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Thread: Some upside in failed en bloc deals

  1. #1
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    Default Some upside in failed en bloc deals

    Published April 15, 2008

    COMMENTARY

    Some upside in failed en bloc deals

    By ARTHUR SIM


    LOOKING for a silver lining when nothing looms but storm clouds may seem a futile exercise.

    But recent events surrounding the failed collective sales of Tulip Garden and Makeway View to Bravo Building Construction may just be a ray of hope in an increasingly gloomy property market.

    To be sure, when Bravo decided it could no longer proceed with the collective-sale deals, some considered it yet another in a series of ominous events signalling the end of 'irrational exuberance' in the property market here.

    Another was the pullout of Kuwait Finance House from a deal to buy 97 units at Goodwood Residence.

    But putting a positive spin on the failed deals, Bravo has actually helped the market by withdrawing almost 400 potential units from future supply. If the Bravo deal to acquire another en bloc site (Pender Court) falls through, the number of potential units removed from future supply could be closer to 500.

    This may be less than 3 per cent of the 17,800 new units CB Richard Ellis estimates could be launched this year, but if more developers were to follow Bravo's move, enough potential units could be removed from the future market to mitigate a more serious oversupply situation - especially in the light of drastically falling sales; only 185 new private homes were sold in February.

    Emergency exit

    Any developer considering the emergency exit that Bravo took will have to ask itself - as Bravo probably did - whether it has the holding power to build and hang on to units until it is profitable to sell them.

    Perhaps the pivotal number to emerge in the failed Tulip Garden deal is the $25.8 million figure representing the 5 per cent deposit on the $516 million transaction that Bravo will now forfeit.

    While $25.8 million is no small sum to lose, it is probably less than what Bravo could have lost had it proceeded.

    Based on a loan quantum of 60-70 per cent of the land price, the loan for the Tulip Garden project would have amounted to $310-$360 million.

    While it is not unusual for a bank to extend loans to preferred developers at interest rates close to Sibor, an interest rate of 5 per cent per annum would have been more likely, considering the times. In which case the cost of the loan could have been between $15.5 million and $18 million for the first year alone. This, also allowing that banks still feel comfortable extending loans of over 50 per cent.

    Another loan the developer would have had to take would have been for construction costs. And based on a cost of $400 psf, this would have amounted to about $200 million for the Tulip Garden project. The quantum a bank will lend a developer varies. Assuming Bravo were to have taken a 50 per cent loan, the cost of this would have been around $5 million for the first year based on a 5 per cent interest rate.

    Bravo's interest payments for the first year could have totalled $20.5-$23 million.

    Developers do not generally borrow more because they expect progress payments from the initial sale of units, which go into a project account, to cover some of the costs.

    But falling sales volumes would have made it difficult for Bravo to depend on the project account to finance construction.

    Lower selling prices would have been a concern too.

    Breaking even

    When the market was at its most bullish last year, Bravo had hoped to launch the new development on the Tulip Garden site at around $2,000 psf.

    However, the US sub-prime crisis has taken its toll on the market, with neighbouring developments Duet and The Cornwall peaking at around $1,500 and $1,700 psf respectively last October.

    It was estimated earlier that Bravo would have to sell all the new units at Tulip Garden for at least $1,500 psf just to break even.

    Developers who are likely to be swayed by this line of reasoning to reconsider developing en bloc sites are more likely to be the smaller, newer players in the field.

    Based on available data, an estimate by Savills Singapore puts the number of new units from en bloc sites bought by construction companies in 2007 at more than 800, excluding Tulip Garden and Makeway View.

    If some of these potential units were to be removed from the future market, supply pressure would be eased.

    It would, of course, be much simpler if the potential units from a large en bloc site like Gillman Heights or Tampines Court were removed from the market.

    But this is unlikely as it has become almost a mantra that big developers have holding power, even if they are losing money at the same time.

