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Simon Cheong: Shortage looms as enbloc properties get torn down

High-end residential rents and capital values in the Orchard Road ‘corridor’ are set for significant gains in the next 18-24 months amid a shortage of such property, says upmarket residential developer SC Global Developments’ chairman and CEO Simon Cheong.

He estimates that about 1,000 homes in the corridor - in places like Grange, Paterson and Tomlinson roads, Angullia Park, Ardmore Park and Cairnhill - have been transacted in en bloc deals over the past year or so. Examples include Lucky Tower, Beverly Mai, Hilltops, Paterson Tower, Angullia Mansion and Habitat One and Two.

‘As these en blocs are taken down, where will the people living in these units go to?’ Mr Cheong asks.

According to him, they will find a replacement property to own or rent in the same area, and this will lead to a shortage.

‘My view is that next year, there will be a shortage in high-end homes,’ he says. ‘Rents are poised to surge and that will mean capital values will go up as well.’

He predicts that rents could go up by about 15-20 per cent next year, after appreciating 10-15 per cent in the remaining months of this year.

Mr Cheong says another factor that will drive up rents and prices is that contrary to popular belief, the new developments that will go up on many of the prime sites will have only slightly more gross floor area than the existing properties.

This is different from earlier waves of collective sales in 1994-1997 and 1999-2000 which covered the most lucrative sites, where redevelopments could tap huge enhancements in gross floor area over the previous properties.

The investment sales head of a major property consultancy in the collective sales market agrees with Mr Cheong’s thinking, saying many recent en bloc sales in the prime area involve old developments which, under an earlier method of calculating density, were built to high plot ratios - the ratio of potential maximum gross floor area to land area. The bottom line is that redevelopment of such sites will not lead to significant additional supply but just replacement supply.

The upshot of a surge in prices would be that owners going for a collective sale would demand higher prices for their land, since it will cost them more to find replacement properties.

‘So unless they get their price they will not sell,’ says Mr Cheong. ‘We’re already starting to see this. Just look at the list of en bloc stalemates in the Orchard Rd corridor. The long and short of it is, we’ll have a very firm high-end market over the next 18-24 months.’

Mr Cheong’s listed SC Global this year bought Paterson Tower on Paterson Hill and Hilltops at Cairnhill Circle and some surrounding terrace houses in collective sale deals totalling $650 million. And he is on the lookout for more such sites in Singapore’s choicest locations.

While land in such areas is expected to cost more, SC Global claims to hold an ace. ‘We believe that SC Global, with our brand name, can buy land at a premium because we can command a higher selling price for our properties,’ Mr Cheong says. ‘What’s the difference between Four Seasons and Holiday Inn? The problem we have is not price for land, but whether land is suitable for a high-end project, for our type of market.’

Source : Business Times - 30 Aug 2006

Court of Appeal to decide if advertising, promotion expenses can be deducted from rental income

Millions of tax dollars hang in the balance as mall operators await a decision by the Court of Appeal on whether spending on advertising and promotion (A&P) can be deducted from rental income.

Landlords saw their hopes dashed last month, when the High Court ruled that A&P expenses beyond those paid to them by tenants cannot be deducted from rent when determining the annual value of a shopping centre, which in turn determines the amount of property tax a landlord has to pay.

The case - which centres on a dispute between Parco Bugis Junction owner BCH Retail Investment and the Inland Revenue Authority of Singapore (Iras) - will now go to the Court of Appeal, after BCH’s lawyer Wong Partnership filed an application last week.

At stake in the case is the taxable portion of $2 million - the amount BCH spent on A&P of Parco Bugis Junction in 2003.

But industry players say the total taxable amount for all landlords could run to tens of millions, because a court ruling in BCH’s favour would open the door for other landlords to deduct A&P expenditure when valuing their properties.

‘If they (the landlords) could include A&P expenditure as part of their expenses, then they can get deductions from it,’ said a shopping centre landlord.

CB Richard Ellis’ executive director of valuation Li Hiaw Ho said some shopping centre managers match the amount they get in A&P contributions from their tenants, and in some cases spend even more than their tenants. Shopping centre operators saved on tax after a court ruled in 2002 that A&P contributions paid by tenants could be excluded from gross rent figures. In that case, BCH, represented by David De Souza and Jeanette Lee, obtained a ruling that meant A&P contributions by tenants, which amounted to $592,000, would not be subject to tax.

With property tax at 10 per cent, any savings add up to a tidy sum for big landlords, such as BCH’s parent company CapitaLand.

Market watchers say that to take advantage of the 2002 court ruling, mall operators have structured new lease agreements so A&P contributions by tenants are set out separately from basic rents.

