Thursday, 22 February 2007

ST Forum letter & Financial Loss Discussion

A letter from Straits Times Forum Online on en-bloc sales, another from a blogger on the financial loss case and one from a forum discussion on the financial loss.

Straits Times Forum Online
13 Feb 2007
En bloc sales:Is there no protection for the minority?
by Ananda Perera

I refer to the letter, 'En bloc sales: Have laws to protect minority' (ST, Feb 9).

I empathise with the writer. We seem to be gripped by en bloc fever. The writer raises some thoughtful issues.

Is there no protection for the minority who have very good reasons not to be forced into en bloc sales?

Unlike some, they are not waiting for better prices and holding the willing majority to a ransom.

As a nation, we seem to make haste for quick gains leaving aside much talked about heartware for those unable to keep pace.

Cost of living will keep on going up. Yet, most pensioners, like me, will hardly get any increases on our fixed pensions, as we are beyond the age to qualify for workfare.

Such groups will keep on feeling the pinch as GST and other price hikes kick in.

The increasing cost of living does not seem to be factored into government pensions.

How we treat our senior citizens today is how the young in authority today will be treated tomorrow.

Can anything be done for such minority groups to ensure a fair distribution of economic wealth, at least for past services rendered?

This is from zynfandel who posted a clear and concise explanation on the unfairness of the financial loss couple, dated 7 Feb 2007. I've reprinted that posting here, hope she doesn't mind! (Let me know if you do, zyn.) Her blog is "in vino alcohol".

From what I understand from the rather unclearly written articles, this one guy at Waterfront View is trying to block the en bloc sale of his estate because the proceeds he will get from the sale of his unit won't be enough to refund the amount that he has so far withdrawn from his CPF account, plus interest, to pay for the home.

That is also rather unclearly written, so let me explain slowly.

Most people who buy a home take a loan to pay for it, and then pay back the loan in monthly installments, partly in cash and partly from CPF funds. Let's say you buy a home for $1 million and your estate goes en bloc with each owner getting $1.2 million. Sounds like you made a profit, right?

But there are two things eating into this profit: the interest on the loan you took, and the "opportunity cost" interest on the CPF funds you withdrew from your account.

Supposing you took a 35-year loan, but your estate went en bloc only 20 years after you bought your home, so you still have 15 years left on your loan.

After you sell your home in the en bloc, you have to use the proceeds to pay back the remaining loan first to the bank. Then you have to give back to CPF the entire amount that you withdrew from your CPF account to pay for your home - PLUS the interest that the withdrawn amount would have earned if it had happily sat dormant in your CPF account (currently 2.5%, I believe). After this, if you still have any money left over, then good for you. Most of the time, apparently, you don't even have enough to pay CPF back in full, so you just give them whatever's left over.

So most people take that into consideration before they sell their homes. But in an en bloc sale, where only 80% of owners need to agree to sell the estate, some people are being forced to sell, even if they don't want to because the sale proceeds won't be enough to cover both the remaining bank loan as well as what is owed to CPF.

In the case of the Waterfront View resident, he bought his unit for $515K and will get $660K after the sale. But he still owes the bank about $343K and CPF, about $407K. After he pays back the bank, what's left over ($660K - $343K) won't be enough to pay CPF back in full.

And this is where it gets unfair. CPF says, oh, it's ok dude, you don't have to make up the shortfall into your own CPF account. Go ahead and sell your house and stop blocking the en bloc.

Of course the guy is all, wtf CPF, this is my retirement money, you morons.

The only way you can block an en bloc is to prove that you are making a loss if the en bloc goes through. But today the Strata Titles Board ruled that CPF losses don't qualify as such a loss.

So my question is, why the hell not? CPF money is still money, and it's money that's supposed to be sacrosanct in Singapore, for heaven's sake, because without CPF we'd have loads of impoverished old people (even more than the loads of impoverished old people we already have).

