Lessons from the Pearl Bank en-bloc

In the recent week before Chinese New Year, there is a return of the en-bloc deals being finalised after a brief hiatus whereby 4 deals were concluded in quick succession:

I would like to dive in greater detail for the Pearl Bank  transaction as there are several  learning points one can derive:

Let’s look at the attributes of this development:

Amount pocketed by buyers

The amount paid by Capitaland is of $929 million includes $201.4 million payable to the government for additional lease top-up premium. Hence, the gross proceeds that will end up in the owner’s pocket is a $727.6 million which is about $1,186 psf ppr. In the event the plot ratio of the existing development is not maximised (which is likely to be the case), the owners is likely to get more than $1,186psf.

Based on newspaper article: “Owners of the 288 apartments, ranging in size from 1,323 sq ft to 3,993 sq ft stand to receive between $1.8 million and $4.9 million (i.e. $1,361psf and 1,227psf); which implies that the existing plot ratio is not maximised.

Hence, to the owner who bought the 1,755 sqft apartment in August 2017, the gross profit assuming a sale proceeds of $1,300 psf is ($1,300-$912)*1,755 (i.e. $680,940). Taking into consideration a seller stamp duty of 12% as the sale was done within one year from the date of purchase would shave the profit by $273,780 to $407,169. The net proceeds would also need to factor in other transaction cost such as stamp duty and professional fees to lawyers and agents.

The science behind additional lease top-up

As there is no increase in intensification of land use (i.e. increase in plot ratio), the additional lease top-up premium will be based on the difference between the a 99 years old land and a 51.5 years old land, which is the current lease tenure remaining for Pearl Bank Apartment. The value of leasehold land relative to freehold is publicly available in the Singapore Land Authority website and the percentage of freehold land for a 99 years leasehold and a 51.5 years leasehold is as follows:

Hence, working backwards on differential premium paid by Capitaland of $201.4 million over the total consideration of a fresh 99 year lease of $929 million will work out to be 21.7% which is close the %  indicated above.

Unbeatable connectivity

This transaction further debunk the notion that freehold apartments are the only ticket to becoming the next en-bloc millionaire. Previous leasehold deals mainly arise from HUDC sites. For Pearl Bank, the key selling point to developers is its unbeatable connectivity. Less than 200 metres away to Outram Park MRT station which will boost 3 MRT lines after the completion of Thomson East Coast line. Currently, Outram Park MRT station is served by East West Line and North East Line. Outram Park is also near Chinatown, Singapore General Hospital and the Central Business District.

Capitaland – Lesson from the past en-bloc cycle

This deal also marked the return of Capitaland in the collective sale scene. Capitaland was one of the bigger players in the last ‘en bloc party’. In 2007, Capitaland paid $1.34 billion for Farrer Court which was developed to D’Leedon and $548 million for Gillman Heights which was developed to The Interlace. Based on a publication in March 2017, Capitaland has paid $8.03 million in extension charges for The Interlace and $2.56 million for d’Leedon. And despite the improving market sentiments of the real estate market in Singapore, Capitaland still have remaining unsold inventory at D’Leedon and The Interlace as at the date of writing (mainly the bigger size units). This would mean that Capitaland continue to incur penalties from indigestion of the last en-bloc cycle more than a decade ago.

Capitaland – The New Oxley

Another point to note is that Capitaland intend to build 800 units in the new development, which is about 2.7 times the existing number of units. The average unit size would translate to about 767 square feet.

In terms of degree of density of population living in the new development, to give potential buyer a sense of how cramp the new development would be, I compared the land size per unit with a relatively new development by HDB at the iconic Pinnacle @ Duxton which was completed in 2009.

As seen from the table, the proposed redevelopment of Pearl Bank will be significantly more cramp than Pinnacle @ Duxton. Capitaland is indeed moving into Singapore shoe-box apartment market (dominated by players such as Oxley) in a big way with this land bid.

Potential road-block – pre-application feasibility study on traffic impact

The site is subject to the pre-appliction feasibility study on traffic impact. Outcome of the study could limit the number of units being built on the redeveloped site and any adverse outcome could also be a show stopeers for other en-bloc bids.

Investment ideas

For buyers who are in the market for potential en-bloc units, the successful deal of Pearl Bank apartment will cast a spotlight on leasehold developments which are more than 30 years old but enjoy unparallel connectivity to key transport nodes as the next development to go en-bloc. Example of such developments are People’s Park Centre and International Plaza at Chinatown and Tanjong Pagar respectively.

The entry of Capitaland in the en-bloc market despite being bitten by unsold units from the last en-bloc cycle also signify the hunger of developers with depleting landbanks.

Buyers would do well to factor in a margin of safety after considering the value of the land based on the lease remaining, whether the plot ratio of the development has been maximised, exposure to seller’s stamp duty and also whether there might be divergent owner’s interest in the case of a mixed use development where office or retail space represent a significant portion of the development.

Reference:

http://www.businesstimes.com.sg/companies-markets/capitaland-buys-pearl-bank-apartments-for-s728m-q4-profit-falls-38

http://www.straitstimes.com/business/property/capitaland-calls-for-more-time-to-sell-units

https://www.sla.gov.sg/Portals/0/Services/Land%20Lease%20Conditions/DP%20policy%20wef%2018%20Jul%202007.pdf