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In July, condominium developer, Macly Assets lost a bid for damages of about $760,000 from a couple whom it claimed had built two unauthorised lofts in their 60 sq m penthouse apartment at Thomson V Two, a smallish mixed development where mickey mouse apartment were sold with a high ceiling.

The developer had blamed the couple for its delay in obtaining the certificate of statutory completion from the Building and Construction Authority (BCA). The $760,000 damages was for lost opportunity cost, as the delay meant that a sum of $5 million, paid by the flat buyers and held in a stakeholding account, was tied up longer than it should have been.

However, the High Court, found that Macly Assets had given written permission for the timber lofts to be built.  The couple however had to spend money to modify their loft to adhere to building regulations.

Do you know exactly what you can build as lofts in a high floor to ceiling height unit?

Loft concepts are how some developers and agents try to sell you projects, swaying you with the argument that you can build extra living space at a minimal cost and lower your overall PSF. Yet sometimes, details are not given in earnest.

Lofts designed as furniture decks are generally regarded as “fixtures” if they are light-weight and do not form part of the structural elements of a building. They should be small and about the size of a normal bed (less than 5m2). When designed this way, they will not require planning permission from URA. Building Plan and Structural Plan approvals by the Commissioner of Building Control are also not required. However, the developer/owner is to check to ensure that the addition and usage of the loft or intermediate floor deck would not exceed the designed load capacity of the unit.

Bigger lofts (more than 5m2) that form part of the structural element of the building, such as mezzanine floors, are considered part of the GFA of the development and will require planning permission from the URA, including Building Plan and Structural Plan approvals by the Commissioner of Building Control. Some of you might have seen huge loft in showrooms used as study areas

If the site has already fully maximized its allowable gross plot ratio (GPR) as stipulated in the masterplan, the additional loft structure will NOT be allowed by the authorities.

So be wary when you see a showroom with a loft concept where the loft is a large space that can accommodate more than just a normal bed. It is not a given that that approvals will be granted by the authorities when you want to build one.

Developers and agents, please be fair to buyers. It may just be a hit and run transaction for you, but buyers will have to regretfully live with a misled purchase.

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On 17 July 2014, Spring Grove condominium, located in Grange Road was put up for enbloc sale at $1.39bn, translating to $2,512 psf per plot ratio.

This is despite a unit in the development fetching only a maximum of $1,800 psf in Oct 2012.

You cannot build anything shabby on that plot.  It has got to be a high end condo to justify the high price tag that a typical buyer has to pay.

Now that would mean construction cost of about $600 psf and a breakeven price for the developer of about $3,100 psf. Perhaps, instead of demolishing the existing condominium, the developer may try to cut cost by simply refurbishing it so it looks brand new.

Appetite for high end-condos in the Core Central Region (“CCR”) where Spring Grove condominium is located has weakened, as shown in the latest quarterly drop of 0.5% in price index for non-landed properties in the CCR.

Why then did the marketing agent for the en-bloc not advise the owners to cool their expectations and be more realistic about the asking price?  One can only guess that if the marketing agent had done so, it would not have been engaged to market the enbloc sale.

The billion dollar question then is, will the enbloc transact successfully at the asking price.

A quick scan of 14 nearby comparable condos (comprising complete and uncompleted developments) registered only a maximum of $2,292 psf (transacted selling price) in the most recent 6 months, a 26% discount to our estimated breakeven price of $3,100 psf.  And we were using the highest transacted price.  If we had used the median transacted price, it would have been a whopping 34% discount to the estimated breakeven price.

We don’t think the deal will go through at $1.39 bn. We deem it overly ambitious in today’s climate.  Who wanna wager against us?

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1) It’s tough being a brick and mortar retailer these days.  Just ask FJ Benjamin, struggling with aggressive industry-wide discounting, rising rentals and manpower shortages.  Most recently, FJ Benjamin registered  a quarterly loss of $5m on the back of a $90m sales turnover.  F J Benjamin retails and distributes exclusively brands such as Banana Republic, GAP, GUESS?, RAOUL, BELL & ROSS and GIRARD-PERREGAUX among many other upmarket brands.  You must have seen many of their stores in shopping malls and here lies a big headache for FJ Benjamin (considered a small retail tenant).  Rising rentals.

2) REITs retail landlords charge their tenants a base rent and a percentage of gross turnover. Small tenants are typically charged a higher base rent than the larger tenants.  A small tenant may be paying up to $40 per square foot per month (psf pm) on Orchard Road compared to up to $20 psf pm paid by a large tenant.  Like in most things, size matters.

3) Smaller tenants are also typically locked into short lease agreements with landlords – meaning that their rents are up for renegotiation (usually upwards) every 1 to 3 years, while anchor tenants typically have their leases renewed every 10-20 years.

4) Why are we highlighting such practice by REITs landlords? Before you get carried away and decide that you also want to be a retail space landlord and squeeze the life out of your tenant, think again.  These REITs landlords are able to do so because they control entire retail complexes which are located in areas of heavy footfall, traffic and supporting amenities.

5) If you are a standalone (strata titled) individual retail unit landlord, you are not a REIT and will not have such a draconian hold over your tenant. Remember that. That landlord next to you can just lower the rent to swing your potential tenant over.

6) With more than 600 new strata shops in mixed development projects coming up in a couple of years, we think you should be cautious.  Already at our outreach, we have highlighted completed retail space projects that are ghost towns where landlords are struggling to find tenants and pay their mortgages. Some of these units are of mickey mouse sizes that no tenant in his right mind will pay good money for. For many of such strata retail units, their location and customer catchment area is a problem. It’s no surprise then that some of these units were recently sold off at a loss. There is only so much bleeding some ill-advised investors can stomach.

7) Be careful when considering to buy strata-titled retail spaces.  If in doubt, you can contact us at Empower Advisory for a second opinion.

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