Is it worth buying a property before it goes en-bloc? Here's what past data suggests

PHOTO: Stackedhomes

One of the main differences between HDB and private properties is the greater potential for en-bloc sales. In fact, some investors go out of their way to purchase older properties; not only is the cost lower (and sometimes higher rental yields), they may also hit the proverbial jackpot if an en-bloc sale happens.

Well, we all know that hitting the en-bloc jackpot is always going to be a profitable one.

But what about those who’ve bought just before an en-bloc sale? With the current 12 per cent Seller Stamp Duty (SSD), would you still even be able to make any profit? Here’s a look at the data.

Real transactions that have seen profits right after en-bloc

We’ve tracked down a series of transactions, made six months before an en-bloc sale of the property. Note that the following buyers made a profit even after paying the Sellers Stamp Duty (SSD).

The SSD is a tax on the sale proceeds of the property, that applies even in an en-bloc situation. The current rate is:

  • 12 per cent on the first year
  • Eight per cent on the second year
  • Four per cent on the third year

In the following table, an exception to this is Raintree Gardens. This property went en-bloc in 2016, when the SSD rate was higher by four per cent (16 per cent on the first year, 12 per cent on the second year, 8 per cent on the third year, and four per cent on the fourth year).

Finally, we calculated the sales proceed by multiplying the en bloc price psf to the size of the apartment, so the numbers could differ if it was done by share value instead. So the cost of the SSD is factored into the final profit margin:

Project Transacted Price Area (sqft) Purchased Date Proceeds SSD Profit Per cent Gains Days between
Florence Regency 900,000 1701 18-May-17 $1,897,992 $227,759 $770,233 86 per cent 155
Florence Regency 1,239,999 1690 Jul-26-17 $1,885,984 $226,318 $419,667 34 per cent 86
Florence Regency 1,280,000 1701 June-8-17 $1,897,992 $227,759 $390,233 30 per cent 134
Florence Regency 905,000 1625 April-27-17 $1,813,902 $217,668 $691,234 76 per cent 176
Goodluck Garden 1,360,000 1270 Nov-2-17 $2,372,640 $284,717 $727,923 54 per cent 126
How Sun Park 1,880,000 2734 July-13-17 $4,016,334 $481,960 $1,654,374 88 per cent 138
Landmark Tower 1,430,000 1292 Jan-26-18 $2,058,938 $247,073 $381,865 27 per cent 112
Landmark Tower 1,035,000 1033 Jan-2-18 $1,647,144 $197,657 $414,487 40 per cent 136
Mayfair Gardens 1,470,000 1798 May-26-17 $2,588,530 $310,624 $807,906 55 per cent 175
Park West 740,000 872 Jul-27-17 $1,164,832 $139,780 $285,052 39 per cent 168
Park West 970,000 1249 Aug-24-17 $1,668,156 $200,179 $497,978 51 per cent 140
Pearl Bank Apartment 1,600,000 1755 Aug-25-17 $2,454,587 $294,550 $560,037 35 per cent 172
Raintree Gardens 1,008,600 1679 Apr-21-16 $1,890,757 $302,521 $579,636 57 per cent 168
Riviera Point 1,500,000 1281 Sept-18-17 $2,250,576 $270,069 $480,507 32 per cent 149
Riviera Point 1,600,000 1346 Nov-10-17 $2,364,044 $283,685 $480,358 30 per cent 96
Sembawang Hills Estate 2,300,000 3681 June-14-17 $4,347,603 $521,712 $1,525,891 66 per cent 118
Sun Rosier 1,925,000 2336 April-25-17 $4,405,300 $528,636 $1,951,664 101 per cent 149
Tampines Court 950,000 1658 March-16-17 $1,697,444 $203,693 $543,751 57 per cent 159
Tampines Court 930,000 1690 May-11-17 $1,730,509 $207,661 $592,848 64 per cent 103
Tampines Court 980,000 1711 May-9-17 $1,752,556 $210,307 $562,249 57 per cent 105
Tampines Court 920,000 1711 May-26-17 $1,752,556 $210,307 $622,249 68 per cent 88
Tampines Court 915,000 1679 April-18-17 $1,719,480 $206,338 $598,143 65 per cent 126

Special shoutout to the Sun Rosier deal as the owner made 101per cent even after factoring the SSD in 6 months.

As you can see, it’s possible to profit off an en-bloc sale, even taking into account the SSD. This was why, in 2017 or prior, it wasn’t uncommon for investors to show interest even in very old properties (or sometimes, interest because the property was old).

However, we should note that 2017 was an exceptional year, and there have been many changes since

PHOTO: Stackedhomes

In 2017, local and foreign developers were both competing to build their land banks. This resulted in an en-bloc fever, with unusually high land prices. For example, Sun Rosier, in the above transactions, was bought at a total cost of $271 million.

This was 15 per cent higher than its initial asking price of $235 million. We’d be hard pressed to find many equivalent examples after 2017. There are two reasons for this:

First, Development Charges (DCs) to build new properties have increased. In fact in 2017, the government raised DCs by 13.8 per cent on average, in 116 out of 118 property sectors; although there was never a direct statement saying it was to cool en-bloc sales.

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What you need to know about en-bloc sales in 2021

DCs for residential properties have yet to return to those levels in most sectors. These higher charges dissuade en-bloc sales, and prompt lower offers from developers. We also wouldn’t be surprised if, in response to another encroaching en-bloc fever, the government decides to hike the rates again.

Second, the government raised the Additional Buyers Stamp Duty (ABSD) to 30 per cent on the land price, for developers. This occurred in the 2018 cooling measures. A developer can get remission of 25 per cent, by completing and selling all units within a five-year period.

