower. This is because the base resale values tend to rise after a failed sale attempt. Unless land prices rise significantly, developers may trim their offers to factor the additional 5 per cent stamp duty as costs.

The Method of Apportionment is often a contentious issue, especially for projects with diverse unit types or sizes. Three key factors used to arrive at the best methods are strata area, share value and market valuation.

There is no-one-size-fits-all formula.

The golden rule is to ensure that all owners enjoy as equal a percentage premium as possible when measured against their respective typical values. If a valuation report is needed to determine the best distribution formula, owners should share the costs of ascertaining this.

Arising from safe distancing measures, electronic means of conducting meetings for collective sales have been permitted until June 30 next year. With the growing acceptance of virtual meetings, we believe there are merits in allowing this on a permanent basis.

Paperless and digital updates, electronic surveys, minutes of meetings, notices and digital signing of the collective sale agreement may even be possible in future.

Featured in The Straits Times on 2 December 2020