I suppose the argument goes like this: you don't have to repay CPF in full anyway, and it's unlikely that the unhappy resident could have sold his individual unit at a higher price in the market in any case, so why not just sell now and put the most he can back into his CPF? Also, if a lot of people don't manage to pay back the full CPF amount, then most estates will never get sold because there will always be someone making at least a CPF loss.

But the point is that maybe he was planning never to sell his home, which means he would have had a permanent home over his head and never have had to pay CPF back. And now, having already paid all that interest on his loan, he'll have to find another home to buy, take another loan, and this time he'll have less in his CPF account to withdraw to help finance that new home.

Which then brings me back to the minimum 80% owner consensus to sell an estate en bloc. If an estate has 500 units, that's a potential 100 residents who are dead set against the sale. But if they don't suffer losses big enough to stop the sale, then they lan lan have to sell. People keep complaining about the intimidation tactics and unending harassment they suffer from marketing agents trying to persuade 80% of owners to go en bloc. Shouldn't the barrier be set back at 90% now that the market is doing so well and developers have already built up considerable land banks?

This all seems very unfair but maybe there's something I don't know. If anyone can enlighten me I would be very grateful.

Finally, one posting in on the financial loss case which gives his interpretation on why this unfairness is allowed to be perpetuated:

The board (largely comprised of people who are working in areas that gain from en-bloc sales, mind you) distinguishes between 'necessary expenses' and 'personal expenses'. Legal fees, stamp duty, privatisation costs are necessary expenses paid by everyone involved in any flat purchase/development. Interest however is a personal expense along with renovation costs.

In political terms, the STB has to balance between encouraging and facilitating en-bloc sales on the one hand, and being equitable on the other. If financial loss includes CPF losses, a substantial number of en-bloc sales might be blocked due to the financial loss clause. People keen to sell their places, and do not suffer such losses, will be obviously put out by such a decision if they have a single person in their property that will suffer from CPF losses.

Of course they have forgotten that the financial loss clause was put into the Land Titles (Strata) Act to protect individuals who might be forced to sell and not receive any profits after deductions. This clause is built specifically for the individual and not for the collective interested in selling the development. By excluding CPF losses, the collective is given greater consideration.

The damning nail in the coffin for the couple is the CPF letter which states they do not have to make good their CPF shortfall, which means in effect they can spend the rest of their lifetime paying the outstanding amt. This gives STB the leverage to point out that this is the couple's own problem, and should not be used against the collective interested in selling.

I hope the couple brings this up for appeal at the next level - the High Court. I think it's a lopsided definition of financial loss that is rapidly favouring en-bloc sales rather than protect the individuals who will suffer from it.


Anonymous said...

Before we start frothing about how injustice is done, can we seek some enlightenment as to whether the Owner had re-financed his loan?He owed bank $343 and CPF $407,total of $750.The purchase price was $515.Surely the bank interest cannot account for the difference of $235.
Further, the bank has the first charge,which is only allowed recently.
Assuming that he did re-finance(no sin in that),is that a fair basis to block the en-bloc? He may withdraw his objection if the rest of the owners compensate him for his 'loss'.Is that fair to the other owners?

Dr Minority said...

I believe the STB would have to take into consideration any refinancing, and it'd have surfaced in the news report as well. In terms of owners pitching in a 'shared sum' to compensate him for loss, that is actually a common practice, particularly if the RP is so low that it creates a number of owners who might be able to block the sale due to financial loss. The issue of fairness to all owners is therefore counter-balanced with the issues of just how much profit do you want to have and more importantly for them, will these profit not materialise if you do not compensate for loss cases. Most owners would prefer a higher RP than a 'shared pot' because it just eats into their profits and charity is not practiced.

The Pariah said...

In this New Millennium, the spate of Collective Sales has hit those of us in Districts 9 and 10 where East meets West, as Dr Minority puts it so elegantly.

