Sunday, August 27, 2017

Perils of owning ageing leasehold properties

By Cecilia Chow
The Edge Property
April 21, 2017

A week ago, Singapore permanent resident Ms Lew was just calculating the remaining lease on her 700 sq ft, three-room HDB flat in Marine Parade and wondering how much it could fetch in the resale market. “I’m just a couple of years from retirement,” she says. Lew’s flat, like the more than 7,000 in Marine Parade, was completed in 1975. According to HDB’s website, Marine Parade was the first housing estate to be built on reclaimed land. This means that the flats in Marine Parade have 57 years remaining on their 99-year leases.

Singaporean Ms Aw, who bought her 1,128 sq ft, five-room HDB flat in Marine Parade 17 years ago, says she now feels “a little unsettled”. Even though her flat is already fully paid for, the 56-year-old says, “My retirement is locked in this flat. If I want to make money from it, I will have to sell it and downgrade to a smaller BTO [built-to-order] flat so I won’t be saddled with a big home loan”.

The two HDB owners are representative of many others staying in ageing leasehold properties who became worried, following National Development Minister Lawrence Wong’s blog post on March 24. It was intended to caution buyers against paying high prices for older HDB flats on the assumption that their flats would automatically be eligible for the Selective En-bloc Redevelopment Scheme (SERS).

Wong wrote, “In fact, for the vast majority of HDB flats, the leases will eventually run out, and the flats will be returned to HDB, which will in turn have to surrender the land to the State.” He added, “As the leases run down, especially towards the tail-end, the flat prices will come down correspondingly.”

Wong subsequently tempered his point with an April 12 Facebook post that said, “Leasehold properties are still a good store of asset value, so long as you plan ahead and make prudent housing decisions.”

Rising uncertainty

Nevertheless, homeowners like Lew have started mulling over their options — whether to keep or sell their flat before the lease runs lower. “It’s unpleasant to have this uncertainty,” she says. “I’m not holding on to the hope for SERS, but I thought I could keep my flat until I’m 70. Now, I’ve to recalibrate and figure out the best time to sell and have enough cash for the next 20 years of my life.”

The main solution for owners of ageing leasehold private properties is a collective sale, but the success rate is not high.

According to Tan Hong Boon, JLL regional director of capital markets, over the past three years, five out of 25 collective sale sites put up for tender were successfully sold, which translates into a success rate of 20%.

Tan says, however, that the outlook for the collective sale market is decidedly brighter this year, with the success rate likely to be higher than 20%. “Those who didn’t succeed the first time around will attempt a second or a third time.”

While owners of units in privatised Housing and Urban Development Corp (HUDC) estates and private condos can decide whether they want to embark on a collective sale, HDB flat owners do not have that option. “This is unlike SERS, where the decision lies entirely with HDB,” says Tan. “As an HDB dweller, you have no say in initiating a SERS.”

Who owns your flat?

There is a fundamental difference between public housing and private, and that is in the ownership title. Nicholas Mak, SLP International executive director and head of research and consultancy, says: “In public housing, the relationship between HDB and the dweller is as lessor-lessee. It’s not like a private condominium, where upon completion — Temporary Occupation Permit and Certificate of Statutory Completion — the developer will transfer the strata titles over to the individual buyers.”

For public housing, the property title remains with HDB, says Mak. A group of HDB dwellers in three housing blocks discovered that the hard way when they banded together to attempt a collective sale on their own during the collective sale fever some 20 years ago. “That was when they woke up to the reality that they didn’t actually own the land,” he recounts. “As HDB dwellers, they own just the right to use that box in the sky.”

This is unlike HUDC estates, which have been privatised, explains Mak. “Once an HUDC estate is privatised, it is similar to the 99-year leasehold private condos, as the owners will get their strata title.”

There are 18 HUDC estates, with a total of 7,731 units. These HUDC flats, which come with a 99-year lease, were built in the 1970s and 1980s for the sandwiched class of that era — people who did not qualify for HDB flats but could not make that leap into private housing. HUDC estates are the predeces- sors of executive condos. When ECs were introduced in 1995, the government moved to privatise the HUDC estates.

Braddell Heights, the largest of all the HUDC estates, has 918 flats and two shops. It was the last of the HUDCs to be privatised, and that was in March this year.

“HUDC unit owners are among the first to feel what it’s like living in a private estate where the lease is running low,” says Mak.

Collective sales take off

Many HUDC estates therefore opted for the collective sale route as soon as the privatisation exercise was completed. From 2006 to end-2016, there were seven successful collective sales: Amberville, Minton Rise, Waterfront View, Gillman Heights, Farrer Court, Shunfu Ville and Raintree Gardens.

The latest is Rio Casa, a privatised HUDC estate with 286 apartments and maisonette units that was put up for collective sale through a tender process on April 10, with Knight Frank as the marketing agent.

Rio Casa is located on Hougang Avenue 7 and has a site area of 396,231 sq ft, with a plot ratio of 2.8 and maximum permissible gross floor area (GFA) of more than 1.1 million sq ft. Ian Loh, Knight Frank executive director and head of investment and capital markets, says the site can be redeveloped into a private condo of about 1,000 units.

