Windfall gains from en-bloc fever are likely to be capped

Sep 12, 2017

RECENT evidence suggests that the en-bloc fever in Singapore's residential property market is hotting up again.

Since last year, a total of 17 residential collective sale sites have been launched, covering more than 3,140 units, according to research by property consulting firm JLL. In value terms, the deals concluded during the first eight months of 2017 totalled about S$3.5 billion across all property sectors, the highest since 2007 - although the figure is well short of 2007's S$11.5 billion worth of deals done. But the pick-up in en-bloc sentiment is unmistakable. The aggregate transaction value for 2017 to date is already more than three times what it was in 2016. Moreover, some 50 to 60 additional en-bloc deals are said to be at various stages of completion.

So why are we witnessing this latest bout of en-bloc fever and what are its implications for the property market and for owners?

The phenomenon appears to be driven by developments on both the supply and demand sides.

Notable on the supply side is the fact that after the completion of more than 20,800 new residential units in 2016 - a record - the government has taken a conservative approach towards its land sales. This was logical, given the tepid state of the property market over the last three years. The prices of private residential properties (excluding executive condominiums) has declined 11.6 per cent since the third quarter of 2013. Even as recently as the second quarter of 2017, the URA's price index for private residential properties showed a decline of 0.1 per cent.

However, in recent months, transaction volumes have been rising, which means that the price expectations of buyers and sellers are better aligned than before and that the pent-up demand in the long-languishing property market was finally beginning to show up. Moreover the pipeline supply of unsold completed private homes has shrunk to just over 15,000 units as at the end of Q2 2017, from more than 21,000 a year earlier. Increasing numbers of analysts began to forecast that Singapore's property market was at an inflexion point and could start to bottom out by next year.

All of this has led property developers to step up the replenishment of their depleting land banks. They began to make increasingly bullish bids at government land sales, with many tenders attracting several bidders. For example, in May, a 99-year leasehold site in Stirling Road attracted a record bid of more than S$1 billion in a contest that featured 13 bidders. Acquiring land through en-bloc purchases thus became a compelling proposition.

Many property market analysts suggest that the surge in en-bloc transactions - which typically lasts six to eight quarters - still has some way to go. While this is possible, property owners - especially those residing in estates with en-bloc potential - should temper their expectations. There is unlikely to be a repeat of the previous en-bloc boom of 2007. Most of the government's property cooling measures are still in place and are likely to remain so; they did not exist in 2007. Interest rates are likely to rise, even if at a gradual pace.

Bullish analysts may well be right about the property market being at an inflexion point, but in the event of overheating - which the government has indicated it is determined to prevent - the land sales programme could be stepped up and the cooling measures tightened, which would douse the en-bloc fever. Thus, even if the fever persists for a time, windfall gains for property owners - and developers too - are likely to be capped.