Tuesday, April 24, 2018

Singapore HDB 99 year lease expiry: Potential time bomb for home ownership?

Some homeowners are disgruntled with the fact that HDB flats only have a 99 year lease.
About 82 per cent of Singaporeans live in HDB flats. Many of them also see their flat as more than a home – some Singaporeans assume that their flat will provide for their retirement. The idea is that, when they get older and need less space, they can sell their flat (which would have appreciated in value), and buy a smaller one. Coupled with their CPF, it should see them through their twilight years. But is this really a safe assumption with all HDBs having just a 99 year lease?

The 99 year lease

Some would argue that HDB flats are not so much owned as they are rented. The reason is the 99 year lease on these units. During a Parliamentary session on 20th January 2014, then Minister of National Development Mr. Khaw Boon Wan confirmed that, at the end of their 99 year lease, HDB flats will revert back to the landowner (HDB). The land will then be turned over to the state. This means the value of a HDB flat at the end of the lease is zero.
To most Singaporeans, this is an abstract principle.

To date, no HDB development has reached the end of its 99 year lease. The government has always intervened before this happens, through the Selective En-Bloc Redevelopment Scheme (SERS.)

Is SERS the answer to the time bomb?

SERS was launched in August 1995, and is – by official definition – a programme to rejuvenate aging housing estates. We note that neither HDB nor the Ministry of National Development has explicitly stated SERS is meant to renew housing leases, although it has served that function in its implementation.

SERS provides residents with compensation based on a valuation of their flat, as well as rehousing benefits. These benefits vary according to each resident’s situation. Some of these include:
  • Guaranteed availability of a flat, at a planned “replacement site”
  • A subsidised price for the replacement flat, with discounts ranging between 20 percent and 40 percent
  • Compensation equal to the market value of the resident’s flat. To our knowledge, this has included Cash Over Valuation (COV)  
Before 2004, residents affected by SERS could choose new units only at a given “replacement site.” After 2004, residents could choose flats from other estates, without losing their rehousing benefits. As of 2011, residents affected by SERS also receive priority when applying for a new flat anywhere.

This is based on our observation of SERS at Rochor Central, Upper Boon Keng Road, and Strathmore Avenue. Around 39,000 flats in 79 locations have been reclaimed under SERS, since its inception in 1995.

HDB often rolls out SERS when an estate is about 40 years into its 99 year lease. As of 2014, about 300 HDB blocks (approx. 31,000 flats) across Singapore fall into this range.

So there is no need to worry about the 99 year lease time bomb right?

To be blunt, we would worry anyway. The two reasons are:
  • No guarantee of SERS happening
  • No guarantee of adequate compensation

No guarantee of SERS happening

The locations targeted for SERS are not disclosed until the final announcement, in order to prevent speculation. This means you cannot buy an old flat (one with 59 years or less on the lease) with any confidence that SERS will happen. The fact that it has often happened is not a guarantee that it will happen, and the government does not seem to have any obligation to use SERS.

Singaporeans who buy old flats – 40 years or more into the lease – should be wary of assuming it provides for their retirement.
Say you are 35 years old when you buy such a flat. By the time you retire at 65, there will only be 29 years lease left on the flat. Most of your CPF money would have gone into servicing the loan for this flat, but you would be lucky to make even half of what you’ve paid upon resale.

In our experience, few buyers are interested in sinking hundreds of thousands of dollars into a property that will only last another 30 years or so.

Even if there are interested buyers, the prospective pool is limited due to loan limitations – several banks will not give out loans for property with less than 60 years left on the lease, or will provide only minimal financing (e.g. Less than half the valuation.) In addition, note that Singaporeans cannot use their CPF to purchase a property if the lease has less than 30 years remaining.

How then can you sell the flat to supplement your retirement?
Your only hope will be SERS. But as we’ve pointed out, this is not a guarantee.

It is a clear lesson to buyers: do not fork out high prices for flats with expiring leases, even if the location seems great. If you insist on buying a flat with 30 or 40 years left on the lease, do not count on it to supplement your retirement. SERS may not come around to save you.

No guarantee of adequate compensation

HDB conducts a satisfaction survey for each SERS event, which is posted on their website. The latest survey, in 2013, shows an 87 percent approval rate. While this is not solely related to financial compensation, we can safely assume that being adequately compensated (i.e. At least able to purchase a replacement flat) is reflected in this.

However, there is no guarantee that overall compensation will suffice. Even if market valuation is paid for the flat (and we assume it has not drastically declined at the time), it may not be sufficient to pay for a new property in the given market.

We assume that HDB will do everything in its power to mitigate this, such as through the subsidised prices for new flats. But for retirees who are thin on savings, a low valuation – or an inflated property market at the time – can eat into their already meagre funds.

What can be done?

HDB and MND are often criticised for not having a clear compensation plan, for when leases expire. This is unfair. There has been a clear plan for when leases expire to date; SERS has helped so far, but it something that exists by the grace of the current government and should not be relied upon indefinitely.

It falls to each Singaporean to be financially savvy, and to pick their property investments (or home purchases) with foresight. It is clearly our culture of self-sufficiency, rather than our welfare policies, that form the underpinnings of our nation.

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