Upside surprise in prime condos in 2015?

January 26, 2015 12:28 PM SGT

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SINGAPORE: The Core Central Region (CCR), encompassing Sentosa Cove, Marina Bay and the prime Orchard Road districts of 9 and 10, is the sector to watch next year, says Donald Han, managing director of Chesterton Singapore.

This segment saw the lowest number of transactions compared to the rest of Singapore and suffered the sharpest price falls in some projects in 2014.

“It’s in the midst of such adversity that you can find great value,” he declares.

This year has also seen property developers deploy various strategies to overcome the illiquidity at the top-end of the condominium market, especially those sitting on large stock of unsold units with the expiry of their Qualifying Certificate (QC) approaching like a ticking time bomb.

The recent sale of Treasure on Balmoral by listed property developer Hiap Hoe Ltd is a classic example.

The developer announced earlier this month that it will sell the entire 48- unit luxury condo block to its privately held parent company Hiap Hoe Holdings.

The deal was done through a sale of shares of Hiap Hoe Superbowl JV, the company holding Treasure on Balmoral for $72.83 million.

The purchase price is pegged to its valuation of $185 million, which translates into $1,789 psf.

As Hiap Hoe Holdings is a substantial shareholder of the listed company owning 69.85% of its shares at the point of purchase, the deal is considered an interested party transaction.

The proposed purchase price by Hiap Hoe Holdings also represented “the best offer received by the group to date”, according to the developer.

In its Dec 8 announcement outlining the rationale for the deal, Hiap Hoe Ltd says it had engaged Savills to sell the units en bloc in a private treaty sale in October 2013.

The guide price then was $2,100 psf, but it failed to secure a buyer.

It was re-launched in July this year, this time with the price slashed to $191.4 million, which translates into a reserve price of $1,850 psf, down 11.9% from the earlier asking price.

It generated more enquiries this time but the highest offer still came in below the reserve price, at $181 million ($1,750 psf), which, according to property analysts, is almost equivalent to its weighted break-even price.

‘Short-term pessimism but long-term optimism’ “The deal demonstrates short-term pessimism but long-term optimism,” says Chesterton’s Han.

“If the developer wasn’t confident of the longer-term prospects of the luxury condo segment, he could just bite the bullet and sell it.

Instead, the developer is transferring the entire project to the holding company.” Could there be more similar deals in 2015? As listed property developers are still sitting on strong balance sheets, “an asset injection into a private holding company will be better favoured than a significant markdown in price”, reckons Steven Ming, managing director for Savills Singapore.

“At the end of the day, the current state of the luxury segment is a result of policies and not a lack of demand.” The reason why so few of such deals have taken off is precisely because they are not that straightforward, according to property consultants.

“These deals may only work for listed property companies with a substantial shareholder that can vote in favour of the purchase,” says Jeremy Lake, executive director of investment properties at CBRE.

“For listed property companies with a more diversified shareholder base, there will be more questions raised on a related party transaction.”

Some developers like Simon Cheong have chosen privatisation instead, with SC Global Developments delisted in March last year.

‘Innovative structures’ Property analysts such as Alan Cheong, head of research at Savills Singapore, reckon that in addition to related party deals, more developers will come up with “innovative structures” involving some form of refinancing or securitisation.

Property tycoon Kwek Leng Beng’s City Developments Ltd (CDL) has come up with a creative solution for its unsold stock in Sentosa Cove.

On Dec 16, CDL announced it had partnered with Blackstone’s Tactical Opportunities Fund and CIMB Bank Bhd, Labuan Offshore Branch to create a $1.5 billion investment instrument to monetise CDL’s properties in Sentosa Cove.

The assets involved are the 240-room hotel W Singapore — Sentosa Cove, the Quayside Isle with 44,121 sq ft of net lettable area which is fully leased, and the unsold stock at the 228-unit The Residences at W Singapore — Sentosa Cove.

The stakeholders in the investment instrument are guaranteed a 5% interest per annum over the next five years.

According to Grant Kelley, CDL’s CEO: “We still own the asset legally, there’s no sale of [the] physical product.”

The hotel currently sees an average occupancy of about 85% with average room rate at $430 per night, he says.

Meanwhile, Quayside Isle is 100% leased, while 106 of the remaining 203 units (52%) at The Residences at W have been leased.

Kelley is confident that the residences will be fully leased by the end of next year.

“We are quite clear on the fact that we don’t want to be selling these assets in the market today,” explains Kelley.

