The impact of law on en bloc sales

By Jovina Ang

SMU Office of Research – An en bloc or a collective sale of an entire property to a single developer or consortium is not new in Singapore.

Since the first en bloc sale in 1994, there have been many waves of en bloc sales in the past 28 years. In 1997 alone, properties that were sold en bloc amounted to the total of S$1.12 billion.

Property owners, especially investor property owners, are drawn to en bloc sales because the potential windfall is high. Many property owners have become instant millionaires resulting from en bloc sales.

That said, property owners whose apartments are their main residence, might be reluctant to participate in en bloc sales due to rising property prices in the past 22 years. For them, finding a similarly sized property in the same area with the sale proceeds from en bloc might not be feasible, let alone the thought of losing the memories and the subjective value they attach to the property that they call home.

This explains why there exists a conflict of interest between investor property owners and owner-occupied proprietors in en bloc sales.

The process of initiating an en bloc sale has become easier since the passing of the Land Titles (Strata) Act in 1999.

An en bloc sale can be initiated when there is consent from 80 percent of the proprietary owners if the property is more than 10 years old. This figure increases to 90 percent if the property is less than 10 years old.

Once the prerequisite amount of consent has been obtained, the next step is for the proprietary owners to delegate power to a group of owners who would form the collective sale committee, to conduct the sale.

The collective sale committee then proceeds to seek advice, as well as appoint a team of property consultants and lawyers to conduct the sale for the whole property development.

“While en bloc sales have taken place since 1994, there has been no fiduciary duties imposed upon the collective sale committee to act in the best interest of all the proprietary owners to obtain the best price for the whole property,” Associate Professor of Law and Associate Dean Zhang Wei informed the Office of Research.

“Agency problems could occur in instances where most of the collective sale committee are investors. For investors, getting a quick sale is more important especially when they could free up capital sooner rather than later. And they might not want to hold out for the best price,” he continued.

“This was an issue until 2009 when a case law involving Ng Eng Ghee v. Mamata Kapildev Dave was passed at the Singapore Court of Appeal. This case stipulated that the collective sale committee must adhere to strict fiduciary duties so that the best price could be obtained for all the proprietary owners,” he added.

The research

The research was designed to specifically examine whether fiduciary duties of the collective sale committee were adhered to.

Professor Zhang’s work, which began five years ago, was the first empirical research to be conducted examining the impact of law on pricing in Singapore’s en bloc sale market. It was also one of the few inter-disciplinary research projects covering asset pricing and property law.

Other than Professor Zhang, the research team comprised of Associate Professor Jianfeng Hu, who hails from SMU’s Lee Kong Chian School of Business, and Professor Kelvin F.K. Low, who is a law professor at the National University of Singapore.

The source data was from Singapore’s Real Estate Sale Transaction Database (REALIS) – a database that housed all the statistics pertaining to the property market in Singapore.

The numbers spanned an eight-year period covering 2006 to 2013 so that impact of the law, which occurred in 2009, could be conclusively confirmed.

In order to derive insights from the data, the research team calculated the price variations for the apartments sold under the en bloc sales across the timeframe.

The price variations were then compared to the price variations of two other groups of properties.

The first group of properties was the individually sold apartments with en bloc potential. The second group of properties was the executive condominiums. Executive condominiums were selected because these are quasi-private apartments that are offered by the Singapore Government’s Housing Development Board. And executive condominiums are not eligible for en bloc sales.

Research results

Before the passing of the law in 2009, apartments that were sold under en bloc were found to have a price premium of 14 percent over executive condominiums. The price premium increased to 25 percent following the introduction of fiduciary duties in 2009. This represented a huge increase of 78.6 percent.

Additionally, it was found that the price premium of properties sold under en bloc sales compared to individually sold condominiums increased significantly as well, with an 85 percent jump after 2009 – further suggesting that the imposition of fiduciary duties has likely spurred the collective sale committee to obtain the best price for all the proprietors.

Using turnover rates of different condominium projects as a proxy, the research also found that legal protection of proprietors is of special importance to projects in which residential owners are in minority, hence lacking the ability to defend themselves against the majority investor owners in en bloc sale processes.

Another finding showed that buyers who buy properties for their main residence were willing to pay 8 percent more for their properties after the change of rule in 2009 when the property was subject to the law of en bloc sales. This finding indicates that better legal protection of residential owners has factored in the projected prices and raised the ex ante (forecast/expected) pricing of condominiums.

Contributions of research

As an owner-occupied property proprietor, getting the best price matters especially when prices of properties have consistently increased since 2009.

Professor Zhang commented: “Our analysis shows that law can protect proprietors undergoing en bloc sales. Not only has the law enforced fiduciary duties on the collective sale committee, but it has also increased the price premium of properties sold under en bloc substantially.”

“This research has implications beyond the shores of Singapore such as in densely populated cities like Hong Kong,” he concluded.

Back to Research@SMU May 2023 Issue