By Joe Wang
Singapore has the second highest home ownership in the world with more than 80 percent of the population living in HDB flats which are widely admired for their high quality and livability. For many Singaporeans, a HDB flat represents the single largest investment in their entire lives.
Given the high stakes involved, it is understandable that we should be extremely prudent and cautious in buying a HDB flat as it will have significant financial implications for our families many years down the road.
The negative publicity surrounding the “lease decay” of HDB flats have spooked many Singaporeans, but is it really all “gloom and doom”?
The 99 year lease tenure of HDB flats is nothing new. Being a small island nation, land is a valuable resource which needs to be recycled for the needs of the future generation. There is nothing inherently wrong in having a limited tenure – housing in China, Vietnam and Myanmar have only 70 years lease. What is more important is for buyers to understand the financial risks involved in buying a leasehold property and to buy the right one with good appreciation potential in order to mitigate them.
When buying a HDB flats, three important factors determine their potential for further price appreciation in the future:
- BTO versus Resale
- Length of lease remaining in resale flats
Location alone accounts for 80 per cent of the inherent value of a flat which doesn’t change with time. All over the world and not only in Singapore, properties located on the fringes of the Central Business District (CBD) usually command a premium and prices usually start to drop the further we move away from the CBD.
For the purpose of evaluating capital growth and rental yield, property strategists like to divide Singapore into three regions: Core Central Region (CCR), Rest of Central Region (RCR) and Outside Central Region (OCR).
The Core Central Region (CCR) consists of Districts 1, 2, 9, 10 and 11, stretching from Singapore’s Central Business District to Orchard Road, Cairnhill, Tanglin, River Valley, Newton and Bukit Timah.
The Pinnacle@Duxton (Photo by Darren Soh)
The Rest of Central Region consists of eight areas on the fringes of the CBD: Marine Parade, Toa Payoh, Bukit Merah, Kallang, Queenstown, Novena, Bishan and Geylang.
The Outside Central Region (OCR) includes all other parts of Singapore which are not part of the central region such as Ang Mo Kio, Yishun, Jurong, Clementi, Bedok and Pasir Ris.
As a rule of thumb, properties including HDB flats located in the CCR and OCR usually have better capital growth than those in the OCR.
Take for example the much touted Pinnacle@Duxton located in District 2. When it was launched in 2004, prices of four-room flats cost between $289,200 to $380,900 while five-room units were $345,100 to $439,400 then.
The prices of all the units have more than doubled since then:
Another popular HDB project launched in the same period is City View at Boon Keng, located in District 12. Prices of three room flats cost between $370,000 to $480,000 while four room units were $450,000 to $600,000. The prices command a premium over other BTO flats as it was built by a private developer under the “Design, Built and Sell” scheme (DBSS) which has since been suspended.
Recent transactions at City View@Boon Keng suggest that prices have nearly doubled:
In contrast, a few BTO projects launched around the same period at Sengkang did not enjoy such stellar capital growth. Five room BTO flats along Fernvale Road launched at between $240,000 and $350,000 are now selling at between $400,000 and $600,000:
Though prices of recently launched BTO flats are unlikely to enjoy such astronomical growth like in the past due to different market conditions, new flats in CCR and RCR are still value for money due to their unbeatable location and scarcity.
BTO versus Resale flats
If you qualify to buy a BTO flat, I would advise you to buy a BTO flat in a good location over a resale flat any time.
BTO flats are priced at a lower price compared to resale flats in the same area and remain the most financially prudent option. Owners are almost guaranteed a reasonable return if they sell their flat later because the flats are heavily subsidized by the government and are built with better facilities and designs.
In the latest BTO exercise for flats in Punggol, the median price for four room flats is $324,000 for BTO flats versus $445,000 for resale flats.
Buyers of BTO flats are also given generous grants from the government by up to $80,000 depending on household incomes.
More importantly, BTO flats come with a fresh 99 year lease which enable them to appreciate in value over a longer period of time.
Length of lease
If you are going to buy a resale flat after all, you should buy one with at least 80 years of lease left. Given the negative publicity surrounding the “lease decay” of HDB flats in recent days, it will be more difficult to sell HDB flats with less than 60 years lease.
Buying a resale HDB flat with a lease of 80 years or more allows you to live in it for up to ten years – enough time for its value to appreciate, before selling it for a healthy profit. Based on anecdotal evidence, prices of HDB flats tend to rise for the first twenty years upon completion and drop after the 40 year mark.
Let’s take a look at recent transactions of resale HDB flats at Ang Mo Kio Avenue 1 which comprises of old flats built in the 1970s and new flats just completed in the last decade:
For two similar sized three room HDB flats, one built in 1977 was sold for only $270,000 while a slightly smaller one built in 2012 was sold for $448,000.
The difference in prices is even greater for five room flats. One flat built in 1977 was sold for $640,000 in April 2018 while another one built in 2012 was sold for $925,000.
The buyer who bought the older flat is unlikely to see much capital growth in the next ten to twenty years while the newer flat can still see some appreciation in price due to its longer tenure.
Of course if you do not intend to sell the flat and want to live in it for life, the tenure doesn’t matter, but take note that you will be left with a depreciating liability in your golden years with your life and CPF savings stuck in it and the only way to generate income from the flat is to rent a room out or put the entire unit for rent and move in to live with your children.
Before buying a HDB flat, you should consider carefully your exit strategy: Do you intend to live in it for life or do you want to sell it after fulfilling the 5 year Minimal Occupancy Period and upgrade? If your aim is to sell eventually, you should buy a BTO flat in a CCR or RCR region. Avoid buying resale flats unless there are compelling reasons to do so.
Many Singaporeans have made a healthy profit from selling their HDB flats in the past as they bought their flats at a very low price during the early stage of Singapore’s economic growth. Singapore is now a developed economy and prices of resale HDB flats have remained stagnant after hitting a peak in 2013. With economic growth likely to be sluggish in the next decade or so, prices of HDB flats are likely to appreciate at a much lower rate, some more than the others. Therefore it is important to buy the right property at the right location and at the right price. Buying an investment grade asset will provide you with additional funds to climb up the social ladder while being burdened with a dud will drain your hard-earned monies and deplete your CPF savings.
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About the Author
Joe is a property enthusiast who bought his first property in Singapore at the age of 26 in 2005. From 2005 to 2015, he built a portfolio of 6 private properties in Singapore and has since sold three of them realizing a net profit of between 60 to 100 percent. He made his first million dollars in property investing at the age of 30 and has now amassed a property portfolio in Singapore, Australia and Malaysia worth more than $10 million dollars.
Joe is a conservative long-term property investor who believes in life-long learning and education in property investing. He does not claim to be a property expert or guru, but rather an adventurer who is in the middle of an exciting odyssey to achieve financial freedom from his property investments.
Email Joe at: firstname.lastname@example.org