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Jan 11, 2008

Intrinsic value of area may resolve en bloc woes

I WOULD like to ponder the potential influence of intrinsic value of area (IV) as a 'currency' to deal with a myriad of problems in collective sales.

Let's look at various scenarios to resolve the unhappiness of minority owners. Please also refer to my letter, 'Flaws likely if en bloc choice left to owners' (ST, Jan 5).

IV forms the foundation on which a conduit for meaningful negotiations from a common baseline is established. It could lead to a happy medium and a win-win situation for owners and developers.

Units of IVs as 'currency' offer complete freedom of choice for owners. The options are total cash-out, partial cash-out and total exchange with cash compensation equal to interest derived from total IV value at prevailing borrowing rate for the entire redevelopment period, payable quarterly. Owners receive two house removal allowances (out and back).

For example: In a condo collective sale, the IV was established as $250 per sq ft at launch in 1985. Mr Tan owns a unit of 2,000 sq ft (2,000 IVs). The tendered market price raises the IV to $1,800 per sq ft. Owners can consider the following options:

Mr Tan can cash out all IVs at $1,800 x 2,000 and moves out with $3.6 million.

He can trade part of his 2,000 IVs for a 1,400 sq ft unit at the same floor level with any view in the redevelopment and pockets $1.08 million ($1,800 x 600) for his balance 600 IVs. If the developers agree, he could reduce his IVs to bargain for a higher floor unit or increase his IVs for cash for a lower floor unit.

He can exchange all IVs for a unit of 2,000 sq ft at the same floor level with any view in the redevelopment and receives compensation for house removal and quarterly interest payment in advance. He wins a new home with higher IVs while the developers win profits for redevelopment.

Paul Chan Poh Hoi