An En Bloc Sale Can Make You A Millionaire, But At What Cost?
There aren’t a lot of ways you can gain instant, substantial wealth. The usual methods (lottery, death of a wealthy relative, money laundering, etc.) are either highly subject to chance or highly illegal.
Fortunately, if you happen to be in Singapore, you can add another money-making scheme to the list that requires less luck than winning the lottery, and won’t land you in jail upon a failed attempt: quite a few Singaporeans have turned into millionaires thanks to en bloc sales.
There has been some media coverage about how these en bloc sales have left overnight millionaires in their wake. However, the road to en bloc millionairehood is not always easy, nor does it happen instantly.
Here, we consider what exactly is involved in becoming an en bloc millionaire, as well as its potential downsides.
What is en bloc?
An en bloc sale refers to the collective sale of a housing development to a common buyer when there is majority consensus among the unit owners to sell. It allows property owners to sell off their units at a premium compared to selling on the resale market. The sale proceeds are then divided among the unit owners.
Properties that have high en bloc potential tend to be older developments that are situated in prime areas.
Why do en bloc sales happen?
Land is scarce in our tiny city-state. Developers who are keen to replenish their land banks will look towards purchasing older developments in prime areas for redevelopment. An en bloc sale grants land to the developers to build new properties, such as higher density apartments that have potential for bigger capital returns.
The government may also acquire land to build public goods such as schools or better transport infrastructure.
How does the en bloc process work?
The en bloc process can be an arduous one that might take up to 2 years to finalise. It includes the following steps:
- Step 1: Setting up a pro-tem committee
Owners interested in selling will set up a pro-tem committee. The committee must get approval from at least 25% of the owners (or 20% of share value) to trigger an extraordinary general meeting (EGM) to determine whether a collective sales committee should be formed.
- Step 2: Engaging with lawyers, marketing or property consultants
The sales committee will engage with lawyers, marketing or property consultants to obtain an independent valuation report, as well as to help determine how proceeds of the sale will be distributed.
- Step 3: Getting majority consensus
If the property is more than 10 years old, 80% of the owners (in terms of share value) must agree to the sale in order for the en bloc process to go through. If the property is younger than 10 years, the threshold increases to 90%.
- Step 4: Putting the property on the market
Unless the property already has a buyer, it will be put up on the market for interested developers to submit bids.
- Step 5: Application to the Strata Titles Board
If there any objectors to the sale, an application can be made to the Strata Titles Board, which will decide if the sale can go through. The Board will evaluate if any unit owners will suffer a financial loss under the sale.
- Step 6: Preparing for handover of property
Generally, unit owners will be given a grace period to vacate their properties, or to make arrangements with their tenants to do so.
The share value represents how much ‘share’ of an apartment or condominium each owner has in relation to other owners. The share value is calculated by taking into account a unit’s size and occupancy.
Individual windfalls and economic rejuvenation
If you happen to own a unit in a property that is about to undergo an en bloc sale, you stand to make a lot of money. The premium you’ll receive from selling en bloc compared to selling on the resale market can be as high as 25%.
While homeowners will have to spend again to purchase a replacement home, some who do so spend only part of their sale proceeds, stashing the rest away in their retirement funds or other large financial goals.
This couple, for example, bought a 1,700 square foot unit for S$500,000 in 2002, and received S$1.7 million for it through an en bloc sale in 2017. They’ve used the proceeds to buy a 1,300 square foot unit at S$800,000 in a nearby area, and plan to save the rest of their windfall on retirement and their children’s education.
Another upside of en bloc sales is that they can economically rejuvenate an area. Dilapidated buildings can be redeveloped to attract younger families with higher incomes, generating commercial interest in the area. Homeowners will no longer have to pay the mounting maintenance expenses of their aging properties, and can move into more modern homes. Acquisitions of land, whether by a property developer or the government, may also lead to a more efficient utilisation of the area.
But it has its downsides
Cash windfalls and economic rejuvenation aside, an en bloc sale has several downsides that could temper the enthusiasm of someone seeking to make a quick buck:
It’s a long, arduous process
Despite being dubbed overnight or instant millionaires, homeowners who have received their en bloc windfalls actually go through quite a long process. The en bloc process might take up to 2 years to be approved and finalised, if at all.
In the meantime, clashing desires regarding an en bloc sale can turn neighbours against each other, creating disorder in hitherto peaceful communities. Even if objectors of the sale prevail and an en bloc application is denied, another application can be applied for after a 2-year hiatus, stirring up neighbourly friction once again.
Communities will be disrupted
Not only does an en bloc evict minority homeowners who were opposed to the sale, it also means that some homeowners may be forced to leave their homes of decades, as well as the social network they’ve built over the years. For some people, especially the elderly, having to rebuild a network of support all over again can be challenging.
Difficulties in finding or adjusting to a new home
The median apartment size in Singapore has been estimated to have fallen to 743 square feet in 2016, from 1195 square feet in 2009. This coupling of reduced home sizes and increasing prices could mean that even with an en bloc windfall, homeowners might not be able to buy a similar-sized home in an area that they would like. They may have to settle for smaller sized units, especially if they want to continue living in the same area or in neighbouring areas (which are likely to be prime areas).
In addition, for some folks, such as the elderly, certain individuals with disabilities, or any other people who need to live structured lives, the change of surroundings that accompanies a new home can be distressing.
If you’ve recently refinanced your home loan in the past two or three years, selling your property before the lock-in period has elapsed will cause you to face a penalty of 1.5% your outstanding loan. For instance, if you’ve refinanced to a S$600,000 loan, you’ll need to pay a S$8,250 penalty.
Property owners who are renting out may also have to terminate the leases with their tenants prematurely. In these cases, they would have to compensate their tenants for the eviction.
Will the frenzy continue?
In 2017, there were 26 successful en bloc deals that collectively totalled S$8.6 billion, the highest number of transactions since 2007. In 2018, the number of successful transactions rose to 35, with a collective value of over S$10 billion.
While 2018 was dubbed the “blockbuster year for selling en bloc”, sales dropped sharply after the July 2018 cooling measures kicked in. After the implementation of the cooling measures, only one residential en bloc deal went through – the sale of Phoenix Heights for S$33.1 million.
Experts note that with the July cooling measures and a slowing residential market, billion-dollar en bloc deals will be “very hard to get through”. They expect developers to be more concerned with clearing existing properties, rather taking on new ones.
However, that isn’t stopping hopeful homeowners. This year alone has seen several residential properties seeking collective sales even after earlier failed attempts. 15-unit apartment Margate Point is making its second collective sale attempt, cutting its reserve price to S$36.5 million from S$38 million. The owners of Peace Centre/Peace Mansion, Kentish Green and St Thomas Ville are also seeking to sell en bloc again despite failed attempts in the past.
To homeowners seeking to make large profits off their properties, going through the en bloc process is still worth the trouble…if it comes to fruition. It is only unfortunate that the generation of large profits and economic rejuvenation brought about by en blocs comes at several costs – namely, the (sometimes unwilling) search for a new home and the dissolution of social ties.