1. Constitution. Is it even constitutional, I wonder? Perhaps, it is only in this little red dot where North nearly meets South where a law could be passed in 1997 with such equanimity by a Parliament of 82:2 mandating collective sale of Privately-Owned property based on 90% share-value majority if your estate is less than 10 years old from the date of issuance of TOL (Temporary Occupation Licence) or 80% majority if 10 years or older. Should a collective sale of a property bought prior to the enactment of this law be subject to this 90% (or 80%) majority?

2. Impact vs Regulation. What is even more galling is that after passing this "innovative" piece of legislation in 1997, they have conveniently left a huge void on everything else related to it.

2.1 To sell the entire estate - there is no regulation or legislation to govern the Sales Committee who dictates the terms of such collective sale and the apportionment method of sales proceeds that are binding on ALL owners. The Sales Committee might as well be a "Committee of One" because - naturally - only like-minded owners will be invited to join. Also, shouldn't the law legislate that the Sales Committee be auto-dissolved once the CSA attempt fails to garner the requisite share-values?

2.2 To repair a broken lock in the estate - There is an entire statute under the Building Maintenance and Strata Management Act to regulate the Management Corporation.

3. Paradigm shift. Pray, let's not be hemmed-in by the marker lines drawn for us.

3.1 Labels of "majority" versus "minority" are misplaced. We are talking about Private Property that we bought at prevailing market prices with our hard-earned money. No government subsidy. Not dipping into taxpayer's money. Are we living on some communal farm all of a sudden when it comes to collective sale?

3.2 10 years! This would be hilariously funny if it wasn't so tragic. How long did your fridge last? Mine is still frightfully cold after 13 years! Man, we are talking about bricks and mortar here. The law says "less than 10 years" and "10 years or more". The first CSA attempt on my estate was four years from TOL - even the central air-conditioning system provided by the developer to me was still under warranty!

3.3 What kind of Master Plan does our MND drum-up when the land use/plot density ratio could be hypothetically out-of-sync from Day 1 of TOL issuance? Hongkong is now talking about 40 years whereas in Singapore we have been slapped with this CSA potential/risk from Day 1 of getting TOL. Bizarre, no?
On our finite-resource Planet Earth, wouldn't it be more sensible to bar CSA for the first 20 years from TOL at a minimum?

4. Property share-values. Dr Minority has done his homework about share-values approved by the Commissioner of Buildings. The share-value bands were only narrowed recently and hence the legacy problem was created by COB in the first place. The esteemed Commissioner apparently did not have the foresight to envisage that a self-appointed Sales Committee of a collective sale could apportion sales proceeds based on such Committee's totally arbitrary formulae/weightages pegged to share values.

5. Apportionment method. A rocket scientist it does not take to derive a mathematical basis of apportionment. Searing as this may sound but it is unconscionable that the Strata Title Boards sanctions such arbitrary apportionment method of sales proceeds by a self-appointed Sales Committee.

5.1 At the time of purchase, you pay for every sq cm of space. Every month, you pay for every share value as approved by COB.

5.2 Now, based on a collective sale forced down your throat if you are amongst the dissenters, you are obliged to accept the apportionment based solely on share value or some dreamed-up weightage even though your apartment is 50% larger than your neighbours.

5.3 Apply a mathematical basis of apportionment. The ratio of "common property" versus aggregate "strata title area" could be established by a quantity surveyor (eg, 1000 sq m of common property of the estate versus 4000 sq m of aggregate strata title area of all apartments - ratio of 1:4). The collective sales proceeds, say $15mn, should then be divided into these proportionate ratios. Hence, $3m would be apportioned based on share values of each apartment and $12mn would be apportioned based on the strata title area of each apartment, thus mathematically and factually accounting for the full apportionment of such collective sales proceeds of $15mn.

6. No-brainer. In most estates, the larger units are invariably outnumbered by the smaller units. It is a no-brainer when it comes to apportionment method because the majority of the owners who own the smaller units would naturally vote to use share-values-only or to assign a weightage to share-values favourable to themselves.