  2. #2
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    Default Re: Some upside in failed en bloc deals

    Quote Originally Posted by mr funny
    Published April 15, 2008

    COMMENTARY

    Some upside in failed en bloc deals

    By ARTHUR SIM


    LOOKING for a silver lining when nothing looms but storm clouds may seem a futile exercise.

    But recent events surrounding the failed collective sales of Tulip Garden and Makeway View to Bravo Building Construction may just be a ray of hope in an increasingly gloomy property market.

    To be sure, when Bravo decided it could no longer proceed with the collective-sale deals, some considered it yet another in a series of ominous events signalling the end of 'irrational exuberance' in the property market here.

    Another was the pullout of Kuwait Finance House from a deal to buy 97 units at Goodwood Residence.

    But putting a positive spin on the failed deals, Bravo has actually helped the market by withdrawing almost 400 potential units from future supply. If the Bravo deal to acquire another en bloc site (Pender Court) falls through, the number of potential units removed from future supply could be closer to 500.

    This may be less than 3 per cent of the 17,800 new units CB Richard Ellis estimates could be launched this year, but if more developers were to follow Bravo's move, enough potential units could be removed from the future market to mitigate a more serious oversupply situation - especially in the light of drastically falling sales; only 185 new private homes were sold in February.

    Emergency exit

    Any developer considering the emergency exit that Bravo took will have to ask itself - as Bravo probably did - whether it has the holding power to build and hang on to units until it is profitable to sell them.

    Perhaps the pivotal number to emerge in the failed Tulip Garden deal is the $25.8 million figure representing the 5 per cent deposit on the $516 million transaction that Bravo will now forfeit.

    While $25.8 million is no small sum to lose, it is probably less than what Bravo could have lost had it proceeded.

    Based on a loan quantum of 60-70 per cent of the land price, the loan for the Tulip Garden project would have amounted to $310-$360 million.

    While it is not unusual for a bank to extend loans to preferred developers at interest rates close to Sibor, an interest rate of 5 per cent per annum would have been more likely, considering the times. In which case the cost of the loan could have been between $15.5 million and $18 million for the first year alone. This, also allowing that banks still feel comfortable extending loans of over 50 per cent.

    Another loan the developer would have had to take would have been for construction costs. And based on a cost of $400 psf, this would have amounted to about $200 million for the Tulip Garden project. The quantum a bank will lend a developer varies. Assuming Bravo were to have taken a 50 per cent loan, the cost of this would have been around $5 million for the first year based on a 5 per cent interest rate.

    Bravo's interest payments for the first year could have totalled $20.5-$23 million.

    Developers do not generally borrow more because they expect progress payments from the initial sale of units, which go into a project account, to cover some of the costs.

    But falling sales volumes would have made it difficult for Bravo to depend on the project account to finance construction.

    Lower selling prices would have been a concern too.

    Breaking even

    When the market was at its most bullish last year, Bravo had hoped to launch the new development on the Tulip Garden site at around $2,000 psf.

    However, the US sub-prime crisis has taken its toll on the market, with neighbouring developments Duet and The Cornwall peaking at around $1,500 and $1,700 psf respectively last October.

    It was estimated earlier that Bravo would have to sell all the new units at Tulip Garden for at least $1,500 psf just to break even.

    Developers who are likely to be swayed by this line of reasoning to reconsider developing en bloc sites are more likely to be the smaller, newer players in the field.

    Based on available data, an estimate by Savills Singapore puts the number of new units from en bloc sites bought by construction companies in 2007 at more than 800, excluding Tulip Garden and Makeway View.

    If some of these potential units were to be removed from the future market, supply pressure would be eased.

    It would, of course, be much simpler if the potential units from a large en bloc site like Gillman Heights or Tampines Court were removed from the market.

    But this is unlikely as it has become almost a mantra that big developers have holding power, even if they are losing money at the same time.

    That was Lesson No. 1, Mr. Sim.

    How about another lesson from the Tulip Garden's case?

