Are the pipes cracked and the paint peeling? Are the air vents choked with dead insects? Do the residents gaze at toxic waste sites with envy? Then you’re looking at a building with en-bloc potential. But don’t go buying everything that looks like a second-hand (and thoroughly used) bomb shelter just yet. Old buildings are just one sign of a potential en-bloc. Here are the others:
1. Land Value vs. Existing Value
At the simplest level, en-bloc sales occur when the value of the land is exceeds the value of the property on it. The most common cause of this is age.
As a building ages, it becomes less valuable than the land it’s on. Maintenance costs grow higher, and it is harder to attract new tenants. But age is not the only consideration; under-utilization of land space is also an issue.
According to property investor Rayner Siew, some buildings (from the late 70′s to mid-80′s) under-utilize the plot they’re on:
“A lot of old buildings don’t fully utilize the plot. For example, in the past, buildings were not as high as today. So sometimes you will see a busy, central location, where the building is only four storeys. If torn down, a developer might be able to put up something bigger, 10 storeys, or whatever. The location can generate more profit.
I have seen some en-bloc properties where everything was still in good condition. So you don’t just see the condition. You should see if the building is not fully utilizing the plot; that is potential for en-bloc.”
Rayner also pays attention to changes in URA’s master plan:
“Sometimes, URA allows the land to be used for other purposes. For example, maybe they only now decided to allow for high rise. Such changes may encourage a developer to buy up the land.”
2. Price and Availability of Surrounding Properties
The biggest problem with en-bloc sales is the CSA (Collective Sale Agreement). En-bloc sales require 80% of the residents to consent (90% if the development is less than 10 years old).
So how do you guess if residents will sign?
You can’t. It’s mostly hope and guesswork. But one key indicator is the price and availability of surrounding property. Property investor Charlie Ng says:
“Usually, residents do not want to move too far away. If someone stays in Jurong, he will probably want to stay in Jurong even after he sells. Maybe he might move to Jurong East, but he probably won’t move to Pasir Ris. This is a big deal for parents, because their children’s schooling can be affected.
So you should check the prices of the nearby houses. If the residents sell, will they be able to comfortably afford the nearby properties? And are these good alternatives? If not, the chances of an en-bloc are much lower. Not impossible, but lower.”
3. Survey the Residents
As mentioned before, you need 80% consensus for an en-bloc. Before you bet on this happening, it’s best to ask the residents.
Money isn’t everything (it’s just most things). Residents agree to move out for different reasons. Some will only agree if they can keep staying in the vicinity; some will only agree because they can’t stand the old facilities. And some won’t move unless it’s in a box to the crematorium, so just give up.
Don’t make assumptions about the residents’ thought process. They may whine and complain about old facilities, but perhaps they also work in the area. Or maybe it’s close to their parents. Such residents might see their ageing home as a necessary evil, and vote against the en-bloc.
4. The Location is Good
Location can work both ways in an en-bloc.
On the one hand, a great locations means a lot of money: Premiums from Orchard area en-blocs, for example, can hit 100%. That said, location can also cause an en-bloc to fail. In well situated properties, residents start making excessive demands. A well-situated shop in Orchard, for example, might only vacate at the most exorbitant price.
For commercial properties with high traffic, expect to wait a long time for consensus. Charlie says:
“It can be a risky move. If the location is very good, the tenants will put up a lot of fight against the en-bloc; probably their expectations will not be realistic. This can result in the buyer holding on to the unit for a long time. But without good location, en-bloc is unlikely to begin with.”
5. Market Confidence
En-bloc fever last hit in 2007, when the property market was booming. As developers grow in confidence, they become more aggressive in their bidding. As such, the likelihood of an en-bloc grows with an up market.
Problem is, it’s difficult for the layperson to know market sentiments. Even amongst experts, a degree of guesswork is inevitable. But signs to look for are:
- Increasing volume (not necessarily price) of property sales
- Numerous other en-blocs
- A low interest rate, and
- Significant rises in rental rates
En-bloc attempts have happened in a down market. However, developers will be cautious, and their offer will be the financial equivalent of spare change. Unless you’re sure the residents have low expectations, don’t bet on an en-bloc during a downturn.
You can follow us on Facebook, if you want updates on property market sentiments. And before buying to en-bloc, ensure you get the cheapest loan; in case anything goes on. Visit free sites like SmartLoans for the cheapest bank rates.
What are signs that tell you of an en-bloc? Comment and let us know!
Get more Personal Finance tips and tricks on www.MoneySmart.sg
More From MoneySmart