According to Loh, the sales committee had secured the requisite 80% consensus among the home owners for the collective sale to take place. “It is quite a feat,” he says. The owners of Rio Casa are expecting about $450.8 million, or $586 psf per plot ratio (ppr). The price tag excludes a differential premium of $141.5 million for intensification of the site based on the maximum permissible GFA and lease top-up premium of $57.5 million for a fresh 99-year lease. Rio Casa has 73 years remaining on its 99-year lease.

Eunosville, a 330-unit privatised HUDC, was put up for sale by tender on April 12, with as the marketing agent. The asking price for the site is between $643 million and $653 million, or $780 to $790 psf ppr. Developed in the late 1980s, it has a balance lease of about 70 years.

The site has a land area of 376,713 sq ft and a gross plot ratio of 2.8. It can be redeveloped into a 1,035-unit private condo, assuming an average unit size of 969 sq ft. The tender closes on May 31.

This is Eunosville’s second collective sale attempt. The first time was in 2013, with JLL as the marketing agent.

High differential premiums

JLL’s Tan advises owners of private residential projects on leasehold sites to be aware that, as the lease gets shorter, the differential premium that developers have to pay gets higher. “This will eat into their sale price,” he says.

For Rio Casa, if the differential premiums were included, the total land cost would amount to $649.8 million, according to SLP Research (see chart). SLP’s Mak points out that the differential premiums account for about 30% of the total land cost for some of these HUDC estates.

Mak attributes this to the Differential Premium system adopted by the Singapore Land Authority (SLA), which values a fresh 99-year leasehold property at 96% of a freehold property. When the remaining lease is 60 years, the differential premium is pegged at 80% of the freehold value. Even when the remaining lease is 30 years, the value is 60% of that of freehold property. The differential premium for topping up the lease is therefore steep, says Mak.

Besides the lease running low, another concern for owners of leasehold condos that are now 30 to 40 years old is that capital costs increase as the buildings age. “The building themselves don’t last 99 years,” Mak says. “The lifts may need to be replaced, the waterproofing or water tank may also need to be fixed, or the swimming pool regrouted.”

Possible solutions?

Mak believes there are two solutions for ageing leasehold properties. One is that SLA could allow homeowners to top up the lease if there is 100% consensus among them. “They can do this on a case-by-case basis,” he says.

In May 2011, it was reported that the owners of the 164-unit The Arcadia had failed in their attempt to get their lease topped up to a fresh 99 years without going through a collective sale. This was despite securing full consent among the owners, who were willing to foot the bill had permission been granted. SLA will allow a lease to be topped up only if there is intensification of land use, says Mak.

The other solution is that developers could choose not to top up the lease, and therefore not have to pay the differential premium. This will then bring down the total land cost, says Mak.

Most buyers want a fresh 99-year lease, however, as the main concern of buying leasehold properties is the financing restrictions that kick in when the lease is low. “Therein lies the conundrum,” says Mak.

Financing restrictions

According to OCBC, when it comes to financing of leasehold properties, the requirement is for the property to have a remaining lease of 30 years on the maturity of the loan. “The quantum of loan to be granted is dependent on the bank’s credit assessment, which includes assessment of debt servicing capacity,” says a spokesman in an email response.

Banks will generally provide financing for the purchase of a leasehold property if home buyers are able to tap their Central Provident Fund contribution. CPF has several ways to calculate this, says Eugene Huang, co-founder and director of Redbrick Mortgage Advisory.

The first formula is based on the sum of the age of the applicant and the remaining lease on the property. The total must be equal to or exceed 80 years, says Huang. For instance, if the buyer is 40 and the remaining lease on the property is also 40 years, the total is 80 years. This means that the buyer is eligible to use his CPF contribution for the purchase of the leasehold property.

If the buyer is only 30, however, and the remaining lease on the property is 40 years, the total equals 70 years. In this case, the buyer will not be eligible to use his CPF contribution towards the purchase of the leasehold property. “This implies that young people cannot use their CPF to buy old leasehold properties,” says Huang.

CPF also requires that a property have a remaining lease of at least 60 years. If the lease on a property is below 60 years, but more than 30 years, a valuation limit is set on the amount of CPF contribution that can go towards the payment of the property.

In this scenario, the numerator in the ratio will be the remaining lease on the property when the purchaser turns 55. Assuming the buyer is 40 today and the remaining lease on the property he wants to buy is also 40 years, when he turns 55, the remaining lease will be 25 years. The denominator will be the remaining lease today, which is 40 years. The ratio of 25 years/40 years is equivalent to 62.5%.

This means if the property purchase price is $1 million, the buyer can withdraw from his CPF up to a limit of 62.5% of the value, that is, $625,000, explains Huang. “And that percentage is the valuation limit.”

‘Limited target audience in resale’

As mortgage advisers, Huang and his colleagues naturally received a lot of calls over the past two weeks. “Some of the calls came from those sitting on old HDB flats, and others on old leasehold private condos,” he says.