7. High-rise slums. Estate maintenance of a development with CSA potential/risk is a Catch-22 issue. In high-density high-rise living on a little red dot, high-class slums can evolve willy-nilly in our Global City. We should have a scaled time-bar for next CSA attempts relative to the estate's age (eg, no CSA for less than 20 years from TOL; 5-year time bar after a failed CSA attempt for estates between 20-40 years from TOL, 3-year bar for estates above 40 years). If owners have an assurance that this CSA cycle has a timeline (and not going into infinity), then the quality standard of buildings in Singapore will be upkept and maintained properly.

8. Financial planning/CPF. Most of us would have used CPF monies substantively to buy a private property. CPF policies ostensibly encourage prudent and stable investment of our CPF monies with net positive gain over time. Hence, the CPF criteria are more stringent for investment properties versus owner-occupied properties.

8.1 The greatest irony is CSAs are almost guaranteed to result in an investment downgrade or downsize for owner-occupiers who need a replacement unit (if new replacement unit) or constant churning of investment (if old replacement unit as yet another CSA is likely to eventuate). This does not even take into account that real estate investment is truly unique - Unit #01 may be much less favoured and therefore worth less than Unit #02 even if both are in the same block on the same level with the same design layout.

8.2 All of us have different cashflow needs, risk appetites and investment-risk/time-horizon profiles. However, CSAs enforced on dissenting owners in effect communalizes all of us into "cashing-out" our original real estate investment.

9. Architectural legacy. Ever notice the difference between apartments built in the 60s, 70s, 80s, 90s and 00s? With all this urban renewal from Day 1 of TOL, what architectural legacy could we even hope for?

10. Community bonding. We are losing our citizens despite our near-First-World trappings. We talk incessantly about community bonding but our policies do everything to DIScourage bonding.

10.1 We are after all human and being human, we tend to be territorial. If we are serious about community bonding, principles similar to HDB SERS should be applied to CSAs to keep a sense of neighbourliness and community - more so for the people with private properties (and their children) are likely to be more mobile in terms of migration possibilities.

10.2 As the developer/buyer of an estate under collective sale is tapping on the land use potential belonging to the original unit owners, developers could be obliged by law to offer a same-size replacement unit at the redeveloped estate or within a 1-km radius of same or higher quality.

10.3 Interestingly - in contrast - Singapore can't even seduce our Permanent Residents to give up their Malaysian, Indian or Mainland Chinese passports despite whatever commonly perceived downsides of these countries at present.

11. Environmental impact/wastage. Again, we have a senseless contradiction. We harp on Asian values, of which frugality is one. Yet our policies foster wanton wastage as gleaming marble floors of less than 10 years or even of 25 years if well-maintained go under the wrecker's ball. It takes an obscene amount of energy to produce a ton of aluminium window frames and yet it's kosher to twist them all up with a CSA and to smash all these double-glazed full-height windows to smithereens?

12. Individual versus Minority versus Majority. However hard we try, I reckon Singapore will not become a Global City of First World Standard in essence (perhaps in trappings, we can pass it off).

Why? Because the hallmark of such places at its peak is giving people the space to grow and evolve into a rich pluralistic diversity yet with a strong commonality. Underpinning their society, there is invariably a healthy respect for the individual (what more for the minority?).

Sadly, we Singaporeans have learned to be a parrot-society veering to a convenient singularity with highly selfish motivations of kaisuism. Instead, underpinning our society, we have tyranny by the majority - be it in HDB Lift Upgrading or Private Estate Collective/En bloc Sale.

Knowing the mass media's pro-CSA slant and the dearth of civil society in Singapore, I have not even bothered to write-in to the mass media. Instead, I have chosen to give grief directly to our humble civil service and statutory boards and whatever mouthpieces the government has deigned appropriate for us to squawk into.

Only Time will tell if the powers-that-be really "listen". And if they did in fact "listen" but can't or won't take what we say into account for whatever reason (valid or otherwise), then at least they could "talk-back" so that we dissenters to collective sales at least would know why we are being led to slaughter, eh?

Let me end off by saying that - at the bottomline, we Singaporeans know the Price of everything but the Value of nothing.