For Singapore’s sandwiched class, private property is often a key investment asset. One of the key reasons is the possibility of an en-bloc sale: a collective sale to developers can be a windfall, as well as a successful exit point for ageing properties. In recent years however, more property owners have become reluctant to vote in favour of an en-bloc sale; and as a homeowner or a landlord, it’s important to be updated on these:
Pitfall #1: The cost of a replacement property has increased
The first consideration is for landlords, who are renting out the potential en-bloc unit. As of April 2023, the Additional Buyers Stamp Duty (ABSD) has been hiked across the board.
This means that, if you lose your rental asset to an en-bloc sale, any subsequent property for rental income would involve an added 20% tax for the second property, or 30% for a third or subsequent property (for Singapore citizens).
(For Singapore PRs, the ABSD rate is 30% on the second property, and 35% on the third or subsequent property.)
Perhaps the worst hit demographic are foreigners who own a Singapore property. ABSD rates for foreign buyers have been doubled to 60%, making any replacement property prohibitively expensive. As an aside, this may also impede en-bloc sales, as many foreign owners are likely to fight tooth-and-nail against it.
But what if you own just a one property?
The good news is, the ABSD will be irrelevant to you. However, you’re faced with a typical boom market conundrum: the best time to sell a property is also, ipso facto, the most expensive time to buy property.
Let’s look at simple island-wide averages (you’ll need to be more specific with location when checking, but this provides a good snapshot):
Had you bought your condo five years ago, a replacement today might cost around 31% more, even without ABSD. As for a landed property, a replacement might cost about 39.5% more.
If you only have one home, and selling it requires you to buy another, the en-bloc may not be the “windfall” you expect.
Pitfall #2: Cashflow issues can arise from slow payment
Ideally, you’ll receive the sale proceeds from an en-bloc in six months or less; but this is not always the case. There have been cases where sellers receive the proceeds as late as nine to 12 months.
This causes a host of cashflow issues. Bear in mind that, to purchase a replacement property, the minimum cash down is at least 5%. This assumes a maximum loan is possible – for older borrowers, a lower loan quantum could mean 10% cash down (e.g., if the Loan To Value ratio drops to 55%.)
There’s also the prospect of having to pay for renovations and furnishing for the new home, if you’re moving in before receiving your sale proceeds.
A potential solution is to use a bridging loan; but these are usually expensive, at around 5 – 6% per annum. The maximum loan tenure is also typically six months, making it insufficient if your sale proceeds are coming a whole year later.
In general, younger sellers have fewer issues, as it’s easier for them to get financing. But older sellers, especially those who are past the retirement age of 65, may find it a challenge to finance their replacement home.
Pitfall #3: Sellers Stamp Duty, plus renovation and furnishing costs, can still lead to a loss
The Sellers Stamp Duty (SSD) still applies in an en-bloc sale. This is a tax of 12% on properties sold within the first year of acquisition, 8% on the second year, and 4% on the third year.
One of the worst possible scenarios is to buy a unit, then furnish and renovate it, only for the en-bloc to happen within the first three years.
You can approach the Strata Titles Board (STB) to object if you’d make a financial loss; and it’s possible that more of the sale proceeds will be apportioned to you, to compensate for the SSD. However, this process may not consider your renovation costs.
If you’ve been especially lavish, then a greater apportionment of the sale proceeds may barely cover your SSD, but not also your $100,000+ renovation works (which may well be the reno cost for older and much larger units, or penthouse-type units.)
Coupled with moving costs and the loss of time, the en-bloc sale could be a net loss to you.
Pitfall #4: The apportionment method may unfairly penalise you for having a larger unit
The method of apportionment is how the sale proceeds are divvied up. One of the methods to be wary of is the use of share value. Under this system, the higher your share value, the higher your sale proceeds become.
This system may unfairly benefit owners of smaller units, because share value doesn’t scale well with size.
In general, your share value starts at five (for units of 50 sqm or less), and increases by one for every additional 50 sqm. This means the owner of a 100 sqm unit has a share value of six, the owner of a 150 sqm. unit has a share value of seven, and so forth.
But this can be disproportionate, as a150 sqm. unit is three times the size of a 50 sqm. unit, despite being having a share value that’s just higher by two. Under these circumstances, owners of multiple small units (e.g., shoebox units) may see outsized benefits, compared to the owners of a single, larger units like penthouses or four-bedders.
Also keep in mind maintenance fees are pegged to share value. This means that over the years, owners of larger units have paid more for property maintenance. How fair is it that they benefit less from an en-bloc?
In addition, some units may have sizes that fall just short of the next share value tier. For example, a unit that is 149 sqm. has a share value of two, despite being a single sqm. off from a value of three.
You may want to dispute such methods of apportionment, before you agree to an en-bloc.
Pitfall #5: There may be no viable replacement properties
One example of this is someone looking to right-size to a resale flat, after the en-bloc sale. Current rules require you to wait 15 months before they can purchase a resale flat, after disposing of a private property.
With no viable options, they may be forced into rental, thus incurring expenses.
There are also cases where the en-bloc property is an intergenerational assert (i.e., it was handed down from previous generations.). It’s plausible that the current owner of an inherited penthouse or landed property can’t afford to replace the unit at today’s prices (see point 1), resulting in a loss of lifestyle choices.
In some cases, there’s simply no other property nearby to replace the en-bloc unit. This necessitates moving into a whole new neighbourhood, which can be disruptive; particularly to families whose children attend school in the area, or who have offices / businesses in the vicinity.
Check for en-bloc activities before you buy
These pitfalls are at their worst when the en-bloc is unexpected. So before you buy a property, especially an older one, check the notice boards. Look for signs of recent en-bloc attempts, and how close they came.
There has to be a two-year break between en-bloc attempts: so if the last one was two years ago, and came close to succeeding, you may want to try buying elsewhere.
For more help on home ownership for single-digit millionaires or other sandwich Singaporeans, reach out to us. We’ll put you in touch with the experts.