Knight Frank says that since the ruling, many shopping centres have deducted A&P contributions by tenants from their annual property valuations.

Where there is no separate A&P provision in lease agreements with tenants, landlords are moving to include one as leases are renewed. A landlord that operates well-known malls told BT: ‘We are working towards amending the leases to allow us to capture the deductibility for the A&P portion. But this will take time.’

Landlords hoped that BCH’s victory in 2002 would pave the way for them to deduct as expenses a wider range of services they provide to tenants. And this year, BCH went a step further and sought a court ruling that all reasonable A&P expenses be deducted from gross rent, saying an additional $2 million should be deducted from gross rent for Parco Bugis Junction when determining its annual value.

But the High Court was not persuaded. Justice Tan Lee Meng said last month that additional A&P expenses were never regarded by the tax authorities as a part of gross rent.

Justice Tan said that going by BCH’s argument, landlords could easily adjust the annual values of their properties by increasing their A&P expenses.

This would mean that annual values would no longer represent hypothetical rents, he reasoned. And as a result, the annual value of a property could not be determined by reference to rents at comparable properties because annual values would depend on how much owners spent on A&P.

Source : Business Times - 30 Aug 2006

PROPERTY market watchers say a 1.36-hectare site for sale in Little India could eventually be home to another shopping centre - just metres from the tourist-friendly Mustafa Centre.

The Urban Redevelopment Authority (URA) said yesterday that the reserve list site, located at the junction of Race Course and Rangoon roads, is now open for application.

The 99-year leasehold parcel, directly above Farrer Park MRT station, has a gross plot ratio of 4.2, giving it a maximum gross floor area of 57,225 square metres. The maximum building height for part of the site is 20 stories, while the rest of the site can only go as high as six stories.

The site comes with a requirement that at least 40 per cent of floor area be used for a hotel. But it is zoned ‘white’, which means developers can use the other 60 per cent for residential, retail or other commercial purposes.

‘The minimum quantum of hotel use will provide opportunities to meet the demand for hotel accommodation in this area,’ said URA, pointing out that the area is highly popular with visitors.

Nicholas Mak, director of research and consultancy at Knight Frank, said: ‘I think that the rest of the space is going to be a shopping centre. A new development could spring up in about three or four years.’

The site could attract bids in the range of $300-$340 million, Mr Mak said.

It does not have the frontage of the nearby Mustafa Centre, but if it were to become a retail centre it could be a serious competitor to the Little India mainstay, he said. A new mall could have the advantage of being directly linked to an MRT station.

However, Savills Singapore’s director for marketing and business development Ku Swee Yong reckons that as much as 40 per cent of the space could be used for offices, and just 20 per cent for retail. In that case, he estimates that a winning bid could be $150-$180 million.

Because the site is situated close to Mustafa Centre, some speculate that Mustafa’s owners could bid for it. Big property developers might also be interested, sources say.

Source : Business Times - 30 Aug 2006

Rich foreigners snapping up prime properties in several cities

GLOBAL property prices have mostly risen in the past twelve months, but a growing number of economists fear that the real estate boom is coming to an end.

In the past month, residential market in the United States has become sticky and there has been a sharp downturn in the construction of new housing.

Sellers from America’s west coast to east coast are finding that they have to mark down prices. Front-page stories about house and apartment price declines in the Wall Street Journal and other newspapers have made the market cautious.

Any global real estate slowdown, however, would come about after extraordinary gains in the past decade (see table).

‘Many commentators have been concerned that the boom in global prices would end in tears,’ says Liam Bailey, head of Knight Frank Residential agents. ‘Close attention has been paid to the US and to other European markets such as France and Ireland where price growth continued to expand last year.’

Bearish property commentators, however, have been concerned for several years and the market has frustrated their predictions by continuing to rise, Mr Bailey says.

A slowdown in the UK, Australia and New Zealand in 2003 and 2004 has been followed by a recovery. Mr Bailey expects price appreciation to taper off but does not agree with views of The Economist and others that there is a serious risk of the property price deflation that has been prevalent in Japan and Hong Kong.

‘Our forecast is that we will see continued slowing of average global house price growth over the rest of 2006 and into 2007,’ says Mr Bailey. ‘This broad trend will mask regional hot spots and investment opportunities.’

Knight Frank’s favoured location is Germany, which has been underperforming and should experience sustained growth from 2007. Following a real estate boom in Latvia, Bulgaria and Estonia, countries with the best potential for further growth in Eastern Europe are Slovenia and Slovakia, the firm contends. Moscow real estate should also do well and will ‘rival London as the most expensive world city within five years’.

Cities which attract a sizeable inflow of high net worth international business people, investment bankers, other traders and high net worth celebrities and other wealthy people, have very different property markets to the rest of their countries.