    HEADS, developer buyers win, TAILS, property owners (collective sellers) lose.

    WHY?

    First, look at the Horizon Towers case where the property was sold way below the market value. The developer buyer won because of the sanctity of contract and buyers can be sued till their pants drop if they refused to complete the sale.

    Now look at Tulip Garden where the property was sold at the market's peak. The developer buyer win again because they can walk away by simply forfeiting their miserable 5% deposit, while the owners stand to lose something like 20% to 30% given the current market sentiment.

    Of course, the owner sellers can sue, like HPL, but developers are incorporated as limited liability companies and the seller owners would lose their pants again if they sue since the developer buyer can go into liquidation with the seller owners having to pay even more in legal fees.

    The morale of the lesson is that Heads buyers win, TAILS sellers lose, and the solution is that ALL EN BLOC SALES SHOULD BE SUSPENDED IMMEDIATELY and the LTSA be amended again to provide protection for home owners.

    How?

    The 5% deposit is based on the standard Sale & Purchase (S & P) agreement meant for the sale of INDIVIDUAL UNITS, not for collective sale which has a much longer time lag between the award of a tender and the final completion.

    The deposit should be raised to at least 30%, and if cash flow is a problem, the usual 5% in cash, with the additional 25% by way of a banker's guarantee or a performance bond.

    I suggest 30% because the ups and downs could easily be 30% either way given our recent experience.

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    Default Re: Some upside in failed en bloc deals

    Quote Originally Posted by James Tan
    That was Lesson No. 1, Mr. Sim.

    How about another lesson from the Tulip Garden's case?

    HEADS, developer buyers win, TAILS, property owners (collective sellers) lose.

    WHY?

    First, look at the Horizon Towers case where the property was sold way below the market value. The developer buyer won because of the sanctity of contract and buyers can be sued till their pants drop if they refused to complete the sale.

    Now look at Tulip Garden where the property was sold at the market's peak. The developer buyer win again because they can walk away by simply forfeiting their miserable 5% deposit, while the owners stand to lose something like 20% to 30% given the current market sentiment.

    Of course, the owner sellers can sue, like HPL, but developers are incorporated as limited liability companies and the seller owners would lose their pants again if they sue since the developer buyer can go into liquidation with the seller owners having to pay even more in legal fees.

    The morale of the lesson is that Heads buyers win, TAILS sellers lose, and the solution is that ALL EN BLOC SALES SHOULD BE SUSPENDED IMMEDIATELY and the LTSA be amended again to provide protection for home owners.

    How?

    The 5% deposit is based on the standard Sale & Purchase (S & P) agreement meant for the sale of INDIVIDUAL UNITS, not for collective sale which has a much longer time lag between the award of a tender and the final completion.

    The deposit should be raised to at least 30%, and if cash flow is a problem, the usual 5% in cash, with the additional 25% by way of a banker's guarantee or a performance bond.

    I suggest 30% because the ups and downs could easily be 30% either way given our recent experience.

    I concur!The buyers can get away leaving the sellers in the lurch.Therefore the law is more equal for some and less equal for others.It will take donkeys weeks or years for the ministry to address the issue.Just like those traffic accident or mishap cases when someone need to shed blood for change to take place.

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    Default Re: Some upside in failed en bloc deals

    Quote Originally Posted by Tony Blair
    I concur!The buyers can get away leaving the sellers in the lurch.Therefore the law is more equal for some and less equal for others.It will take donkeys weeks or years for the ministry to address the issue.Just like those traffic accident or mishap cases when someone need to shed blood for change to take place.

    Thanks, Tony. Remembered when I was in school some fifty years ago when the literature textbook, Animal Farm, had this to teach us ".... some are more equal than others", and this remains true till today, even for a democratic and law abiding Singapore.

    Singapore laws are pro capitalists. If you wonder why the en bloc laws were changed in the 1990s to enable the 80% or 90% majority instead of the 100%, just check into this website, www.bca.gov.sg (the official website of the Building and Construction Authority, BCA.

