Wednesday, 23 May 2007

Asset Valuation and Market Equilibrium

It's often rare nowadays to see something published in the Straits Times's Forum pages on en bloc sales, much less a letter and a response. Let me reprint the 2 letters first and then discuss them :-

Collective property sales: Check the frenzy
Straits Times Forum
19 May 2007
By Magdeline Goei (Ms)

I AM all in favour of collective property sales in land-scarce Singapore, but measures should be put in place to check the frenzy we are witnessing now. This, in my opinion, is not healthy for the economy and not healthy for the fabric of Singapore.

When we buy an apartment, the price we negotiate reflects the view, layout, floor level and prestige factors such as in the case of a penthouse. But we are not able to negotiate the share value allocated to the apartment, which is set by the developer and approved by the Commissioner of the Buildings Management Unit.

Share values were established purely for the apportionment of running costs in a development. They may be fair for the apportionment of running costs, but it in no way follows that they are a fair reflection of the respective stake owners have made in a development. Therefore, they should not be taken into consideration in the calculation of price or in important collective-sale decisions.

When it comes to valuing apartments, marketing agents do not take into consideration floor levels or prestige factors. This means the apartment on the second level will get the same price as one on the 20th level. This is not the practice in the real world. Is this fair?

Hopefully, amendments to legislation will incorporate the following:

  • Valuations must give due recognition to different floors;
  • Voting rights in collective-sale decisions should be weighted according to the size of the flat, not the share value allocated to it as is currently the case. This is because we have no say in the allocation of share value but we have a say in the size of our apartment.
  • A bigger say must be given to owner-occupiers as they will need to acquire a replacement property and may suffer a loss; and
  • The bar should be raised from the current 80 to 85 per cent. This will still allow steady growth in prices - which we all desire - but will moderate the current feverish pace of collective sales.

Collective sales can be a useful engine of growth in the key property sector of our economy. But now that they have become so important and so frequent, it is vital that the upcoming review of legislation corrects certain imbalances which have become apparent.

Let the market find its equilibrium for collective property sales
Straits Times Forum Online
22 May 2007
By Tay Sing Poo

I REFER to the letter, 'Collective property sales: Check the frenzy' (ST, May 19), by Ms Magdeline Goei.

In any asset valuation, the asset's terminal valuation is a key consideration. In collective property sales, the terminal value of a private estate is merely its land value.

The potential yield of a piece of land on redevelopment depends on its locality, prevailing plot ratio, land size and legislations on development control.

Considerations such as higher floors, layout, good views and prestige such as that of a penthouse do not affect the potential yield of a piece of land.

In an efficient market, prices reflect these considerations. I am fully confident that the current legislation on collective property sales is still relevant and that the Singapore property market is efficient.

The issue at hand is thus not with flaws in our legislations but how well informed buyers of Singapore properties are.

Overly legislative controls and frequent reviews will disrupt what is already an efficient market.

We should let the market find its equilibrium for collective property sales.


Mr Tay brought out two issues in counter to Ms Goei's comments - (a) Land value as potential yield and (b) market efficiency.

Land value as potential yield
What Mr Tay seems to be confusing is that Ms Goei is not talking about the 'terminal value' or land value, which is the prerogative of any developer wishing to pay for the land. She's referring to the Collective Sale Agreement's method of apportionment (or method of distribution). In most enblocs, the popular method is "50/50" or each owner will get a chunk of the sale proceeds based on 50% of their unit size and 50% of their share values. Ms Goei's point is that irregardless of the land value, the method of apportionment must take into account other valuative factors that a unit in the estate has (be it unit height, view and yes, unit size).

After all, according to Mr Tay's logic, all methods of apportionment should exclude unit size, and take into account share values only, since a unit's size does not "affect the potential yield of a piece of land". In fact, taken to its logical conclusion, methods of apportionment should be distributed equally among all owners irregardless of share values, unit size, floor height, view, feng shui, what have you, since all these do not affect potential yield.

So why, one must ask, do agents and the STB allow for the 50/50 method of apportionment? Why not allow for a 33/33/33 method of apportionment that factors in valuation of individual unit according to its uniqueness, share value, and unit size?

  1. Equity. When an owner purchases a flat, he/she pays a premium for particular selections - unit size, floor height, angle/view. It is only fair for that owner, when collectively selling, to gather back some of that premium. Otherwise, if we use Mr Tay's logic, even the smallest unit in the 3rd basement level under the carpark next to the unmarked grave would be distributed the same amount as the 3 storey penthouse suite in the same estate.
  2. Laziness. We've been through briefings by agents which went for the popular 50/50 method, and by some more fastidious agents that tried to include the valuation method (unfortunately they did not reveal the weighting in their calculations, claiming it proprietory). It's more complex but it's possible, and it's a question of whether they'll do it or not.
  3. Greed. Some SC members will lose out if the 33/33/33 method was used. There are cases where SC members would calculate the profits they'd gain from the various agents' methods of apportionment, and took that into account when deciding who they'd award the contract. So if the members had units that would disadvantage them if the 33/33/33 method was used, why select these agents?
Market efficiency
I'm not fully familiar with economics but I do believe that any economic argument almost never takes into consideration irrational conditions such as ideological considerations (eg government's best interest to let the market escalate, the greater division of income gap and disappearance of the middle class) or social considerations (eg the house is more than a mere 'asset' but a 'home' to many). The point of dissent and frustration for many who asks for regulation of enbloc sales arise from these reasons.

  1. The current 'efficient' market is creating a situation where middle class Singaporeans will not be able to invest in a condominium as a form of upgrading their social status. With prices skyrocketing, only the upper class and foreigners with capital will invest in non-landed residential property, and rent them out. One of the 5 'C's will become increasingly harder to obtain. It isn't just how 'well informed' buyers are, but how 'cash ready' they are in order to purchase what many perceive to be a sign that they have 'made it' in Singapore.
  2. As a consequence it is creating the so-called 'New Poor' in Singapore, where the middle class have to remain in the HDBland. Note the attempt to appeal to this group, when the government tried to build HDBs with the trimmings of private condominiums (private facilities, branded fixtures etc).
  3. A unit in a non-landed residential estate is to many BOTH an asset and a home to some. The current en bloc legislation is creating a market that is weighted in favour of developers and not home owners, much less owner-occupiers. Left to its own, many owner-occupiers will be forced to downgrade, squat, downsize or become a refugee, as the Pariah often pointed out.
Will the government slap back the capital gains tax that some argued stopped the property market frenzy in 1997 to 2004? I don't know, but left unchecked, the 'efficient market' is creating problems that economics often excludes in their rationalisation.

1 comment:

Anonymous said...

Simple improvement to 50/50 method of apportionment:

1. Price penthouse separately. This reflects market reality. Anyway, there are only a few of them, so it's easier to be done.
2. Add 1% for every floor. Start from 2nd floor. So 3rd floor gets 1% extra.
3. Pay renovation done in the past 4 years. Straight 25% per year.
4. Agree on the value of facing (afternoon sun or morning sun) and view (pool view or garbage dump view). Once you agree (e.g. pool view gets 8% more), then simply apply across the board for those pool-view facing units.

You can take each of them, or all of them. They are independant of each other.

By applying the simple improvements above, it will take it closer to market reality.