http://www.straitstimes.com/archive/...c-bid-20140721

CAI JIN

All eyes on Spring Grove en bloc bid

Lessons for home owners, developers if sale is successful

Published on Jul 21, 2014 12:56 AM

By Goh Eng Yeow Senior Correspondent


A CANNY purchase of a block of freehold land in Grange Road by the United States government 64 years ago is turning into the proverbial goose that lays the golden egg.

The first windfall came in 1991 when it reaped $80 million from selling a 99-year lease on the 24,481 sq m site, which at one time housed the ambassador's residence.

City Developments developed the plot into the 325-unit Spring Grove condo.

Now the US government stands to get another big bite of the cherry as the Spring Grove owners have launched a collective sale at the eye-popping price tag of $1.39 billion.

As the land owner, the US government would enjoy a windfall of $245 million just to top up the lease by a further 27 years - to 103 years - if the collective sale attracts a buyer.

This is three times what it was paid for the original 99-year lease which it sold on the land 23 years ago.

In land-scarce Singapore, where freehold land is a much prized commodity, the potential bonanza the US government could reap is unlikely to pass unnoticed.

For home owners who bought leasehold property on freehold land not owned by the Government, the Spring Grove collective sale will hopefully provide some clarity on how they can realise the potential of their estate through such a sale as the duration of the lease runs down.

Thus, the yardstick by which the US government arrived at its asking price for the top-up premium is likely to attract considerable scrutiny, especially since it may set the benchmark for any subsequent collective sale on a leasehold estate whose freehold rights are not held by the Government or the home owners.

Currently, when a lease runs down for 99-year projects on land owned by the Government, firms that redevelop the site after a collective sale pay the Government a top-up premium to get the lease rewound to 99 years.

Take the Eng Cheong Towers site in North Bridge Road, which became the first collective sale of a 99-year leasehold property when it was sold for $47.5 million in 2005.

The developer reportedly paid the Government a modest $8.5 million to reset its then remaining 65 year lease to 99 years.

In the Farrer Court collective sale in 2007 - the priciest collective sale ever at $1.34 billion - a sum of between $175 million and $225 million was reported to have been paid for topping up the lease from the remaining 69 years to 99 years.

But while the top-up premium paid for the Farrer Court collective sale was similar in quantum to what is being demanded by the US government for Spring Grove, the site had a shorter remaining tenure and a land area three times the size of Spring Grove.

When the Spring Grove collective sale was first touted last year, the draft collective sale agreement showed that the original reserve price was $1.045 billion, of which $121 million would go to the US government to top up the lease to a new 99-year one. This was 11.6 per cent of the proposed sales proceeds.

However, owners baulked at having to give up their homes and the portion of the sales proceeds earmarked for them was raised by 23 per cent, from $924 million to $1.14 billion. This enticed enough of them to give the requisite 80 per cent consent in March.

Meanwhile, the US government redid its sums and doubled its asking price, from $121 million to $245 million, to extend the remaining 76-year lease to 103 years. As a result, its slice of the proceeds will rise by 6 percentage points to 17.6 per cent if the sale goes through.

Will hiking the top-up premium by such a hefty margin dampen buyers' interest for the site since property market conditions are not exactly buoyant?

That remains to be seen, but it helps to explain how the Spring Grove collective sale has a whopping price tag of $1.39 billion - 33 per cent higher than the original reserve price of $1.045 billion set last year.

For real estate developers sitting on a cache of freehold property, the Spring Grove collective sale also bears watching.

As a rule, most of them do not retain any reversionary interest on the freehold land. Their connection ends once all the condos have been sold.

Yet, the handsome gain the US government may reap from the Spring Grove collective sale may cause developers to have a change of heart.

Leasehold units typically sell at a 10 per cent to 15 per cent discount to similar freehold homes so the full value of the land cannot be realised.

But even if developers have to take a discount to sell leasehold condos on freehold land, this may still be worthwhile as some developments may turn out to be gold mines like Spring Grove and offer them a second bite of the cherry, like what the Americans are attempting.

The battle for Spring Grove once again casts the spotlight on how valuable freehold land has become in Singapore. It will only reinforce the view that such land can only get pricier as time passes.

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