Heartland Boy had previously explained that there are various reasons why young couples may choose a HDB resale flat over a HDB Build To Order (‘BTO’) flat. For instance, they may require a bigger space found only in the previous generation of HDB flats. For some young couples, they might place a premium on unique features such as an executive HDB flat or a HDB terraced flat which are both no longer available in newer generations of public houses. Unfortunately, the shorter leases attached to such HDB resale flats often do not cross their minds. As Lawrence Wong, Minister for National Development, commented in his blog post, “I was concerned by the suggestion that some buyers are forking out high prices for older flats in anticipation of the benefits of SERS.”
Heartland Boy agrees wholeheartedly. For those young couples who are eligible to buy a resale flat in Singapore, they often neglect the importance of the lease on their dream HDB resale flats. In this article, Heartland Boy would like to highlight why it is important to be aware of the lease on your dream HDB resale flat.
1. Owners Of Public Homes Have Less Control Over Their Leases
While a private apartment (condominium) and a public apartment (HDB) may both share a common 99-year lease period, the owners have varying degrees of control over the renewal of their leases.
To get started on this point, it is important to understand the concept of leasehold. For a HDB flat with a 99-year leasehold, this means that ownership of the asset will be returned to HDB and the State when the lease expires. At that point, the asset will depreciate to zero value. This is in contrast to freehold assets whereby the owners get to hold the assets in perpetuity.
For owners of public housing, whether they are Singapore Citizens or Singapore Permanent Residents, they cannot proactively initiate any collective sale to renew the lease of their properties. Instead, they can only hope that their public houses are selected for Selective En Bloc Redevelopment Scheme (SERS) by the government. Under this scenario, their public houses are taken away by the government. In return, home-owners are compensated for their losses based on prevailing market valuation and a guaranteed opportunity to select a new flat at another site. Unfortunately, owing to stringent selection criteria, only 4% of HDB flats have been selected for SERS since 1995. Therefore, young couples may find the value of their dream HDB resale flats depreciate to zero should them not be selected for SERS. This is probably why the Minister’s article has startled so many because, for the majority of the population, a HDB flat is their greatest store of wealth.
In contrast, owners of private property can proactively apply to top up the lease back to 99 years as long as Singapore Land Authority (‘SLA’) grants approval and the appraised premium has been paid. Approval is typically granted if it involves land-use intensification or urban renewal. This is the rationale why real estate developers are prepared to pay off homeowners of private property in an en-bloc sale.
The difference could not be starker since there is only one “buyer” (government) for public housing whereas there are more “buyers” (private developers) for private housing. Therefore, there is less control for home owners of public housing over the destiny of the leases.
2. Limited Pool of Buyers In The Future
While buyers of older HDB resale flats may argue that they are not necessarily chasing after the SERS jackpot, they might not realise that the pool of potential buyers shrink every day that their property ages.
For instance, prospective home-buyers are only allowed to use CPF savings to finance properties (both public and private) that have a minimum remaining lease of 30 years. As for properties with a remaining lease of between 30 to 60 years, the buyer’s age and the lease must total at least 80 years. As an illustration, only buyers aged above 45 years are able to buy a property that has a remaining lease of 35 years.
As CPF savings are commonly used to finance real estate purchases, those who cannot access them will simply look for alternative choices such as a property with at least 61 years of lease left. Therefore, as the remaining lease runs down, the pool of potential buyers will shrink gradually.
In addition, it will be difficult to secure bank loans from financial institutions. If you are unsure, you can use PropertyGuru’s Smart Refinancing tool to check for free.
3. You May Outlive The Lease On Your Dream HDB Resale Flat
Heartland Boy has come across peers who remarked, “I do not need to worry about the potential pool of buyers because I am never going to sell this dream home since I will be living here forever.”
In Heartland Boy’s opinion, that is always a very poor school of thought for a variety of reasons. That is because circumstances change all the time. You may find yourself having to sell that dream HDB resale flat owing to financial, marital reasons etc. Even then, as real estate is a very illiquid asset class, the exit options available warrant even greater thinking.
As Lawrence Wong recommended in the same article, “one possible guide is to buy a flat that covers you and your spouse to age 95.” Therefore, for a young couple who is buying a HDB resale flat that is older than them, there is a strong possibility that they will outlive the expiry of the lease on their dream HDB resale flat. That is really an unsavory situation to land yourself in, especially at a juncture of your life where you would not want to worry about getting a roof over your head.
Be Aware Of The Lease On Your Dream HDB Resale Flat
Having explained some of the pitfalls of a short lease, Heartland Boy hopes that future home buyers would sign the Option Agreement with heightened awareness of the leasehold concept. Do not let emotions dominate your decision making process, for it is certainly unrealistic to overpay for an ageing asset with the expectation to strike the SERS jackpot.
After you have purchased and renovated your flat, get a Home Contents insurance plan to complement your compulsory fire insurance plan. This ensures that you have complete coverage (structure, renovation, personal belongings) for your cherished home. Compare and purchase on Insurance Market.sg* to get the most comprehensive home insurance policy at the most competitive rate.
*Insurance Market.sg is an affiliate partner of Heartland Boy and he earns a small fee for every successful referral.
HDB introduced the Re-Offer Of Balance Flats in the second half of 2017. Read this article to find out how you may potentially benefit from it.