Some upside in failed en bloc deals

April 15, 2008
COMMENTARY
Some upside in failed en bloc deals
By ARTHUR SIM

LOOKING for a silver lining when nothing looms but storm clouds may
seem a futile exercise.

But recent events surrounding the failed collective sales of Tulip
Garden and Makeway View to Bravo Building Construction may just be a
ray of hope in an increasingly gloomy property market.

To be sure, when Bravo decided it could no longer proceed with the
collective-sale deals, some considered it yet another in a series of
ominous events signalling the end of 'irrational exuberance' in the
property market here.

Another was the pullout of Kuwait Finance House from a deal to buy 97
units at Goodwood Residence.

But putting a positive spin on the failed deals, Bravo has actually
helped the market by withdrawing almost 400 potential units from
future supply. If the Bravo deal to acquire another en bloc site
(Pender Court) falls through, the number of potential units removed
from future supply could be closer to 500.

This may be less than 3 per cent of the 17,800 new units CB Richard
Ellis estimates could be launched this year, but if more developers
were to follow Bravo's move, enough potential units could be removed
from the future market to mitigate a more serious oversupply
situation - especially in the light of drastically falling sales;
only 185 new private homes were sold in February.

* Emergency exit

Any developer considering the emergency exit that Bravo took will
have to ask itself - as Bravo probably did - whether it has the
holding power to build and hang on to units until it is profitable to
sell them.

Perhaps the pivotal number to emerge in the failed Tulip Garden deal
is the $25.8 million figure representing the 5 per cent deposit on
the $516 million transaction that Bravo will now forfeit.

While $25.8 million is no small sum to lose, it is probably less than
what Bravo could have lost had it proceeded.

Based on a loan quantum of 60-70 per cent of the land price, the loan
for the Tulip Garden project would have amounted to $310-$360
million.

While it is not unusual for a bank to extend loans to preferred
developers at interest rates close to Sibor, an interest rate of 5
per cent per annum would have been more likely, considering the
times. In which case the cost of the loan could have been between
$15.5 million and $18 million for the first year alone. This, also
allowing that banks still feel comfortable extending loans of over 50
per cent.

Another loan the developer would have had to take would have been for
construction costs. And based on a cost of $400 psf, this would have
amounted to about $200 million for the Tulip Garden project. The
quantum a bank will lend a developer varies. Assuming Bravo were to
have taken a 50 per cent loan, the cost of this would have been
around $5 million for the first year based on a 5 per cent interest
rate.

Bravo's interest payments for the first year could have totalled
$20.5-$23 million.

Developers do not generally borrow more because they expect progress
payments from the initial sale of units, which go into a project
account, to cover some of the costs.

But falling sales volumes would have made it difficult for Bravo to
depend on the project account to finance construction.

Lower selling prices would have been a concern too.

* Breaking even

When the market was at its most bullish last year, Bravo had hoped to
launch the new development on the Tulip Garden site at around $2,000
psf.

However, the US sub-prime crisis has taken its toll on the market,
with neighbouring developments Duet and The Cornwall peaking at
around $1,500 and $1,700 psf respectively last October.

It was estimated earlier that Bravo would have to sell all the new
units at Tulip Garden for at least $1,500 psf just to break even.

Developers who are likely to be swayed by this line of reasoning to
reconsider developing en bloc sites are more likely to be the
smaller, newer players in the field.

Based on available data, an estimate by Savills Singapore puts the
number of new units from en bloc sites bought by construction
companies in 2007 at more than 800, excluding Tulip Garden and
Makeway View.

If some of these potential units were to be removed from the future
market, supply pressure would be eased.

It would, of course, be much simpler if the potential units from a
large en bloc site like Gillman Heights or Tampines Court were
removed from the market.

But this is unlikely as it has become almost a mantra that big
developers have holding power, even if they are losing money at the
same time.

EastLiving.com.sg

Contact Stuart Chng: (65) 9691 9907
Email: stuart.chng@eastliving.com.sg

EastLiving - Singapore Property and Real Estate DB