The National Day Rally (‘NDR’) has often been dubbed the year most important political message in Singapore’s calendar. Unsurprisingly, Heartland Boy had his ears peeled to the English version of the 2018 NDR that took place at ITE College Central on 19 August 2018. Afterall, he considers himself a mini current affairs geek. Topics spoken had a central theme of rising cost of living. One topic that many have a vested interest in, or at least 80% of the population that are living in HDB flats, is that of decaying HDB leases. It all started with a timely reminder from the Minister for National Development that once the leases of HDB flats run out, they will be returned to HDB at zero value. This came as a rude shock as most HDB owners were relying on their HDB flats to provide some form of retirement value. Therefore, if the can is kicked further down the road, it has the potential to become a political hot potato. To mitigate some murmurs already bubbling at the surface, Prime Minister Lee introduced a new scheme known as the Voluntary Early Redevelopment Scheme (‘VERS’). On the surface, VERS appears to be the panacea to the issue of zero-value HDB flats. However, void of significant details announced at the National Day Rally 2018, Heartland Boy thinks that vested stakeholders should not rejoice at the Voluntary Early Redevelopment Scheme, yet.
1. Eligibility Criteria Still Vague
To even bestow home-owners with the opportunity to collectively decide on the fate of their ageing HDB flats, their HDB block must first be selected. However, the selection decision is probably decided unilaterally by the HDB. Therefore, besides the fact that only HDB apartments that are more than 70 years old will be eligible, little or no other information on the selection criteria was released at the National Day Rally 2018. Even if the decision process is unilateral, Heartland Boy cannot imagine the government of the day risking its political capital to deny any HDB precinct that has crossed the 70-year old mark a shot at VERS.
2. Threshold To Secure Approval Unknown
No information was also given on the required threshold to secure approval. While we might not know today, we can still hazard a guess by drawing reference from the Collective Sale Land Titles (Strata) Act:
- If the development is less than 10 years old, owners holding at least 90% of the share value must consent
- If the development is more than 10 years old, owners holding at least 80% of the share value must consent
Going by this guideline, it is possible that owners holding at least 80% of the share value must vote to agree to the Voluntary Early Redevelopment Scheme. However, given that these flats are at least 70 years old, Heartland Boy speculates that a lower threshold of 75% or 70% could possibly be set.
Even if a lower threshold is indeed set, Heartland Boy cautions all home-owners not to underestimate the power of emotions. Going by current demographic trends, majority of the owners could well be in their 70s or 80s when the day eventually arrive for a block of residents to vote on VERS. As illogical as it sounds, not everyone makes decisions driven by the nuts and bolts of wealth accumulation. There could be a million reasons NOT to sell a home:
- Emotions attached to the community forged over several decades eventually giving rise to a preference to age in place in a familiar environment
- Too troublesome to be shifting to a new environment at such an old age
- Unwilling to downgrade to a smaller apartment unit (since HDB sizes are bigger in the past)
- No family member to bequest any inheritance to (given trend of declining family formations and falling birth rates)
- Not motivated to bequest asset to future generations (shift in cultural mindsets etc)
Therefore, all vested stakeholders should not discount the irrationality of emotion as a factor in the decision-making process. That is why Heartland Boy read with horror about how some homeowners are postponing the sale of their ageing HDB flats in lieu of VERS. This group of people are already living with the assumption that a successful VERS outcome is a certainty when it is clearly not the case.
3. Compensation Of VERS Less Than SERS
The government was quick to manage expectations that the compensation for VERS will not be as lucrative as SERS. This is understandable as HDB flats eligible for VERS would only have a maximum remaining lease tenure of 29 years. On the contrary, some flats selected for Selective En Bloc Redevelopment Scheme (‘SERS’) still have a healthy average leasehold of 50 years remaining.
Furthermore, from a real estate perspective, flats selected for SERS has higher redevelopment value than flats selected for VERS since the latter have been overlooked during the SERS selection process.
This begs the question of how much compensation would be received by homeowners from a successful VERS exercise. If compensation is pegged to market value, how would homeowners be able to afford flats with longer or even fresh 99-year leases such as BTO? This calls for either a downgrade in flat size or location or both. Expectations have to be massively managed either way.
4. CPF Financing Issue Not Addressed
Part of the reason why the value of HDB flats is likely to fall with decreasing leasehold tenure is due to the lack of financing.
Basically, once a property has less than 60 years lease remaining, constraints on the use of CPF Ordinary Account (‘OA’) starts to kick in. When lesser funds from the CPF OA can be tapped, it means a larger proportion has to be paid in cash. This immediately narrows the pool of buyers. Simple economics would reveal a fall in demand leads to a fall in price.
This further compounds the issue raised in Point 3. If the compensation of VERS is indeed pegged to market value, the amount could be “insufficient” in the eyes of the HDB apartment owners as the market value had already adjusted to the fact that there is a limited pool of buyers.
Voluntary Early Redevelopment Scheme
All things considered, even with little information provided on VERS, Heartland Boy would say that things have improved. That is because there is now at least a “buyer of last resort”. As long as sufficient residents vote “Yes”, the government is obliged to purchase it back if the precinct is selected for Voluntary Early Redevelopment Scheme in the first place. The fact that so little details have been released also goes to show how difficult it will be to tackle this political hot potato for the 4G government.
Separately, given the current environment of monetary tightening, your monthly home mortgage may increase stealthily without your notice. Therefore, I think one of the best personal finance actions that you can probably take today is to review your mortgage today using the Smart Refi tool to secure a package before interest rates increase.