In-situ Upgrade (v0.9)
2025 Note: This proposal was first written in 2021. Now that it is 2025, this proposal here is effectively a VERS. Guess I was a bit ahead of the times.
Introduction
The following requires a bit of heavy reading. In summary, the proposal says, if you are the existing owner of a 2,000sf apartment in Pandan Valley, you can sell it today for $5.2 million.
The Problem
To sell Pandan Valley en bloc the traditional way is too difficult, the main reasons being:
- It is very large for a developer to chew. The financing costs alone for $3b is easily above $100 million a year.
- The wildly different apartment types and sizes make it almost impossible to derive at a fair division of the sale proceeds to each owner, making an agreement unreachable.
Where's the Free Lunch?
It will be good if we all understand from where the additional value from an en bloc sale comes.
Pandan Valley Condominium sits on a site of 865,127 sq ft, and the government-approved plot ratio is 2.1, meaning that the built-up footage can be up to (865127 x 2.1 or) 1,816,766 sq ft.
The total built-up footage of all the existing units and structures in Pandan Valley that add up to the legal built-up area is a number that is hard to come by. The last I heard was that the current built-up is at 1.5 of the land area. At 1.5 it would mean all our apartments add up to only 1,297,690 sq ft.
An en bloc sale means we have an additional (1816766 - existing built-up or) 519,076 sq ft of built-up space that we can offer to the developer when we sell the whole plot of land en bloc. If we each sell our units individually, we are unable to realize the value of the extra unused plot ratio.
The proper and more efficient way of expressing the above is simply: we have an approved plot ratio of 2.1 but we currently consume only 1.5. There is thus 0.6 x 865,127 sq ft of value that can be monetized.
The Proposal
Instead of taking the traditional route, I propose selling only the 0.6. We won't take cash, yet, not a cent. Instead, we offer the 0.6 to the winning developer for free (for now). For the gift of 519,076 sq ft of entitlement, the developer has to demolish the existing estate and:
- Re-build the existing condo, giving every existing owner back a unit of the same size.
- Design and build additional apartments to take up the 0.6, or 519,076 sq ft. The developer own these apartments and can sell them at its own time and pleasure.
- Pay to or require from SPs a sum of money, which I shall call the Quantum. This Quantum is positive, ie developer pays us, if the value of the gift of 519,076 sq ft is more than enough to rebuild the whole estate. The Quantum is negative, ie we have to pay the developer, if that same gift is smaller than the cost of rebuilding. Opening the redevelopment of Pandan Valley to open competition will ensure that we have the best value for the Quantum. Obviously, it will be a much harder sell to existing SPs if the Quantum is negative. I am hopeful the Quantum can be zero or positive. Perhaps the real estate experts can weigh in with their assessments.
More details on the above are elaborated here.
A brand-new freehold apartment in the Holland Road area in 2025 should easily fetch above $3,000 psf (Van Holland units were sold at $3,045 psf in 2020, while 99-year leasehold One Holland Village Residences transacted at $3,069 psf in 2021). Let's take a very conservative number of $2,600 psf for Pandan Valley in 2025. Assuming the existing built-up plot ratio is 1.5, the winning developer is thus given a free gift from us that it can sell for $1.35 billion (0.6 x 865,127 x 2,600). All it has to do is to re-design and build the estate.
To re-tell the story, the above proposal, if it comes to fruition, means the following for Pandan Valley owners:
- For those who wish to cash out, they can sell their existing apartments, at their own time, each at the value of a brand new freehold apartment in the posh Holland Road area. The past transacted values give you an idea of how much you can receive.
- For those who wish to continue to live in Pandan Valley, they need to seek alternate accomodation for the period of the re-construction. They then return to their original apartment, but to a brand new one. No more leaking toilet pipes.
This plan has the following advantages:
- All owners are able to realize the latent value of the existing asset, without even having to discuss their share. ☛See last point below. Each owner can sell at the price of a brand new apartment. The profit will be very significant, even if the Quantum is negative.
- The developer faces way much reduced risk.
- The developer does not have to pay cash for the land, and thus does not incur the cost of financing. Reduced costs ultimately benefit us owners.
- There is no stamp duty for existing owners as there is no transaction on their unit (unless they decide to sell and/or buy another property).
- Owners do not have to sell at the same time. There is thus no surge of a few hundred replacement homes being sought at the same time, jacking up prices seeking one. (Past en bloc sellers have regretted with no profit after having to buy another home of similar size in the same area.) Owners can sell anytime, beginning from today, whether before, during, or after the condo is re-built, and are yet able to realize the enhanced value.
- Owners who want to continue living in Pandan Valley in their same apartments, albeit in a brand new estate (no more asbestos or leaking pipes), can do so for a small cost of alternate accomodation during the redevelopment.
- ☛ The Quantum, if positive, is expected to be only a small amount of cash (if any). To "aportion" this amount to existing owners will not be controversial and should easily achieve all SPs' agreement.
Financial Simulator
How much we can actually get, or whether even this proposal can be realized, depends on a few unknowns. The first is the actual built-up area now. The value of the 0.6 may be insufficient for the re-construction costs. Hopefully, with an open contest of ideas, developer creativity can come up with something attractive and viable. A simple calculator has been created below for you to simulate and visualize various scenarios.
(All blue numbers in this document will be updated when you change any of the values in the calculator.)
| Land area, A: | 865,127 sq ft |
| Current built-up: | x A |
| Area gifted to developer, a = 0.6 x A: | 519,076 sq ft |
| Valuation of gift *, V: | $ psf * $ |
| The Quantum†, B: | $ million † |
| per owner (even distribution B/623) | ±$000 |
|
* This is an internal number for developers and it is included here only for completeness. As owners, we don't really need to know or care what this number is if there is open competition. † This is the developer's bid, again its internal number, but included here to make the calculator complete. | |
| Below are included for the curious. | |
| Area gifted to developer, a: | 519,076 sq ft |
| Selling price of gifted units, s: | $ psf |
| Total sales proceeds, S = s x a: | $sp |
| Developer's desired profit, P: | $ million |
| Available budget for construction (whole project): | $000 psf |
Deal Breakers
A negative Quantum may look like a deal breaker. It may not be. It requires cash payment only for SPs who wish to continue living in the new re-built estate. The sinking fund can also be used to offset a negative Quantum.
This in-situ upgrade proposal will require 100% SP agreement.
Please let me know of any suggestions to enhance this simulator
H. Eng
July 2021
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