This makes larger land plots problematic. Whether a development has a few hundred units, or more than a thousand, a developer still has the same five-year time limit. As such, only the boldest developers will consider large condo developments for en-bloc.

Besides the different circumstances in 2021, there are a few added risks to understand before trying to “buy just before en-bloc”

  • The method of apportionment makes it hard to predict how much you’ll get
  • SSD aside, your home loan package may have prepayment penalties
  • Timing issues regarding the sale proceeds
  • If an en-bloc fails repeatedly, you could be saddled with a liability
  • New EGM rules

1. The method of apportionment makes it hard to predict how much you’ll get

It’s commonly said that the share value of the unit determines how much you’ll make, during an en-bloc sale. This may lead you to believe that “higher share value = bigger sale proceeds”. The reality doesn’t quite work out that way. In fact, larger units with a higher share value often get a worse deal.

The share value system was devised by BCA to work out an equitable distribution of maintenance costs – it was never designed to be a method of apportionment during en-bloc sales. It can be extremely unfair to owners of large units.

Here’s why:

Gross Floor Area (sqm) Share Value
50 Five
51 – 100 Six
101 – 150 Seven
151 – 200 Eight
201 – 250 Nine

You might assume that, if your unit is 200 sq m., you would get four times as much as someone whose unit is 50 sq m. However, the share value doesn’t rise proportionally in the same way – at 200 sq m, your share value is not 20, it is just eight.

(A good thing in any other context, otherwise maintenance fees for bigger units would be unsustainable).

As such, owners of bigger units may dispute this approach, and a different method of apportionment may be used. Besides this, you also have:

  • Genuine home owners who don’t want the en-bloc, and will want to be compensated for costs like renovations and moving (imagine if you move in just a year before, renovate the place, and are now forced to move again!)
  • Owners who are eager to force through the en-bloc as fast as possible and move on to their next investment, who may be inclined to settle for less
  • Problems and costs involved in topping-up the lease, which may cause the developer to offer less than expected

All of this goes through several rounds of negotiations, so it’s hard to guess what your likely pay-off will be. There are highly profitable en-bloc cases, and there are cases where owners barely break-even.

(An outright loss is unlikely however, as the Strata Titles Board will usually not approve an en-bloc if it results in someone suffering a financial loss; even if there’s sufficient consensus).

2. SSD aside, your home loan package may have prepayment penalties

PHOTO: Stackedhomes

In our experience, buyers who have only used HDB loans before tend to get blindsided by this. HDB does not care if you choose to repay your home loan early, by whatever amount. Banks do, as they could lose out on the interest among other costs.

As such, many home loan packages involve a prepayment penalty; these are often applicable within the first three to five years. The standard penalty is up to 1.5 per cent of the amount (e.g., repaying $800,000 early would incur an added $12,000).

There are some loan packages that offer ways around this however, such as loans that don’t charge prepayment penalties due to sale. If you need help deciphering all this fine print, which is admittedly confusing, drop us a message and we can check for you.

In any case, if you’re buying with an eye toward a quick en-bloc sale, be careful which loan option you use.

3. Timing issues regarding the sale proceeds

If the en-bloc property is also your home, be aware that en-bloc sales can incur added costs in the form of temporary accommodation, or interest on short-term loans.

This is because the sale proceeds may take some time to come in; in some cases, up to 12 months. This is problematic if you’re required to vacate the property, long before your sale proceeds come in.

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Also, remember that buying a second property, while still holding on to your soon-to-be-en-bloc-home, will incur Additional Buyers Stamp Duty (ABSD).

If you still have an outstanding home loan on the en-bloc property, it will also lower the amount you can borrow for your next home; maximum financing is often capped at just 55 per cent if you have an outstanding home loan.

All of this can snarl your cash flow, and force a rushed decision on your next property. We’ll cover more of this in an upcoming article, and look at how to work through it – but for now, suffice it to say the en-bloc process can result in added costs like having to rent.

4. If an en-bloc fails repeatedly, you could be saddled with a liability

There is a restriction period of 12 months after a failed en-bloc sale, before another attempt can be made. Repeated, close-fought en-bloc attempts tend to result in run-down properties for a very simple reason:

If the last en-bloc attempt failed by a margin of five or six per cent, there’s a high chance the en-bloc is around the corner. In light of that, how many owners are going to agree to a maintenance fee hike to improve the facilities, fix an old sauna, repaint the façade, etc.?

This can result in situations where a string of failed-but-close en-bloc attempts, over a period of years, results in a run-down condo; one that also brings in lower rental costs, and is difficult to sell.

5. New EGM rules

In a nutshell, it is a limit to the number of proxy voters during en-bloc sales. So no longer will it consist of a handful of people voting on behalf of potentially hundreds of owners, and it would naturally slow down the en-bloc process.

This will impact bigger developments more than smaller ones. With proxy votes capped at two, developments with 800 to 1,000+ units are likely to see a lot more home owners come to table; with consensus being slower to attain.

So while it is possible to make quick profits off an en-bloc sale, it’s not a suitable strategy for every investor

PHOTO: Stackedhomes

If you’re dealing with a single property that will also be your home, buying in hopes of an en-bloc is hazardous.

It’s best to engage in en-bloc speculation only if the property is (1) not also your primary residences, and (2) you won’t have too much capital tied up in an old, hard-to-sell property, should the en-bloc attempt fail.

We’ll also add one final hazard: if you just have sheer bad luck, the government might pass new cooling measures just before your en-bloc deal goes through; and that may prompt a developer to change their mind about buying.

This is an approach for well-capitalised investors, who are also seasoned enough to spot en-bloc potential, and understand Singapore’s private property market cycles. 

This article was first published in Stackedhomes.