Huang is not spooked by the National Development Minister’s blog post. He and his wife, Landy Lan, also a co-founder of Redbrick, purchased a 710 sq ft, two-bedroom unit at Chuan Park in Lorong Chuan.

The couple paid $850,000 for the condo unit in 2013, which Huang says, on hindsight, was at the peak of the market.

Chuan Park is a 452-unit, 99-year leasehold property completed in 1985, with a lease from 1980. Even though the property is already 32 years old, Huang is not too worried.

The main reason for the purchase was that he and his wife wanted to live near his parents, who reside in Yio Chu Kang. They also like the location because it is within driving distance of the CBD, and the MRT station is at their doorstep, he says.

“For private condos, the collective sale market is much bigger. So, the possibility that a developer will come in to buy the project en bloc for redevelopment is quite high,” says Huang. “The fact that the property is leasehold and old obviously means the target audience in the resale market is already limited, as they will face financing restrictions.”

‘A ticking time bomb’

According to the Department of Statistics, the home ownership rate among Singapore resident households is 90.9%. Today, 80% of Singapore residents live in HDB flats. Another 14.4% live in condos and apartments, with 5.2% in houses or landed property.

Assuming just half the people in private housing are holding on to 99-year leasehold properties, that implies that 90% of the resident population will be affected by a shortening lease at some point, says SLP’s Mak. “What is going to happen in the future when more of these 99-year leasehold developments age?” he asks. “It’s a bit of a ticking time bomb if the current situation continues.”

Owners of ageing 99-year leasehold condos and privatised HUDCs can still exit via a collective sale, though. “They can generally expect a premium of 30% to 60% over the existing value in a collective sale,” says JLL’s Tan.

Owners of ageing HDB flats need not worry too much, though, says mortgage adviser Huang. “You may not make money, but you will not be sitting on a property with zero value,” he says. “After all, 80% of Singaporeans’ wealth is tied up in their HDB flats.”

4 Ways to Make Sure Your Old HDB Flat is a Decent Retirement Asset

Joanne Poh
May 2, 2017

There’s been a lot of talk lately about how older HDB flats are an unwise purchasing decision.

Sure, the possibility of outliving your HDB flat is a good argument for an early death.

But whether you’ve already shelled out the cash for an old flat, or are living in an old flat your parents bought decades ago, there are still ways you can squeeze a bit more cash out of your home to boost your retirement, before the lease finally runs out, such as the following.

Rent out rooms in your flat

Since the resale value of your flat will fall on the tail end of its lease, if you intend to hold on to it in the long-term, the main way you can monetise it is by renting out the rooms or, if you have alternative accommodation arrangements, to rent out the entire flat while you live somewhere else.

If you don’t mind living with others, you can earn a considerable amount even if you continue to live in the flat. For instance, I have a friend who lives in one of those two-storey maisonettes in a central mature estate, and earns around $24,000 a year renting out the spare rooms.

Sell the flat in under 10 years

For now, the demand for older HDB flats in attractive mature estates remains high, thanks to young couples who are willing to pay a premium for a good location and a bigger flat.

So barring a property market crash, you might still be able to get a decent price on your flat—but only if you sell it before it can get much older, say in under 10 years. Flats between 20 and 40 years old tend to not to experience huge falls in price.

It is when the flat reaches the age of 65 that it experiences the sharpest decline in value—or at least, that’s what analysts have gleaned from past buyer behaviour. If you haven’t sold your flat by then, you’re probably better off living in it for the rest of its (or your) life.

So why would you want to shell out a huge downpayment on an old flat, only to sell it in 10 years’ time? Well, some couples might want to live in a more central location to save time and energy commuting when their kids are young and need to be ferried to/from school and childcare. Others may not want to wait years for a BTO and decide to go for a resale flat, so why not one in a better area?

Apply for the Silver Housing Scheme

Selling your flat and downgrading is one way to use your home to fund your retirement. This gets complicated when you’re living in an old flat, as you won’t be able to sell it for much towards the end of the lease.

The Silver Housing Scheme enables you to sell your flat and buy a smaller, cheaper one.

You will have to make sure the value of your existing flat hasn’t fallen to the point where the proceeds aren’t sufficient to buy you a new one. Some or all of what’s left of the sale proceeds will be paid into your CPF account. You will also receive a cash bonus of up to $20,000 depending on your income.

You must be aged above age 55, own a bigger HDB flat and have a monthly household income of under $12,000 to qualify.

Pray your flat will be selected for SERS

If your flat is selected for SERS, you’ve hit the jackpot. You get to trade in your aging flat for a brand new one with a 99-year lease, located not far from your previous home. You’ll also receive cash from the government.

However, the government has warned that not old HDB flats will qualify for SERS (Selective En bloc Redevelopment Scheme). Whether yours will qualify depends on a combination of luck and smarts in picking the right property. For instance, you want to pick a flat in a central location that’s likely to experience escalating land values. Flats that are in lower-density buildings also tend to be more likely to get selected for en bloc.

This is definitely not a strategy you want to bank your life savings on. But if you’re already in the situation where you’ve got an old flat on your hands, you might want to start believing in the power of prayer.

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