07 August 2008

So what's the alternative in the END?

This 7 Aug 2008 blog entry is the third part, continuing from the earlier two parts, both dated 6 Aug 2008, viz:

- The SOURCE and Themis

- IN-BETWEEN: Why en blocs are not right for Majority Consenters nor Minority Dissenters?

- So what's the alternative in the END?
ANSWER to Q: So what’s the alternative in the END?
[Hint ... look to South Korea! The South Korean model even offers relief to Developer-buyers if problems (eg, liquidity crunch, weakened demand) should surface.]

How we answer the above question will be very telling on us as a society. Do we "care about the beans or the beings"? This was the poser in The Economist (2-8 Aug 2008) regarding the breakdown in the latest round of Doha talks on world trade.
From the Gahmen's perspective: There is a spectrum of possibilities. The pendulum could swing all the way back by repealing the en bloc law and we go back to 100% consent. OR it could swing all the way to the other side by reducing the requisite majority from the present 80% (90%) level to more than 50%. OR it could tinker and tweak ... make a hole here by relaxing the substance of this provision ... and patch there by tightening the form of that clause. You fix one crack and another leak springs elsewhere.
OR those who govern could do a paradigm shift of the mindset to ensure at least equivalent REPLACEMENT for existing qualifying Owners and revamp the en bloc business model. This would arise only IF those in the relevant ministries, government agencies and statutory boards step up to it and make an essential difference in the spirit described in Dr Cherian George's Straits Times commentary (10 Aug 2008): "No other organization has the resources and powers of the state, and individuals who step forward to help the state use that power for SOCIETY'S BENEFIT deserve our support, not our contempt". [Capitalization emphasis is by The Pariah.] Any takers?
As a pithy saying goes: "If you don't stand for anything, you'll fall for anything".
From the Owners' perspective: ONE size cannot fit ALL.
Sub-group 1 of owners: They want cash. Within this sub-group, some just want a quick flip, others demand a huge premium, yet others just want more than everybody else, some face the frightful prospect of just covering their original purchase price and outstandings under bank mortgages and/or Central Provident Fund charges, some are holding multiple investment properties, a fair number merely want to ride on the collective sale premium and are prepared to downgrade/downsize because of their changed accommodation needs/financial circumstances (some are truly desperate for immediate cashflow due to inadequate retirement planning, speculative investments gone awry or failed business ventures - whilst I empathise with their desperation, does it justify their attempts to drag others down with them as they sink in their abject failures???).

Sub-group 2 of owners: They want replacement units. Within this sub-group, some need a roof over their heads, some need a replacement asset either for short-term resale or long-term retention as part of their portfolio. The existing location matters either because of (i) the asset premium attached to such prime/popular location or (ii) the familial and social ties (short travelling distance to school/work or childcare/daycare centres, childhood fondness for the area as part of their families' inter-generational link, parents or siblings living nearby, long-time neighbours who provide a support network to each other in their twilight years and who therefore intend to re-congregate, etc).

Sub-group 3 of owners: They want to keep their present apartments for a variety of reasons and personal preferences. For this sub-group, their salvation is repeal of the en bloc law OR steadfast Minority Dissent at the legislated cut-off point. The former (ie, law repeal) is highly unlikely in my opinion but others may hold different views. The latter (ie, steadfast core dissent) is too fraught with unknowns and uncertainties. The stakes are high, with no room for compromise and the determinant factor of "core dissent" is totally beyond one's control. At an emotive (heart) level, I do identify with this sub-group (Home Sweet Home, as we fully understand). But at a cognitive (head) level, I reckon a middle path needs to be trodden. Whilst nobody can make everybody happy all of the time, we can try to make MORE people happy for MOST of the time!

And try we must. So how do we achieve (1) urban renewal/higher land use efficiency as envisaged by Gahmen and (2) yet ensure commercial viability for developers and (3) still preserve sense of time/place and community for en bloc owners? A Win-Win-Win!

As mentioned in para C-4.3 of my mega 4-part Nov 2007 blog entry ("After the 2007 law, what's next???") -
Proposed Solution: Two options –
(a) Cash or
(b) 1-4-1 Exchange (sell one; get one back)
= Doing right (owner’s choice: cash-out now/in future OR keep rebuilt home)

South Korea’s en bloc laws
mandate 1-4-1 exchange

and it works!
MinLaw knows about the South Korean model. Can our Singapore Government follow South Korea’s lead? South Korea's model is different due to their legacy and scale issues. Singapore is much more compact, with little legacy issues. We could piggy-back on the best elements in the South Korean model and customize them for Singapore's context, eh?

