The Myth, The Hoodwink, & The Reality

The JLLS lady said a very true thing yesterday when she said that developers are not content with 10% profit. It is a myth; the minimum percentage that is factored into the residual valuation,  the actual profit margin can be much higher, even obscenely higher. 

The whole point of a proper residual valuation is to have an honest base on which to work from. If it turns out that the actual Net Site Value is very high then it is for the OWNERS to decide whether or not to dangle a carrot at the developers in the form of a discount. It is not for others to slice and dice the figures on their own accord. It is not their land.

The game has become more sophisticated this second time round, the MA has a smaller fig leaf to hide behind, and we are subjected to a new range of tactics. Yesterday, we were presented with never-seen-before-but-please-take-a-quick-look-before-you-pass-it-around laminated pictures/data of a would-be development on our TC site... oh, and by the way, do not take any photos of it .....   This MA thinks we are goondus.

Why? Why would a MA be bothered about how a make-believe development will look like? What business is it of the Sellers (us) to concern ourselves with how the Buyers intend to divide up their GFA? We do not care if they build 2000 shoe boxes or 20 mansions.

I will tell what I think; I think it was a feeble attempt to justify why they took 15% off the GFA, why they rate efficiency at 85% and not 95%. Whilst others ogled the picture I quickly jotted down the data underneath. I did not have enough time, but that was the whole point of producing this article out of the blue, so that people would NOT have time to study and scrutinize it too deeply. The SC had better demand a copy immediately as it was not in the original proposal but presented to owners on the day. They must get a copy for record purposes, before it disappears..

% PERMISSABLE GFA

Balcony: 10%

PES: 1%

A/C: 2%

Circulation: 9%

Other GFA: 4%

Let us, as amateurs, look at each one in turn, using the link for the  URA Handbook on Gross Floor Area.  How did they arrive at 85% GFA? Were they correct in doing so?

Balconies:

So, it is (GFA) + (10%  Bonus GFA)

PES (Private Enclosed Space):

Found under 'Items not counted as gross floor area'.

 So, even though PES is not GFA deductable, they deducted it from the GFA anyway.
Now we have (99% GFA) + (10%  Bonus GFA)

A/C (I am assuming this stands for A/C ledges):

 So, even though A/C is not deductable from the GFA, they dedusted it anyway.
Now we have (97% GFA ) + (10%  Bonus GFA)

CIRCULATION: 

I assume this is for all those other GFA items. 

It is worth noting here that water tanks, bin centre, PUB switch room/ cable chambers, general car parks, driveways, drop-off points, the first main entrance, letterboxes, covered linkways, skybridges, M&E spaces, rooftop pavilions, planterboxes (facing outwards), pump rooms, refuse chutes (hollow chamber), shadow areas (this one is interesting....a developer can increase the saleable GFA by building weird shaped buildings), shadow area of columns (another cracker!), first floor landscaped areas, lushly landscaped sky terraces, swimming pool, tennis courts  do not use GFA.

Common things that use GFA are:  guard house, lift motor room, refuse chamber (the bottom), staircases (design dependent), void decks, 2nd/3rd+ main  entrances , service ducts, lift shaft or lift lobby (which ever is smaller), walls and columns.

Now, please, 9% for this  list of items? 177,000 sqft for these? How enormous will the guard house/lifts or lift lobbies be? New mass market developments do not allow for void decks aka HDB. Even in house refuse chutes are becoming rarities.  From the $32k formal valuation and JLLS proposal, 5% for 'circulation' is quite ample. A smart architect can work around these exemptions to the developer's best advantage.

So, now we have (88% GFA) + (10% Bonus GFA)

Other GFA:

Unbelievably there is still yet an 'other' undefined GFA!!  What 'other' is there left?

So we have a final count: (84% GFA) + (10%  Bonus GFA) 

Disingenuously paraded as a round  95% GFA

Are they right?  I don't know, but there is a big question mark over their assumptions. My query rises out of how the valuations at the STB in 2008 were treated by the experts. At no point did the experts question  the 95 + 10% and 100 + 10% GFA efficiency - it did not raise an eyebrow and so, in my opinion,  must have been considered normal.

It is my guess that high-end condos in posh locations probably do not utilize all the GFA and instead have more open space and greenery to make the place feel exclusive and luxurious. But lets get real here, TC will be a low end mass market condominium surrounded by HDB. The developer will most likely maximize every square inch of GFA- every inch means more money in his pocket.  Just look at the 4 estates crammmmmmmed onto ex-Waterfront View to get a more realistic idea of any future development .

The Sale Committee did well when they requested to have the residual valuation breakdown from our newly elected MA. Faced with their proposal, they should now seek independent  advice on the following:

Question 1:

What is the 'usual' efficiency percentage in a suburban mass market project. Find out what it is in the Waterfront Collection etc

Question 2:

Do you or do you not add in the 10% Bonus GFA when calculating for the Gross Development Value ( the gross sales proceeds received by the developer before any costs are deducted).

2 formal Residual Valuations, and 1 informal Residual Valuation said YES

1 informal Residual Valuation said NO

Logically the answer should be yes, as there is a construction cost/financing cost/ DC for balcony etc  to the 10% GFA Bonus. If these deductions are reflected in the calculations, but the Bonus GFA is not reflected in the GDV,  .....well, then owners are not being shown the full figures.