Published April 2, 2007

Lower DC for Wing Tai at Ardmore Point site

It will cut group's breakeven cost for new project and boost profit margin


LISTED Wing Tai Holdings may enjoy a saving in its land cost for Ardmore Point, resulting in a lower breakeven cost for the new project that it will develop on the site.

BT understands that the development charge (DC) - a component of the developer's land cost - will be significantly lower than the $31 million estimated earlier because the development baseline has turned out to be higher than previously assumed.

DC is typically calculated based on the difference between proposed development use and the development baseline. The latter is pegged to the site's existing entitlement or the highest use for the site which has been paid for.

The higher the development baseline the lower the DC amount payable, based on a given DC rate.

Industry observers reckon that following its development baseline search, Wing Tai has managed to lock in the DC quantum based on the Sept 1, 2006 rates by obtaining provisional permission for a new condo project before the latest revisions in DC rates took effect on March 1, 2007 rates.

When Wing Tai announced its acquisition of Ardmore Point in October last year at $201 million, the DC was assumed to be $31 million, reflecting an all-in unit land price of $1,369 per square foot per plot ratio.

With a lower DC, the unit land price is lower and, as a result, Wing Tai's breakeven cost for the new project on the plot will also be lower. This translates to a bigger profit margin for the listed property group.

The company declined to comment.

The 60,533-square-foot freehold site is zoned for residential use with a 36-storey maximum height. It could be developed into a new condo with about 108 units averaging 1,800 square feet. Wing Tai has not given details of the project, except to say recently that it is slated for launch early next year.

The application for the collective sale of Ardmore Point by its majority owners was made to the Strata Titles Board in late November last year. Two owners objected but the case was settled following a mediation in January this year.

Market sources say one area of dispute could have been the higher-than-expected development baseline which Wing Tai now enjoys. The sale, brokered by CB Richard Ellis, was approved on Jan 27.

The $31 million DC quantum indicated earlier was an estimate, made without a development baseline search with the Urban Redevelopment Authority (URA).

Property agents told BT that a common reason agents do not make any application to URA to confirm the development baseline is the high costs involved ranging anywhere from about $4,000-$10,000 for engaging the services of an architect to estimate the gross floor area (GFA) of the existing development and then recomputing it from the old definition of GFA to the current definition.

This is required by URA if the existing development on the site was approved before Sept 1, 1989. Based on the information provided, URA will process the application for $1,500.

A seasoned property consultant told BT that for very important collective sales cases, his firm may decide to take a business risk and first pay for the costs involved in verifying the development baseline, but with an undertaking from the en bloc sales committee that the amount would be deducted from sale proceeds of all owners upon the successful sale of the property.

However, if a sale fails to materialise, then the property consultancy firm runs the risk of being saddled with the costs. Another alternative would be to ask members of the en bloc sales committee to bear the costs first and claim them from the remaining owners later.

Yet another solution would be to state explicitly in the sale and purchase agreement with the developer buying the site as to how any difference in actual development baseline/DC will be split between owners and developer.

Some quarters argue that if the developer makes an unconditional offer for a site - that is, one not tied to a specific redevelopment approval from the authorities or to a certain development baseline/DC - then the developer would have a stronger case for not being obligated to agree to share any DC saving with the sellers, just as the owners would not want to accept a lower price in the event that the developer has to bear a higher DC.