Horror stories of exchange seemingly haunt MinLaw. Have they been misled into believing that exchange is fraught with difficul­ties, delays, added costs and lower sales pro­ceeds? As explained in my 6 Aug 2008 blog entry ("IN-BETWEEN: Why en blocs are not right for Majority Consenters nor Minority Dissenters") - With the evidential trend of “Developers getting 1-4-2 or 1-4-4” versus “Owners getting 1-4-½ divided by 2”, can exchange negotiations be left to the market? Is the playing field level when Disparity (disparate Owners with 101 reasons for/against en bloc sale) faces Singularity (Developer-buyer’s single-minded profit focus)? Isn't the stage set for exchange to be exploited by Developer-buyers on discounted basis (instead of 1-4-1)?

In the current legislative VACUUM, corporate greed breeds INERTIA towards exchange based on SAME size (eg, 1350 sq ft in Strata Title Area, NOT Net Saleable Area), SAME level (eg, 12th floor) and SAME orientation (eg, living room main window facing North-North East). Paterson Lodge overcame practicalities in 1-4-1 exchange. Getting a dark and dank basement unit in some nook or cranny in en bloc exchange is SCARE-MONGERING of the highest order!

In a casual conversation a few months ago, I asked the CEO of one of the Big-Boy Developers if he thought 1-4-1 exchange in en blocs would be commercially viable. His answer: Yes. This guy was unequivocal - no if's, no but's! And he belongs to the genre of CEOs who are "on the ball"! When I probed further as to whether his public-listed company would take the lead in setting an exemplary standard of corporate social responsibility in offering 1-4-1 exchange in en blocs, he was very clear that such leadership initiatives must come "from the top" as he pointed towards Heaven with a suitably beatific smile. "From the top" doesn't mean God, I reckon. He means the Gahmen! Quite naturally ... in the commercial world where profit accountability to shareholders is primary, the 100% differential between "1-4-2" versus "1-4-4" is too high a price for corporate conscience (1-4-2 and 1-4-4 are not Toto combination numbers - please read my 6 Aug 2008 blog entry "IN-BETWEEN: Why en blocs are not right for Majority Consenters nor Minority Dissenters"). Now who can blame a guy with a pleasant and beaming moon face?
Why is MinLaw so fearful about 1-4-1 exchange? Let's examine why MinLaw fervently believes 1-4-1 exchange will present a host of "practical difficulties" and "delay the process ... which could, ultimately, translate into lower sales proceeds".

When buying an apartment at a soft launch (just as in deciding whether or not to opt for 1-4-1 exchange in an en bloc sale) - other than price and location, what are the other main decision factors?
(A) unit size
(B) unit level
(C) unit orientation
(D) design lay-out
(E) quality of finishes.
Of course, there are other risks in 1-4-1 exchange and these will be addressed below.

Let's dissect it
IF, IF, IF 1-4-1 exchange is mandated by law as ONE of the TWO options for en bloc settlement for qualifying Owners (barring en bloc flippers) buttressed by calibrated guidelines for Factors (A)-(E) and regulations for the other known risks ...

At the outset, Factors (A)-(C) (ie, unit size, level, orientation) are ascertainable factually from the title document and surveyor's report. Flexibility options to upsize/downsize or upgrade/downgrade within limited range could even be offered based on formulaic specifications and verifiable construction costs. Examples: (i) The owners of an existing 3000 sq ft apartment may prefer two units of 1500 sq ft in the redevelopment now that their children have grown-up and flown the coop. (ii) Another owner of 2000 sq ft unit may want to buy an extra 250 sq ft based on construction cost plus xx% premium. (iii) Yet another owner may not have enough savings to bridge the technical "sale and re-purchase" involving CPF paybacks or outstanding bank loans, in which case, the owner could trade-in 180 sq ft from the existing unit. (iv) An owner presently on the lowest floor may wish to upgrade to mid-level in the new condo by paying the floor differential premium at soft launch.

