Published December 13, 2008

Show Me The Money

Wacky idea to move the property market

Desperate times call for desperate measures. How about using property raffles to boost home sales in Singapore?


THE Emerging Trends in Real Estate Asia Pacific 2009 report, released last week by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP (PwC), painted a near- doomsday scenario of the property market in this part of the world.

The day of reckoning is just around the corner, says the press release. Industry experts are anticipating falling asset prices, rising capital rates, deteriorating debt markets, increasing foreclosures and bankruptcies, and plummeting transaction volumes as the financial crisis travels the globe.

According to the press release, the report - which is into its third Asian edition - is based on surveys and interviews with hundreds of the 'industry's leading authorities, including investors, developers, property company representatives, lenders, brokers and consultants'.

The investing landscape has undergone a substantive and possibly permanent change, according to the report. Asian banks have re-rated real estate for risk, and with the re-pricing of debt, investors will demand higher yields. The days of financing property via highly leveraged borrowing appear to be gone.

'Asia shares the same liquidity crisis that the rest of the world is facing,' said Stephen Blank, ULI senior resident fellow for finance. 'Financial institutions - whether international or national, regional or local - are reluctant to extend credit as deleveraging reduces balance sheet lending capacity. While fundamentals in most markets and property sectors will be impacted by the prospects for a global recession, financing will be the single biggest issue facing the industry in 2009.'

The report noted that the 'credit squeeze became a chokehold . . . culminating in the near-paralysis of regional debt markets'. The 'moment of truth' has yet to arrive in the Asia-Pacific (except for China and Japan, where the credit squeeze began earlier).

'Refinancing may be the catalyst that brings the crisis home to regional real estate markets . . . during 2009 and into 2010 as short-term and construction loans mature,' states the report. However, one fund manager noted in the report that 'banks are being very accommodating because they know that if they start foreclosing on these rollovers, it's just going to force values to fall further'.

Asian property sales have plunged 68 per cent in the third quarter of 2008, according to Real Capital Analytics.

However, the market softness will attract more traditional players to shop for quality assets in major locations. There will be more realistic pricing expectations, KK So, PwC real estate tax leader in Asia-Pacific, was quoted as saying in the press release.

The report ranks Singapore No 2, after Tokyo, in terms of investment prospects. However, 'the biggest threat to Singapore, other than the squeeze on credit, is the seemingly generous pipeline of development projects which may be completed during a period of sagging interest from foreign business investors', David Sandison, PwC tax partner, was quoted as saying in the press release. 'Apart from this, local players in the retail and office space are also seeking to cut costs by downsizing and relocating to more affordable parts of the island.'

However, acceleration of government infrastructure projects and other measures aimed at buoying the economy should be sufficient to stabilise the market and see it relatively safely through these troubled times, he said.

The strongest buy and hold recommendations for Singapore were in the hotel sector. Some 65 per cent of respondents advised holding, and 24 per cent recommended buying. Only 9 per cent suggested selling. The residential sector appeared to be the weakest. Some 65 per cent recommended holding, but a relatively high 23 per cent recommended selling. Only 11 per cent advised buying. For the office sector, 23 per cent recommended buying and 21 per cent said sell. The corresponding numbers for the industrial sector were 34 per cent and 13 per cent.

All in all, a rather gloomy picture especially for the residential property market where thousands of units sold under the deferred payment scheme will be due for completion in the next two years. Coupling that with the fact that there could possibly be more retrenchments, we could see massive supply but minuscule demand. We could be in for desperate times; hence, desperate measures may be required if the worst comes to pass.

A friend recently returned from the US mentioned about property raffles conducted there. This is how it works: Say a property owner wants to sell his apartment and there are no buyers or the price offered is significantly below his asking price. So he decides to sell tickets of, say, $10 each. Each ticket buyer has a chance to win his apartment. The condition is that the draw will take place only if he manages to sell enough tickets and raise the amount which meets his asking price.

So, for a $500,000 apartment, 50,000 tickets would have to be sold. I thought the idea was interesting, for several reasons. One, at a time when few people are willing to commit a big sum of money for a big-ticket item, most probably wouldn't mind and could easily afford to fork out $10 for a chance to win an apartment.

Two, the odds of landing the apartment are far better in a property raffle than winning the top prize in a Toto draw, the prize money of which sometimes amounts to only $600,000. Assuming 50,000 tickets were sold, the chance per ticket is one in 50,000. To win the top prize of Toto with an ordinary ticket, your chance is one in 8.145 million!

Three, the property owner may potentially end up getting more than his or her asking price.

Common practice in US

House raffles are common in the US, with charities often joining forces with property developers to raffle new homes. In the UK they remain rare, according to a report in the Telegraph in October 2005. But with figures from the UK Nationwide Building Society showing that house prices fell for the second consecutive month in September - the first time in five years that prices have fallen for two months running - more sellers may be considering similar action in future, the report said.

The newspaper featured a certain Daniel Bloy, who had up till October 2005, put his Nottingham flat up for sale for five months. He received only one realistic offer, and even that fell through. Refusing to slash his price any further, he offered his two-bedroom flat as the first prize in an online spot-the-ball competition, giving one lucky winner the opportunity to own a home, mortgage-free, for just £25, or S$56. (A spot-the-ball competition is a game where the player has to guess the position of a ball which has been removed from a photograph of a ball sport.)

The Telegraph quoted Mr Bloy as saying that the competition had been fully approved and was run by solicitors. Photographs are available online and entrants who got in touch with his solicitors could view the lease details and title deeds. He added that he had spent several weeks researching both the gaming laws in the UK and the possible tax implications of such a scheme before seeking legal advice.

Under Mr Bloy's rules for his spot-the-ball competition, a minimum of 6,000 tickets had to be sold for the flat sale to go ahead; the maximum was 8,000 tickets. If fewer than 6,000 tickets were sold, the winner of the spot-the-ball competitions would walk away with 65 per cent of the value of the ticket sales.

Apart from the first prize, there were also 11 smaller cash prizes.

At £25 a ticket, if the maximum number was sold, £200,000 would be raked in. If just 6,000 were sold, the flat would effectively be sold for £150,000. His earlier asking price for the apartment was £130,000. Even if far fewer tickets were sold, Mr Bloy would keep 35 per cent of the proceeds, which would be sufficient to cover the additional legal fees and costs of promoting the scheme.

The legal costs, said Mr Bloy, were obviously significantly higher than what one would pay for a normal house sale. He had to pay all the usual conveyancing costs and associated legal fees, and estimated that he spent more than £2,000 drafting the competition rules.

Mr Bloy's competition was based on the popular 'spot the ball' format. Other house 'raffles' in the past have required ticket buyers to answer a number of simple trivia questions.

Under competition law in the UK, if a name is simply drawn from a hat, the arrangement is classified as a lottery, and the organisers need to apply for a special permit to run it. The winner, however, would have to pay stamp duty plus his own legal fees. Mr Bloy's competition was to have opened on Sept 26, 2005 and close on Dec 16, 2005. No subsequent reports were found. I wonder if he managed to sell his flat.

In Asian markets, if things do deteriorate to an extent where almost all transactions seized up, then perhaps property raffles could be an interesting option to get the money flowing again. To make it easier, perhaps a company with a special licence from the regulator could be set up to conduct such raffles. Checks would have to be done to ensure that the 'owner' is the rightful one, and that the property will come unencumbered.

As they say, desperate times call for desperate measures. So, even if this scheme is not implementable, it's at least an interesting one to mull over.