Old En-bloc Potential Condo – Should you buy?

Investing in real estate often involves strategic decisions, and one intriguing strategy is purchasing an old condominium with the anticipation of an en bloc sale. While this approach can yield high returns, it comes with its set of risks and uncertainties. In this guide, we’ll explore the pros and cons of buying an old condo and waiting for en bloc, shedding light on what potential investors should consider before diving into this unique investment avenue.

Understanding En Bloc: The Basics

En bloc, also referred to as a collective sale, occurs when a 80% of property owners in a private development agree to sell the entire property to a buyer, often a property developer with plans for redevelopment. En bloc prices typically exceed market rates, making it an appealing option for property owners seeking substantial returns on their investment.

The en bloc process is complex and time-consuming, often extending up to two years. It necessitates agreement from a significant majority of owners, and even with such agreement, the sale may still fall through. The process involves multiple stages, including obtaining consent from owners, marketing the property, negotiating price, distribution and terms, and legal completion.

En bloc sales can be highly profitable for property owners, as prices are usually well above the market rate, with developers willing to pay a premium for a desirable en bloc site. This is particularly true for freehold properties, which are especially attractive to developers. Consequently, there are buyers eager to invest in older condos, anticipating a windfall when an en bloc sale occurs. However, it’s crucial to recognize that the profit margin may be lower for every subsequent buyers as the development ages, given that they purchased at potential en bloc prices.

Pros of Buying an Old Condo for En Bloc

Potential High Returns:

The primary allure of investing in an old condo for en bloc is the potential for substantial returns. If the collective sale gains approval, property owners may receive a payout well above the market value of their units.

Freehold Properties:

Developers favor freehold properties for en-bloc initiatives due to the scarcity of freehold plots released by the Government Land Sales (GLS). This preference can enhance the attractiveness of your property to potential developers.

Cons of Buying an Old Condo for En Bloc

Uncertainty:

A significant drawback is the inherent uncertainty surrounding en bloc sales. Securing agreement from a large majority of property owners is challenging, and even with approval, there’s no guarantee that the sale will proceed. We’ve witness numerous developments, whether freehold or on a 99-year lease, going through multiple rounds of seeking developers for enbloc, spanning years without any successful outcomes.

Long Waiting Time:

The en bloc process is time-consuming and can take up to two years. During this period, property owners must continue their financial commitment to cover maintenance costs and mortgage payments, adding financial strain.

Risk of Oversupply:

The success of an en bloc sale is also influenced by market conditions. An oversupply situation due to numerous new property launches may dampen the en bloc market, posing a risk to potential returns.

Increase in Maintenance Fees Due to Aging:

As a development ages, the need for repairs and maintenance increases. This may lead to a rise in maintenance fees for property owners, further impacting the overall investment return.

Reduced Rentability:

Older facilities and environments may make the property less appealing to potential tenants. This reduction in rentability and rental prices can affect the property’s income potential, impacting the overall return on investment.

Diminished Profit for Later Buyers:

En bloc sales often yield the highest returns for first owners who purchased their units at lower prices. Subsequent buyers may experience lower profits as property prices increase with each transaction. Buying into the investment later in the process may result in a lower profit of the collective sale proceeds.

The Worse Downside:

There are too many old developments with too few developers, be prepared for the possibility that the property might not go through en bloc. As the development ages, maintenance costs can increase, and eventually, the developer might use this as leverage to offer a lower price due to the property condition or limited lease.

With maintenance expenses becoming prohibitively high, keeping the property may no longer make financial sense. If 80% of the owners agree, you might be compelled to proceed with the sale. Your profit, having bought at a high price, could be limited or not at all, while the initial owners still make a substantial profit.

Thorough Due Diligence

Before embarking on this investment journey, conduct thorough due diligence. Understand the historical success rates of en bloc sales in the area and the potential demand for the redeveloped property.

Professional Guidance

Seek advice from a real estate professional who can provide insights into market conditions, potential risks, and the likelihood of a successful en bloc sale. Their expertise can guide you in making informed decisions aligned with your financial goals.

Conclusion

Investing in an old condo and waiting for en bloc presents a compelling yet nuanced strategy. While the potential for high returns is attractive, the uncertainties and risks involved necessitate careful consideration and thorough research. It’s crucial for potential investors to weigh the pros and cons, understand market dynamics, and, if needed, seek professional guidance to make informed decisions on whether to embark on this unique investment journey. Remember, success in real estate investments often lies in a well-informed and strategic approach.

While it’s dampening to admit that seeking an old property for enbloc has more drawbacks than benefits, it could be a bit risky. However, if the property consistently rents well, bringing in a good income, it might not be too bad after all.

I’m Jerry Han Sin, bringing over 15 years of valuable experience as a seasoned agent. Whether you’re considering selling or renting your property, I’m here to assist you every step of the way. My expertise spans both residential and commercial properties, ensuring comprehensive support for all your real estate needs. Backed by a dedicated team, we stand ready to provide the assistance you require for a seamless and successful transaction. Your property journey is important to us, and I’m committed to making it a smooth and rewarding experience for you.