Flat Hopper

Bite-Sized Portions Not Served Here.

Understanding En-blocs And What Gets Paid

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The Interlace - The Leasehold Giant Children's Playground

The Shore Residences left me thinking, who exactly gets paid for an en-bloc? The happily displaced owners of the en bloc for sure. The government or one of its statutory boards definitely, but for what? And what’s the difference betwen land that is freehold and leasehold when it comes to en-bloc? This post will try to explain some of the factors that make an en-bloc worth considering to developer using The Interlace (Formerly Gillman Heights) as a case study.

When would a developer purchase a property for en-bloc?
For a leasehold or freehold property to be worth purchasing, the land must have potential to be redeveloped profitably. Factors that affect the en-bloc potential of a property are:

  • Location affects the capital appreciation of the redeveloped property and determines its positioning. It is easier for a developer to market a luxury condominium in Orchard Rd than in Pasir Ris.
  • Plot Ratio is determined by land size, max floor height and the built-up area of the property. Properties with large land area and small built-up are ideal for redevelopment to maximize their plot ratio.
  • Asking Price is the value that the developer pays the collective owners for the site. Developers have to weigh the project’s age, condition, bank loans and possible legal battles in the price negotiation.
  • Development Charge is the levy that paid by the developer to the state for redevelopment to a more valuable i.e. higher plot ratio. This is imposed regardless whether the land is freehold or leasehold.
  • Lease Top-up (For Leasehold) depends on the age of the project and the land valuation. This also depends on the land owner whether the lease top-up is approved and the length of the new lease.

What is the difference between freehold and leasehold en-blocs?
Leasehold sites here refer to 99-year properties where the land is state owned. The difference is the type of levy (development charge or differential premium) imposed to enhance the value of the land:

  • For Freehold – Development charge
  • For Leasehold – Differential Premium + Lease top-up

For converted freeholds like The Shore Residences, any redevelopment would still incur a development charge, but lease top-up and differential premium if any, will be probably depend on the strata title owner i.e. Far East Organisation.

What is Development Charge (DC)?
According to Ministry of National Development, the principle of DC is to allow the land value of a site to be enhanced due to rezoning the site to a higher value use i.e. industrial to residential or increasing the plot ratio. The DC system, where a part of the enhancement in land value is taxed, allows the State to have a share of the gains from the value enhancement arising from its grant of planning approval. The DC rates is pegged to a percentage (%) of the land enhancement value.

DC calculated is based on the published Table of Development Charge (DC) rates which states the DC rate (per square metre) of GFA for each location group in Singapore. The Table of DC is reviewed every six months, in March and September of each year. The most significant change to the DC rates has been revision of the pegged rate with effect from 18 July 2007 from 50% of enhancement value to 70%. This is a huge 40% increase in land enhancement levy for the developer and a blow to en-bloc sales.

What is Differential Premium (DP)?
The DP system is a modification of the DC system to better account for leasehold redevelopment. It is still based on the Table of DC rates and therefore also affected by the July 2007 revision of the pegged rate. For DP, the DC rates will be adjusted to reflect the age of the leasehold land, using a table of leasehold values as a percentage (%) of freehold value. This is similar to PARF and COE value of your car when you want to scrap it. If you scrap your car early you can still get a most of it back, but this value decreases significantly after a certain age.

Leasehold Table – Depreciating much like your car

The Leasehold Table is also used to calculate the Lease Top-up back to 99-years based on the valuation of the land.  You can see this more clearly in the case study.

Case Study: The Interlace (Formerly Gillman Heights)

Feb 2007, Capitaland announced that is acquired Gillman Heights Condominium though an en-bloc. Capitaland paid S$548 million inclusive of a differential premium of S$90 million to top up the lease to 99 years and to increase the plot ratio to 2.1. In its place, The Interlace. A giant’s playground of Lego blocks spread over the 8 hectare site. I think the architecture is gorgeous and courtesy of the firm who was also responsible for this monstrosity in China.

CCTV Headquarters - We are watching you or ... was it you are watching us?

I will tabulate the fact sheet for easy reference,

Gillman Heights The Interlace
Completed 1985 2015
No of Units 607 1040
No of Blocks 10 31 (Literally)
Highest Floor 20 24
Plot Ratio 1.8 2.1
Est. Psf Sold (Owner) $500 psf $1,000 psf

Most of the information above along with the total land area of 836,432 sq ft  (77,707 m²) can be found in this Capitaland press release. We can now use that and what we learnt to estimate the Differential Premium and Top-up Value.

Firstly, Capitaland made the press release in Feb 2007. We are going to assume that the latest Table of Development Charge before the date was used – Sept 2006. Note that Capitaland seemed to have just missed the July 2007 deadline for the revision of DC rates. Phew!

From the map and the DC table, the Gillman Heights site is at Sector 83 and is classified B2 for non-landed residential use. Also from the Leasehold Table, Gillman Heights at 22 years old is valued at 90% of a freehold property. Below is the calculations I followed from SLA documents.

Base Value
User Group: B2
DC Rate: $1,500
Base GFA:  139,873 m² (77,707 m² x 1.8)
Base Amount:
$188,828,550 (137,873 m² x $1,500 x 90%)

Proposed Value
User Group: B2
DC Rate: $1,500
Proposed GFA:  163,185 m² (77,707 m² x 2.1)
Proposed Amou
nt:  $220,299,750 (163,185 m² x $1,500 x 90%)

Differential Premium = $31,471,200 (Proposed Amount – Base Amount)
Lease Top-up Amount = $58,528,800 ($90 million – Differential Premium)

Basically, the developers got out lucky on this one in terms of value, they paid only $363 psf per plot ratio which is very low by present standards. They also missed being hit by the change in DC rates, which would have cost them another $12.6 million. And because the project will only be 24 floors high, construction costs aren’t likely to be exorbitant.

If you take construction costs to be conservatively $300 psf and say 80% of the total GFA can be sold to future residents, profits for the sale of The Interlace could be in the low hundreds of millions. That’s pretty impressive for a leasehold site.

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Written by L

January 19, 2010 at 1:16 pm

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