London is a prime example. The typical buyer of a two million euro (S$6 million)-plus home in central London is now more than likely to be a foreigner, according to Knight Frank. Just over half the houses and apartments in prime London areas have been sold to buyers from Russia, the Middle East, Asia, Europe and elsewhere.

Around 50 per cent of expensive properties in Singapore were also bought by foreigners, says Knight Frank.

In New York, foreign owners make up 34 per cent of sales in the prime residential market, ahead of Paris, where they account for 27 per cent. In Hong Kong and Sydney, foreigners contribute 13 per cent and 9 per cent respectively of prime residential deals.

Foreign buying explains why London prices have soared in the past year while the rest of the UK market has stagnated.

The local British populace has struggled to afford the surge in prices and is now worried about interest rate rises. Wealthy foreigners do not need to borrow. If an apartment or area takes their fancy, they can buy it for cash.

Source : Business Times - 30 Aug 2006

DTZ attributes the buzz in Q2 to price recovery over past few years, interest in high-profile projects

The sub-sale market in the high-end residential segment was abuzz in the second quarter, both in terms of price gains and activity, as those who bought units earlier took the opportunity to sell them for a tidy profit.

DTZ Debenham Tie Leung’s latest analysis of caveats shows the median price of private apartments and condos that changed hands in the sub-sale market in Q2 jumped 37 per cent from Q1. The median price rose from $598 per square foot in Q1 to $822 psf in Q2.

This was the highest level since $830 psf a decade ago in Q2 1996 at the peak of the property market, according to the firm’s analysis of caveats captured by the URA Realis database.

Subsales essentially refer to cases in which buyers who bought from developers sell in the secondary market prior to the project receiving Certificate of Statutory Completion. The certificate is typically issued about a year after a project receives Temporary Occupation Permit.

Sub-sales - often seen as a proxy of the level of speculative activity in the property market - were transacted largely for apartments/condos in the higher price brands in the April-June quarter this year, DTZ says.

The two highest price bands DTZ used in its five-tier analysis - units costing $1 million to less than $1.4 million, and units priced at $1.4 million and above - accounted for 44 per cent of total sub-sale transactions in Q2.

These two price bands posted respective quarter-on-quarter increases of 73 per cent and 23 per cent in the number of sub-sale deals. There was also a 60 per cent quarter-on-quarter rise in number of sub-sales of units costing $800,000 to less than $1 million.

DTZ attributes this partly to strong interest in exclusive projects that were either completed recently or are nearing completion - such as The Pier at Robertson along the Singapore River, and The Berth By The Cove at Sentosa Cove.

‘People who want to buy homes for owner occupation or for investment with immediate rental income flow tend to prefer a unit that is nearing or has received Temporary Occupation Permit,’ says DTZ executive director Ong Choon Fah.

She also points to sub-sale interest in popular projects such as Icon in Tanjong Pagar, The Berth by The Cove and The Sail @ Marina Bay (first tower) that were launched by developers a few years ago at prices lower than those of similar projects released recently.

For instance, Ho Bee launched The Berth by The Cove in late 2004 at an average of $785 psf. Condo units there today would be worth more than $1,000 psf, property agents say.

DTZ says: ‘With the price recovery in high-end residential projects, those who bought units earlier in such developments have been able to benchmark the value of their properties against the newer projects.

‘This has created an opportunity for them to sell their units in the sub-sale market to the increasing number of buyers who are keen on such high-profile exclusive projects.’

DTZ’s analysis shows that while there was a pick-up in sub-sale deals in the higher price bands in Q2, activity in the two lowest price tiers declined from the preceding three months. As a result, the total number of apartments and condos sold in the sub-sale market for Q2 - at 115 - was hardly changed from the Q1 figure of 113.

Buyers with HDB addresses continued to account for a lower share of the number of sub-sale deals for private apartments and condos, down to to 23 per cent in Q2 from 38 per cent in Q1.

The firm also notes that the number of sub-sales continued to remain relatively low in Q2 - at 2.8 per cent of the total 4,096 apartment and condo transactions in the quarter.

‘Going forward, while sub-sales will still be significantly lower than the levels between 1996 and 1999, the momentum for the sub-sales market is expected to strengthen on the back of the recovery of the high-end residential market and several high-profile projects that are expected to be launched,’ DTZ says.

‘These will boost median prices of apartments/condos transacted in the sub-sale market. In addition, a strong take-up for these forthcoming high-profile launches may also lead buyers who are unable to secure a choice unit to remain interested in the sub-sale market for several top-quality projects which have been previously released at lower prices.’

Source : Business Times - 29 Aug 2006