Unless the Developer-buyer is a newbie in the construction industry, these developer companies are very conversant with the latest urban planning guidelines and building requirements. Therefore, Factors (D)-(E) (ie, layout and quality of finishes) could be drawn up and warranties are committed by the Developer-buyer in a legal document. Owners could evaluate all these PRIOR to signing the Collective Sale Agreement (CSA). No doubt, urban planning guidelines and building requirements may change prior to submission of the plans for Grant of Written Permission. But if there is political sincerity in tri-partite contributions towards urban renewal, the authorities could grant exemptions based on evidence of achievement of requisite en bloc consent prior to public announcement of such planning or building changes. If there should be deviations in quality of finishes (eg, due to change of supplier source, or discontinuation of product line, etc), these are certifiable by quantity surveyors and compensations are similarly warranted in a legal document.
Depending on the deal structure (and this is where natural market forces will throw up various hybrids of risk and ownership options), title risks are capped via legal transfers/caveats. There are financial and completion risks as the Developer-buyer may go belly-up or incur delays in getting the Temporary Occupation Permit (TOP). But a bank guarantee/performance bond would mitigate delay/non-completion risks with a sufficiently high penalty built-in to deter such delay/non-completion.
Finally, 1-4-1 exchange entails temporary displacement for Owner-Occupiers or Investor-Owners who opt for a replacement unit. Relative to the scale of things, it is financially feasible for the Developer-buyer to compensate for such displacement from vacant possession to TOP issuance as reimbursement of (i) Owner-Occupiers' rental expense or (ii) Investor-Owners' rental income. In comparison, the Developer-buyer would incur substantive interest cost to pay-off the Owners who opt for upfront cash which in turn would earn interest or offer other investment opportunities for such Owners.

So nobody is gaining at the expense of anybody - the risks and opportunities are DIFFERENT for those who opt for Cash versus those who opt for 1-4-1 Exchange! Each bear their own risks and avail of their own opportunities!
Different sizes for different people, eh? 1-4-1 exchange may not be ideal ... but it is the lesser of two evils to be assured of equivalent REPLACEMENT at a minimum, instead of utter DISPLACEMENT!

Depending on risk appetite and investment horizon, Owners who opted for replacement unit could still liquidate and sell their unit in the open market (subject to minimum time constraints imposed by Developer-buyer) during/after redevelopment. Otherwise, Owner-Occupiers who chose this option could move back into the redevelopment upon completion and preserve the sense of community with some of the previous owners amidst the new owners and keep a sense of time and place in the SAME neighbourhood.
Under this proposal, Owners are well-placed to make an informed choice PRIOR to signing the CSA – Cash or Exchange. By adding just one more settlement option, the displacement impact from an en bloc would be significantly tempered for Owners. It may lessen the acrimony amongst neighbours! Even if the en bloc were to fail, it leaves a sour after-taste and an uneasy truce hangs over the entire estate for years to come, and estate fires are lit whenever maintenance/upgrading issues surface (metaphorically speaking, although it may become literal one fine day if die-die-must-sell owners decide to take matters into their own hands and scorch dissenters' front doors to coerce en bloc consent under duress)! 1-4-1 exchange may preempt hooliganism and criminal acts during the Battle of Wits and War of Wills.

It is noteworthy that MinLaw uttered NOT a squeak in the face of increased hooliganism at EOGMs and vandalism of private property AFTER the amended laws came into effect! MinLaw's legislative tweaks were intended to make the en bloc process more transparent. Did they? Or did they unwittingly make the Yes/No divide more apparent, thus facilitating easy target ID for strongarm tactics? Merely reinforcing "Tyranny by the Majority", eh? By no means am I advocating veils, curtains or transparent walls that fog-up at the flip of a switch (which is what you get in the fancy condos these days)! Increased transparency within a FLAWED LEGISLATIVE STRUCTURE coupled with an INCONGRUENT BUSINESS MODEL ain't gonna cut it! Offering exchange may reduce the incidence of expensive and time-consuming legal suits and appeals to government agencies for assistance. With everything flying helter-skelter all over town and tearing the very fabric of our society. it has become socially unacceptable and economically unproductive!!! Sure, 1-4-1 exchange may spawn unforeseen evils - but the chances are probably lower, especially if the Gahmen adopts other counter-balancing measures.