“We’d rather wait until the market has a little more lift, which will be towards the end of the tenure of the instrument.”

At the end of the five years, the residential units will be sold individually rather than in a bulk sale.

The current valuation is $2,400 psf, and the assumption is that the units would not be sold below this price.

According to URA Realis, the sole transaction at The Residences at W this year was in October when a 1,259 sq ft, three-bedroom apartment on the fourth floor was sold for about $3.64 million ($2,891 psf).

So far, 25 units in The Residences at W have been sold.

Unlike in the traditional prime districts, developments at Sentosa Cove are exempted from the QC restrictions, which require them to sell all the units in a residential development within two years of completion and disallow developers from renting units in the project.

Developers are aware that there is very limited supply in the CCR in the foreseeable future, explains Savills’ Ming.

“They, therefore, prefer to hold on to their asking prices than sell in the current unfavourable market environment.”

Some listed property developers such as Bukit Sembawang Estates have historically shown a preference for offering a discount to clear unsold stock.

It did that at the relaunch of its 102-unit freehold Paterson Suites in April 2012 before its QC expired at the end of that year.

It had 19 remaining unsold units then, and offered buyers units at an average price of $2,800 psf, with a 5% rental guarantee for four years.

Alternatively, they could opt for a straight 10% discount to purchase at an average price of $2,500 psf.

This July saw Bukit Sembawang use the same ploy to clear its unsold stock of some 37 units at the 156-unit freehold Vermont on Cairnhill.

After offering a 12% rebate, it sold the units at a median price of $2,113 psf, according to URA data.

It remains to be seen what it plans to do with its 85-unit Paterson Collection that is expected to be completed sometime next year.

The freehold condo project sits next to Paterson Suites, where the most recent transaction was for a 1,679 sq ft, three-bedroom apartment that changed hands for $4.6 million ($2,739 psf) in November.

Sale of funds’ legacy holdings roiling market Real estate funds selling legacy holdings in bulk sales are also setting a new floor price for the top-end condo segment.

More deals are expected in the coming year, say property consultants.

Two possible sales are on the table.

One is the bulk sale of 21 Anderson Royal Oak Residence by Arch Capital at $1,850 psf, which translates into $158.3 million.

Arch Capital had purchased the 34-unit condo project in 2010 for $200 million or about $2,338 psf based on its gross floor area of 85,552 sq ft.

If a deal is finalised at the price, it represents a 20% markdown from its purchase price for Arch Capital.

The other is 18 units at Paterson Suites by investment fund Real Estate Capital Asia Partners (RECAP).

The 18 units are part of a total of 20 that the fund had purchased from Bukit Sembawang in December 2010 for $118.6 million or $2,700 psf.

It subsequently sold two mid-floor units of 2,196 sq ft each at prices of $6.1 million ($2,775 psf) and $5.7 million ($2,596 psf) in April and May 2013 respectively.

Blackstone is said to have completed the purchase of the 18 units at $2,100 psf, or a ballpark price of $83 million, which is 22% below RECAP’s purchase price four years ago.

The price of $2,100 psf is also comparable to the sale of 12 units at Grange Infinite by ARA Asia Dragon Fund to an Indonesian investor in September.

“You’re seeing a luxury condo segment that’s dysfunctional owing to property cooling measures interfering with market forces,” remarks Savills’ Cheong.

“What if the measures are relaxed, and instead of behaving like a balloon that’s being squeezed, the market behaves more like plasticine and retains its current structure owing to the prolonged restrictions? Therein lies the danger,” he warns.

The biggest hurdle to bulk deals currently is the 15% Additional Buyer’s Stamp Duty and borrowing limit for corporate entities buying residential property being capped at 20% loan-to-value ratio, say property consultants.

These measures were introduced in January 2013.

This explains why vendors had to offer at least a 20% price discount in recent deals, point out property consultants.

However, over the past three to four months, several funds and high-net-worth investors have started to step up on “reviewing opportunities” in the high-end segment, says Savills’ Ming.

“And we expect to see activities extend into 2015.”

While it’s hard to predict how the luxury segment may perform in the near term, anyone with a three- to five-year view “will find comfort in entering the market today given that there are opportunities to acquire highend properties at values that are arguably below replacement levels”, adds Ming.

Chesterton’s Han agrees.

“I’m a bit more positive about the market by virtue of the fact that ‘hot money’ will start to recognise where the compelling buys are, and they are mainly in districts 9 and 10.”

This article appeared in the City & Country of Issue 658 (Dec 29) of The Edge Singapore.

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