If your property were to be acquired by the government, how much compensation would you be entitled to? The recent spate of compulsory land acquisitions to make way for the Kuala Lumpur-Singapore High Speed Rail (HSR), North-South Expressway and new MRT lines might raise questions on matters pertaining to compensation. The Edge Property spoke with a few valuers with experience in land acquisition valuation. The following are some of the issues that surfaced.

1. Acquisition for new road

If your property is acquired to make way for a new road, it is possible that the compensation is less than the "market value". This is because the Road Line Plan might have shown a road line affecting the property before and as the date of the acquisition. Valuers typically refer to transactions of comparable properties to value a property. The comparable properties selected for the acquired land could be those affected by a road line.

In Ng Boo Tan v Collector of Land Revenue, Tan’s property was acquired in Dec 1998 to make way for the relocation of the Upper Paya Lebar Road/Bartley Road junction. Tan was offered $285,000 in compensation for her freehold apartment unit at 209D Upper Paya Lebar Road. She appealed saying that it was lower than the value of four- and five-room HDB flats.

Although she asked for $800,000 in compensation, the Appeal Board only increased the compensation slightly to $309,928. In a nutshell, the Appeal Board based its decision on three recent comparable transactions ranging from $250,000 to $300,000. In the three transactions, the buyers seemed aware of a road line affecting their properties when purchasing them.

One of them testified that he was aware of the road line and would not be able to use their CPF savings or obtain a bank loan to finance the property. Separately, the realtor who brokered one of the three transactions said that if the property had not been adversely affected by the road line, it would not be selling at $250,000.

Against this backdrop and after the valuer made valuation adjustments, the Board found the market value of Tan’s property to be $300,000. The Board also allowed Tan to be reimbursed for reasonable expenses arising from the change of residence, resulting in a total compensation of $309,928.

The presence of comparable sale transactions appears to be the game changer in Tan’s case. In the absence of comparable transactions, valuers would likely have to rely on their professional judgement. Valuation is said to be both an art and a science. A seasoned valuer pointed out that even the bids submitted by developers in a residential land tender could differ from each other significantly.

2. What if you suffer financial losses?

It was not clear from the case whether Tan’s property was affected by any road line when she bought it. The Road Line Plan could change after Tan bought the property. What if Tan had paid, say, $500,000, as there was no road line affecting the property then? She would have suffered a loss of around $200,000.

The government had, in previous land acquisition cases, offered ex-gratia payment. This is a goodwill payment that takes into account the individual circumstances of property owners affected by land acquisition, disbursed at the discretion of the government.

The same could apply when a buyer purchases the property at the peak of the market, say, in 2013, and subsequently it is gazetted for land acquisition in 2017, when prices are soft. If the property owner incurs losses because the compensation is based on the 2017 market value, he would likely receive an ex-gratia payment.

In 2013, Pearl Centre owners received ex-gratia payments to mitigate the financial impact of the acquisition exercise, according to a statement by the Singapore Land Authority. The owners had asked for higher compensation earlier, owing to the possibility of an en bloc sale. The Land Acquisition Act, however, does not take into account such speculative factors in computing the statutory compensation.

3. When a small part of the property is acquired

A strip of land at Thomson 800 condominium was gazetted for land acquisition on Jan 19, 2011 for the construction of the North-South Expressway. The market value, based on a full residential use, was $11 million. However, the Authority awarded compensation of only $556,000. This was based on the land use as road and/or green buffer. Was this just?

The Management Corporation Strata Title Plan No. 2504, which represented the strata owners at Thomson 800, appealed and submitted a claim of $5.84 million. The appeal failed.

The appeal failed because the Board found that the acquired land had no unutilised gross floor area. In another world, all the allowable gross floor area has been utilised for in the condo development. So the small strip of land that was acquired had effectively zero plot ratio. The Authority had also stated that the acquired land was physically and legally incapable of residential or any development.

Interestingly, the Authority’s valuer derived the $556,000 market value by referring to a rental transaction of a playfield on Upper Thomson Road. The valuer found that the monthly rent of the playfield was $0.53 psm, which was 3% of the minimum rent of non-landed residential units contracted in January 2011. She then raised that 3% factor to 5%. The $556,000 value for the acquired land was 5% of $11 million. To recall, $11 million was the market value of the acquired land based on residential use.

It appears therefore that when a small strip of a property is acquired, it is crucial to determine whether there is unutilised gross floor area and whether that acquired land is capable of being developed on its own.

The Authority awarded compensation of $556,000 for a strip of land at Thomson 800 based on the land use as road and/or green buffer

4. Compensation for lessees

Imagine that you have leased a commercial unit for 15 years. At the end of the fifth year, the property is gazetted for compulsory acquisition. You will be entitled to compensation if you can prove that the annual rent you pay is lower than the market value. This is known as profit rent. The value of your interest can be derived by capitalising the profit rent that you would enjoy over the remaining lease term.

What if you had paid a lump sum upfront, instead of annual rent? For conventional properties, a valuer is likely to find comparable transactions and refer to them to value your interest over the remaining lease.

5. Land acquisition of country clubs

By now, we should be accustomed to the wide gap between the Authority’s compensation offer and the landowner’s claim. In December 2015, the Authority awarded compensation of $89.8 million for Jurong Country Club’s 67ha site. JCC is appealing for $168 million. The decision in this case could have an implication on the compensation for Raffles Country Club which was gazetted for land acquisition on Jan 4 to make way for the HSR and Cross Island Line's western depot.

The large difference in valuation could be attributed to many factors. Owing to a lack of comparable sale transactions, valuers may adopt the profit method to value a country club. To put it simply, this is the present value of future expected benefits.

However, each assumption in the profit method could create a point of contention. Let us assume that a country club’s average profit for the past three years is $5 million and it still has a remainder lease of 20 years as at the date of acquisition. In theory, the country club’s value, using the profit method, would be the present value of $5 million annually for the next 20 years.

The first point of contention would be the capitalisation rate adopted to derive that present value. A small difference in capitalisation rate could result in a significant difference in the present value. For example, if an 8% capitalisation rate is adopted, the present value of $5 million profit over the next 20 years would be $49 million. If a 9% capitalisation rate is adopted, the present value would be $46 million. The difference would also widen if the profit is, say, $10 million instead of $5 million.

Another point of contention would be the amount of profit adopted. In a recession, the country club might incur losses, but the value of the property is definitely positive. Conversely, the profit would be inflated in a good year.

Another valuation method for properties that lack comparable transactions would be the replacement cost method. The market value, to put it simply, would be the aggregate of the land value and the value of improvements. One problem with this method is deriving the value of the land, since such properties lack comparable sale transactions. Cost is also different from market value.

Valuers we spoke with commented that they preferred the profit method of valuation and would use the replacement method to counter-check. Valuers usually use one primary method to value such properties. They will use another method to check whether the value in the first method is not too way out.

On a final note, each land acquisition case is unique. Loh Kia Meng, partner at Dentons Rodyk & Davidson LLP, says things have improved dramatically since the early nation-building years of the 1970s to the 1990s.

“Since then, the Authority has adopted a more consultative approach towards affected landowners, and much longer lead time has been given to landowners so that they can have ample time to manage their affairs,” Loh notes. Landowners would certainly appreciate the increased consultative involvement offered by the Authority, he adds.

Give us your views. Email propertyeditor.sg@bizedge.com