In fact, offering 1-4-1 exchange as an ADDITIONAL OPTION may shorten the en bloc process because it would be palatable to more owners. The en bloc Start Point (ie, setting Reserve Price which - by my reckoning - sparks the preliminary decision trigger, NOT the first CSA signature) to the End Point (ie, application to Strata Titles Boards for collective sale order) should be achievable within 12 months. The present legislation created an en bloc business model that is too out-of-whack as Owners may have to wait for 30 months or more to lay hands on the collective sale proceeds to buy a replacement unit (as explained in my 6 Aug 2008 blog entry "IN-BETWEEN: Why en blocs are not right for Majority Consenters nor Minority Dissenters").

Also, it would significantly reduce the market/financing risks for the Developer-buyer because (i) the 1-4-1 exchanges would constitute committed pre-sales of their new inventory and (ii) the interest cost would be significantly reduced. Both of these are very helpful in this age of shortened business cycles with increased volatility which beset not just property assets but most other asset classes too.

Volatility could be somewhat tempered if the Gahmen also imposes en bloc quotas by (a) geographic region and (b) quality type. Since our road use traffic is managed via car quota of COEs (Certificates of Entitlement) by quantity and engine capacity, surely management of en bloc pace in land-scarce Singapore is not that wacky an idea!!! To preempt urban planning mistakes of other countries (eg, Hongkong's over-congestion), plot amalgamations could be incentivised.
As the 1-4-1 exchange option may well hasten the rate of en bloc redevelopment in the current Re-making of Singapore (by MM Lee Kuan Yew's reckoning, it would "take us another one or two decades as we move into a new era" - Straits Times, 31 Oct 2007), it is only prudent to (i) introduce en bloc quotas and (ii) incentivise plot amalgamations CONJUNCTIVELY with a mandated 1-4-1 exchange to ensure a well-rounded solution. This would preempt the torrid recurrence of the 2006-07 en bloc frenzy that eroded Singapore's national competitiveness (not to mention the sense of loss and possibly regret by those who were capitulated with fateful resignation/fatigue or were misled by half-truths in signing the CSA or were forced to sell under the collective sale order)!!! Construction costs, property prices and rentals went spiralling at rocket speed as the TRIPLE-WHAMMY EFFECTS kicked in: (1) immediate DEMAND for housing, (2) inevitable laggard SUPPLY during redevelopment period and (3) exacerbated COMPETITION for construction materials/labour. From the economic perspective, the pro-cyclical effects only increase the risks of asset bubbles, market volatility and bubble bursting - not very prudent economic planning, eh?Like a bagel with hole in the centre, Business Times (27 Mar 2008) confirmed that Singaporeans have been pushed out from the Core Central Region (CCR) as the local segmental share of private non-landed property market dropped from 54% to 47% from 2000 to 2007 whilst foreigners’ share doubled. Pan-island, our share dropped from 77% to 63% (lowest share since 1995). Certainly, it could not be due to (a) falling birth rate as demographics of private property ownership is likely above age 35 or (b) lack of upgrading aspirations from our dominant HDB heartlands. Was the Bagel Effect accentuated because Singaporeans were shortchanged from en bloc windfall? I lay no claims to prescience or clairvoyance! More than a year ago, in May 2007 blog entry ("In between ... evolving a Bagel Class of Singaporeans"), I blogged about this projected drop of Singaporean ownership of apartments in prime districts. Really, I derive no pleasure in saying "I told you so". To the contrary, I feel sad at such dire predicaments faced by fellow citizens who continue to call Singapore "home". En blocs must push everybody up,
NOT pull everybody down (or push up only selective parties, eg, flippers, marketing agents, lawyers, developers, government).

That is the surreal disjunction between en bloc sales and en bloc windfalls!
FY2007 budget planning was all happy nonsense – the projected $0.64bn deficit became an actual $6.4bn surplus (Straits Times, 16 Feb 2008). Stamp duties/property-related revenues were $3.4bn in excess – 53% of budget surplus came from realty! Realty reality, ugh???
Will Gahmen “do right” to ensure equivalent Replacement (not disconcerting Displacement) even as we sacrifice our homes for Singapore’s Re-making? ...... When? There are human lives behind every en bloc sale. Let's make en blocs humanistic! Since urban renewal and increasing land use efficiency are part of our NATIONAL AGENDA with ramifications on the economic competitiveness and attraction of Singapore, it is High Time that TRI-PARTITE CONTRIBUTIONS be made by Gahmen, Corporate Developers and Owners (instead of just Owners as is the present situation)!