    Look up for the annual report for 2004 and you will see the Vice Chairman of BCA then was the First Vice President of the Real Estate Developers Association of Singapore (REDAS). Got the message?

    The biggest real estate stakeholders are the property owners, but if you look at all the years' BCA BOD, you can't find a representative from the property owners association, viz the Association of Management Corporations in Singapore. While the BCA Board Members are indeed distinguished people, the representation is not representative of stakeholders and therefore strata laws failed to address the problems of the industry and tend to be, as you said, "less equal for others".

  5. #5
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    Default Re: Some upside in failed en bloc deals

    Quote Originally Posted by James Tan

    Singapore laws are pro capitalists. If you wonder why the en bloc laws were changed in the 1990s to enable the 80% or 90% majority instead of the 100%, just check into this website, www.bca.gov.sg (the official website of the Building and Construction Authority, BCA.

    Look up for the annual report for 2004 and you will see the Vice Chairman of BCA then was the First Vice President of the Real Estate Developers Association of Singapore (REDAS). Got the message?
    Haha.. I really must follow up on your lead. I wrote about the history of the 80% amendment in 1997 by tracing back news articles to the point when there was (a) SERS which was generating huge profits for Heartlanders but not condo dwellers (b) forum letters that asked why can't enblocs be more facilitated in condos, to even 70% etc, and then 6 mths later, parliament debates on 80% amendment.

    I have not looked up the BCA site. Was this Vice Chairman of BCA in the same role in 1996-98?

    Their defence, I'm sure, is that it's a small world and only so many qualified people who can helm such high key organisations and government institutions. Such people will also categorically state that there is no conflict of interest in their performances...

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    Default Re: Some upside in failed en bloc deals

    Quote Originally Posted by DrMinority
    Haha.. I really must follow up on your lead. I wrote about the history of the 80% amendment in 1997 by tracing back news articles to the point when there was (a) SERS which was generating huge profits for Heartlanders but not condo dwellers (b) forum letters that asked why can't enblocs be more facilitated in condos, to even 70% etc, and then 6 mths later, parliament debates on 80% amendment.

    I have not looked up the BCA site. Was this Vice Chairman of BCA in the same role in 1996-98?

    Their defence, I'm sure, is that it's a small world and only so many qualified people who can helm such high key organisations and government institutions. Such people will also categorically state that there is no conflict of interest in their performances...

    Sorry, I don't have the infor either as BCA does not post everything. Their latest annual report is only up to 2005, not even 2006 or 2007.

    Nobody in the world would admit to devious tricks to get what he wants, while in some cases, the truth may hurt many people. For example, do you know why and how the SMU was formed? Only those holding senior positions in NUS and NTU (biz and accountancy faculties) would know the truth; the public is given the picture that a management university is long overdue, blah, blah, blah... and those who knew the truth are gagged!

    If you look at the old rules, 100% consensus was needed regardless of the age and as a housing developer, doesn't that cause you to lose en bloc opportunities?

    And the authority that can spearhead the amendment of the en bloc laws?

    There is nothing wrong for the housing developers to be board members of BCA, but the representation must be balanced by representatives from the DIRECT stakeholders, the real estate owners, otherwise things can only go one side, a natural law.

    In the pre-2004 version of the LTSA, it was so ridiculous that the managing agent cannot be fired except at a general meeting (so claimed), but they can fire the MCST anytime they want simply by resigning or just walking out!

    The situation was remedied when the Association of Management Corporations in Singapore (AMCIS) called for a review of the LTSA in 2001 which lead to the enactment of the BMSMA in 2004 and brought into operation on 1 April 2005, whereby the Council can now be empowered to hire and fire the MA.

    What we need is a balance to ensure justice: en bloc sales are far from the level playing field, don't you agree, Dr.? Thanks and regards

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