By Timothy Quek
In a report published by Swiss bank Credit Suisse on 20 September, analysts Louis Chua and Nicholas Teh noted that the much touted Voluntary En Bloc Redevelopment Scheme (VERS) is not a panacea to the real and pertinent issue of “lease decay”.
Noting that one of the stated aims of the scheme is to spread out redevelopment, the report pointed out that flats with 10 years of lease remaining would theoretically be worth only half of flats with 30 years left.
Lease decay, not upgrading or an aesthetic make-over of HDB flats is the key factor behind the declining value of HDB flats.
All HDB flats are owned by the HDB and comes with a 99 year lease. When a buyer buys a flat from HDB or another lessee, he/she signs on a lease agreement to lease the flat from HDB.
Above: A sample of a HDB lease agreement (Source: Facebook)
From a legal perspective, once the lease runs to zero, the flat automatically reverts back to HDB, the lessor with no compensation offered to the lessee as what happened to the 191 leasehold terrace houses in Geylang which were acquired by the government recently.
When Singaporeans buy a HDB flat, they expect three things:
- The value of their flat will appreciate over time and never depreciate.
- They are able to sell their flats for a profit years later and use the money either to upgrade or to retire.
- They are able to pass their flats as a bequest to their children after they pass on.
This means that if I buy a four room BTO flat in Punggol for $400,000 now, I will expect to sell it for $500,000 or $600,000 in 10 to 20 years time. If I buy a resale five room HDB flat in Toa Payoh for $500,000 now, I must be able to sell it at $700,000 to $1 million many years later. If I do not sell the flat and pass it on to my children after I pass on, they are able to inherit something of substantial value.
Such a future scenario is neither realistic or feasible because by nature of the fact of the limited tenure of HDB flats, their value will start to depreciate from 40 or even 30 years onward.
There are reports of Singaporeans paying over a million dollars for an aging HDB flat in Bukit Merah and Marine Parade with only 50 years of lease left. Who will pay more than a million dollars for these flats in 10 years’ time knowing that its tenure is getting shorter and shorter?
As a housing agent, I can say first hand that it is very difficult to sell HDB flats which are more than 40 years ago. In the first place, these old decrepit flats built 40 years ago do not appeal to young Singaporeans below the age of 30. Those who are interested to buy such flats are usually in their mid 40s and 50s and they face severe restrictions in the use of CPF funds. I have a 52 year old client who is keen to buy a 3 room flat in Toa Payoh to live with his mother. However, he is unable to use his CPF funds and the banks will only offer him a 10 year loan. He has to fork out more than $100,000 in cash alone to purchase the flat which he didn’t eventually. Just check out the the property listings on property portals on aging flats in Toa Payoh, Ang Mo Kio, Bukit Merah, Queenstown and other matured estates and you will notice many of them have been there for months.
Passing your HDB flat to your children as a bequest is not only difficult, but not feasible as well. Your children may want to buy a new flat and they cannot own two HDB flats at the same time. Assuming they do want to stay in your flat, it will be left with less than 30 or 20 years of lease as well and after paying for the monthly mortgage, they will have to return the flat to HDB when the lease ends, assuming VERS is unsuccessful, leaving nothing for them or their children.
The proposed Home Improvement Programme (HIP) for all HDB flats at 60 years old may only serve to mitigate the steep depreciation in value – it still doesn’t change the fundamental fact that the flats are running down in their tenure just like no amount of Botox injection or fillers will make a 60 year old look like a 30 year old.
When you rent a flat, no matter how much money the landlord spend to spruce up the place to make it as comfortable as it is for you to live in, the flat still doesn’t belong to you and you have to return it to the landlord when the lease ends. It is the same with HDB flats – no amount of upgrading or home improvement can disguise the fact that you are only leasing the flats from HDB for a limited period of time.
VERS, as Prime Minister Lee Hsien Loong has pointed out will be much less attractive than SERS. The government is not going to pay a million dollars for each unit. Any compensation is likely to be of a token nature and those who paid exorbitant prices in the resale market will make a terrible loss. Imagine in just over 20 years time, we will have many flats built in the 1970s reaching the 70 year old mark. Where is the government going to get the money to pay for VERS for so many flats together at the same time when we will be facing much higher social and medical expenses from an aging population from now?
Then again, not all flats will go through VERS. What if you are unable to get a majority to support it? There will be some flat dwellers who bought the flats at low BTO prices and have little incentive to move. In the end, the flats will return to HDB when their lease end with the lessees getting not a single cent.
Neither HIP or VERS will offer much consolation to HDB flat dwellers, many of whom are expecting to get a windfall from the future sale of their flats. As the Credit Suisse report pointed out, it will likely take some time for Singaporeans to understand the “evolving narrative on the nature of HDB flats — from one where HDB flats are a good store of value and attractive investment class that will continue to appreciate, towards one where we are likely to see a steady diminution in value as we approach the end of the 99 year lease.”
While I applaud the government of rolling out these initiatives to assuage the angst of Singaporeans over the lease decay of their HDB flats, we need to start addressing the elephant in the room right now and start calling a spade a spade.
It is time Singaporeans be educated on the reality of the inherent values of HDB flats: that they will appreciate at most for the first ten to twenty years of their lease after which they will depreciate steadily and more so after forty years when there will be restrictions imposed on the use of CPF funds and it is more difficult to secure a bank loan.
The faster we wake up from our slumber and face the unsavory truth, the earlier we can start financial planning for our future and retirement, either by reformulating our strategy previously based on using our HDB flats as a “nest-egg”, switching to private properties which offer a better store of value over time or diversifying our portfolio to include more of stocks, unit trusts and bonds.
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About the Author
Timothy is a guest contributor to Singapore Property Update. He has been a property agent for the past ten years.