06 August 2008

IN-BETWEEN: Why en blocs are NOT right for Majority Consenters nor Minority Dissenters?

Having focussed on the SOURCE (ie, the en bloc legislation) in the 6 Aug 2008 posting below, let's now turn the spotlight on the IN-BETWEEN. Minority sues Majority, and vice-versa. Developer-buyer sues some Majority or threatens to sue all Majority. Majority sues Developer-buyer. Sue Strata Titles Boards (STB)? Sue Singapore Land Authority? Who’s next? Sue Sale Committee? Sue marketing agent, lawyer?

Why? When Singapore is not even litigious as a society? In fact, we are reputed to be a law-abiding people! By and large, we are even a sticky bunch when it comes to contracts - nothing more, nothing less, by-the-book type. So why???

En bloc “windfall” is
300% “shortfall”!

In a recent Straits Times Forum discussion thread, someone succinctly encapsulated it as:
They promise you Utopia during en bloc but you end up in Ethiopia after en bloc!
Yeeha, this says it all, man!

Hindsight is a precise science.

In Straits Times (16 Jun 2007) poll of 40 owners, half expected to downgrade after their estates’ en bloc in locations ranging Sophia Court, Nathanville, The Orange Grove to Minton Rise, Waterfront View because they “have to pay around twice the sum they got from their en bloc sale” for a similar size apartment.

D9: Hilton Towers redeveloped into The Lumos. Business Times (5 Jul 2007) said Developer could “recoup its entire initial investment in its exclusive The Lumos condo by selling just two pent­houses and a few mid-sized units”. En bloc owner got $1088psf but he’d pay $3000psf for comparable-size unit on 2nd floor – 176% difference in the 7 months between receipt of en bloc proceeds and earliest booking in redevelopment. By paying off owners of 72,800 sq ft aggre­gate strata area, land-value was unlocked to create 125,735 sq ft – 73% inventory windfall for Developer on top of 176% price hike!

D16: Waterfront View carved into three plots; one-third already yields 60% of en bloc strata area in new Waterfront Waves. New Paper (4 Feb 2008) recounted plight of Waterfront View en bloc owners who wanted to move back to redevelopment. One is hoping for market downturn to buy 2-bedder at half the size of his old 1,600 sq ft unit for almost $700k (en bloc price $660k). Another bit the bullet with 4-bedder of 1,600 sq ft at $1.27mn (double $630k en bloc sum).

A distinct pattern evolves in the en bloc aftermath as the mantra repeats itself ad nauseum, whether downtown or in the suburbia: From developer-buyer’s perspective:
1-4-2 (buy one; get one free);1-4-4 effectively (if both sold at double price - as is likely because en blocs bubble only when market heats up)
From en bloc owner’s perspective:1-4-½ divided by 2 (twice the price; half the size; quarter the value - en bloc land is shared with double the number of owners after redevelopment)Bear in mind that construction cost is 20-25% of total cost of new development (Straits Times, 24 Mar 2008). However, Q4 construction costs have risen another 20-25% in 2007 compared with 2006 for mid-market condos targetted at HDB upgraders (Business Times, 24 Jul 2008) which in turn translates into 55% or more profit margin shrinkage for this band of developers whereas the profit margin impact is much less at 25% or so for prime market developers (Business Times, 7 Aug 2008). This ill-timed spike is not only due to the global rise in raw material costs and fall-out from regional spats on resource exports but also partly due to government policies being behind the curve. When the corporates are adversely affected, the Gahmen would respond with alacrity - that's great! It was impressive that the Gahmen reacted 3 times within 8 months (Nov 2007, Feb 2008 and Jul 2008) by deferring public sector projects aggregating S$4.7bn to 2010 to ease Developers' construction woes. In sharp contrast, it took the Gahmen nearly a decade before they responded to citizens' en bloc woes by reviewing the Land Titles (Strata) Act (the legislative hole in respect of en bloc vote for mixed residential-cum-commercial estates was extant from Day 1 and it was this hole that kick-started the amendment review) - that's dismal. How I wish the Gahmen would respond with half that alacrity to citizens' woes? Sigh ... but never mind, each of us will have a chance to tell the Gahmen what we really think at the next General Election!

