Thursday, March 25, 2010

Mixed development en bloc sales need incentives

Collective sales of such properties tend to be slow

SINCE the phenomenon of collective sales started in 1994, there have been over 400 en bloc developments sold to date. Of these, only a handful, possibly about 10 or so, were mixed developments, that is, buildings with a variety of uses like shops, offices and apartments. Most of the successful en bloc sales were purely residential developments, or those with a few shops within the condominium.

In the most recent property boom in 2006/07, prime land and buildings were hot commodities, and en bloc sales were the predominant way for developers to lay their hands on them. So if demand was so strong, why were there so few sales of prime strata titled commercial or mixed developments?

Firstly, only a minority of mixed developments and shopping centres in Singapore are strata titled. The majority of them have single owners – usually an institutional fund, trust or investment company. Take Raffles Place as an example. Of the 30 office buildings located in the vicinity of the MRT station, only three are strata titled.

It is relatively easy for single owners to monetise unused plot ratios or give a facelift to their building. These moves usually enhance the owner’s investment returns which serve to motivate the building’s redevelopment or refurbishment.

Keppel Land, for example, tore down Ocean Building and is redeveloping the site into Ocean Financial Centre. OUB Centre has an annex block under development. Shell Tower was transformed several years ago into a modern office block, now called Singapore Land Tower.

However, amid these spanking new Grade A offices in Raffles Place, there are some old strata-titled buildings like The Arcade and Clifford Centre, which many regard as tired and outdated.

In the case of strata-titled buildings, especially those with no major owners, the motivation to build consensus among the owners and incur large sums to upgrade common areas is usually not high.

Owners of many older strata-titled complexes have contemplated pursuing an en bloc sale. But in most cases, they find it difficult to devise a formula to distribute the sale proceeds among the different use groups.

This is made more complicated by the allotment of share values which vests more shares per square metre for shops than offices. Apartments are in third place. The weightage ratio determined by the authorities is 5:4:1 respectively.

To add to the complexity, some old commercial buildings even have their car park space separately strata titled, as in the case of Orchard Towers and Shenton House.

Aside from the challenge of slicing the sale proceeds among the different use groups, finding an equitable apportionment formula for the retail units can be difficult. The values of two shop units of equal size located in different parts of the same floor can differ tremendously. A unit facing a busy concourse, escalator or with a main road frontage could be worth double a unit of the same size tucked away in the rear or close to the toilets or loading bay.

Another challenge that owners of shop space tend to face – especially those that run thriving businesses from their units – is the heavy cost of relocating. There are fit-out costs, business disruptions and perhaps most significantly, the loss of goodwill when they move. The goodwill factor is difficult to quantify and factor into any apportionment formula.

For some trades, there could be just one or two buildings they can consider operating in. The rest simply do not work. For example, a major computer retailer would not for a moment contemplate anywhere other than Sim Lim Square or Funan DigitaLife Mall.

For many shop owners, the motivation to sell may not increase as the building ages, especially when they enjoy a thriving business arising from a unique location.

Little wonder then that major mixed developments or strata titled retail buildings that were sold en bloc – like Katong Mall, Kim Seng Plaza, UIC Building and Kim Tian Plaza – had one or several major owners who controlled substantial portions of the floor space and share values. Without that, getting a consensus of more than 80 per cent may not have been possible.

The main aim behind the en bloc law that allows for a majority rather than a unanimous vote is to facilitate urban renewal. Over the past 10 years, the en bloc phenomenon has helped transform Singapore’s urban landscape in many precincts as modern buildings replace old ones.

So, if the en bloc sales mechanism in its present form does not work effectively for ageing strata-titled mixed developments or shopping centres, town planners may need to think of alternative solutions for them.

One option is the classic ‘carrot-and-stick’ approach. Provide the owners incentives to band together to sell collectively or spruce up the building within a reasonable time frame. The incentives may be bonus plot ratios or reductions in development charges (DC) which would enhance the monetary gains if they comply within the time frame.

In 1994, the Urban Redevelopment Authority (URA) had successfully transformed the Hillview area near Upper Bukit Timah from an old industrial belt into a district of modern condominiums, with the aid of time-sensitive bonus plot ratio carrots. That was a win-win approach.

The alternative is the draconian win-lose approach of invoking the state’s land acquisition powers.

The situation is by no means dire. Some could even argue that older buildings with all their imperfections widen the range of offerings at economical rates.

Old office buildings offer more affordable rents to price-sensitive businesses. Some old shopping centres like Queensway Shopping Centre and Katong Shopping Centre appeal with their specialty goods at cheaper prices, not to mention the nostalgia of their older setting.

Karamjit Singh is managing director and Pamela Kow is senior manager of Credo Real Estate

Source: Business Times, 25 Mar 2010

No comments:

Post a Comment