Anyway, back to the point ... with Developers reaping as much as "1-4-4" whilst Owners get raped with "1-4-½ divided by 2", the obscenity is multiplied by the en bloc exponential increase in 2006/07:

Year - Sites - Value (bn)
2007 - 109 - $13.3
2006 - 79 - $ 8.2
1999 - 39 - $ 2.5 (majority consent is legislated)1996 - 36 - $ 1.7 (total consent)
The sense of being aggrieved persists beyond one generation because property ownership is emotive and punches twice below the belt, being part of:

(a) retirement planning (real estate is a store of value/inflationary hedge);

(b) estate planning now deprived from being bequeathed.

Despite being aggrieved, most would concede that Government is “being right” in asserting the greater interest of Urban Renewal.

Is “Being Right” = “Doing Right”? Let’s dissect the “Dào Lǐ“ ( 道 理 ) ("rationale") as applied to the sense and sensibilities of en blocs. "Dào Lǐ“ is more than “rationale”! Its etymology traces back to "Dào" (denoting "the Way" under Daoism) and "Lǐ" (denoting "Logic”).

Urban Renewal (National Cause) through En Bloc/SERS
= Being right

Result of En Bloc: (Personal Sacrifice) as Squatter, Refugee, Downgrader, Downsizer
= NOT doing right

Although this distinction of "being right" versus "doing or NOT doing right" was made in my mega 4-part Nov 2007 blog posting ("After the 2007 law, what's next???"), this point merits re-emphasis. After heeding government exhortations to be prudent and not over-commit in real estate investment, an Owner-Occupier with one residential property would face a daunting prospect. In the en bloc aftermath of “twice the price; half the size; quarter the value”, you simply can’t afford a new replacement unit in same vicinity.

As a reputable property marketing agency was recently quoted in the press as saying:
Property is all about LOCATION and TIMING.

Location is turf issue because it embeds your sense of time/place and defines your community. Location also determines investment value at a first cut.

Timing inherently means that the en bloc process must be a quickie one-nite stand (decide go/no-go and if you go, then you need to get in and out quickly so as to collect the money and buy a replacement unit - whether as a roof over your head or as an asset replacement). It is madness to drag things out over a 24-42 month courtship for divorce (up to 24 months is mandated by law) which only guarantees Displacement, NOT Replacement, in a moving market!

Hence, the present en bloc business model is so, so, so out-of-whack! The current long gestation period serves the interests of everybody BUT the Owners!

Let's draw a correlation between Sovereign Wealth Funds buying into MNCs and Developers buying into en bloc land.

- It only takes about a week for Temasek Holdings and the Government of Singapore Investment Corporation to decide and plonk billions of dollars for stakes in Barclays, Citicorp, Merrill Lynch, UBS. Why? Because as potential buyers, they did their homework in advance and they kept their finger on the pulse all the time. [Whether that purchase is well-timed or not, it is another matter because the first decision hurdle is whether to buy or not to buy.]

- So it is beyond comprehension why our legislation provides for a SECOND period of up to 12 months for the Sale Committee essentially to find an en bloc Developer-buyer and finalise the deal!!! The law already provides for a FIRST period of up to 12 months for the Sale Committee to collect the requisite 80% (90%) signatures for the Collective Sale Agreement (CSA) and apply to STB for a collective sale order. Surely, as market players, potential Developer-buyers would have gotten wind of the CSA signature collection during the first time-period of up to 12 months? All pertinent facts about the present estate and the redevelopment potential are available in public records and/or ascertainable for Developer-buyers to do their homework in advance.

Maybe the en bloc window of "12+12 = 24 months" was NOT the intention of Parliament when this piece of legislation was first enacted in 1999? Maybe Order 2004 is NOT in order (elaboration is set out in my 6 Aug 2008 blog posting entitled The SOURCE and Themis)? Maybe, maybe, maybe ... as in Hans Christian Andersen's fable, we need a child to say "but he hasn't got anything on" just as the Emperor regally struts by amidst our en bloc blitz and glitz!
With legal suits flying all over town ..., with seemingly law-abiding citizens resorting to hooliganism, vandalism and criminal acts ..., “being right” is turning out all gloriously wrong!