A report by Credit Suisse released on September 19 said that private apartments are a better store of value than HDB flats. The report pointed out that an established collective sale process for owners of private apartments accentuates the difference as to why these are better store of value to HDB flats.
“We believe it will likely take some time for residents 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, following which the flats will revert to the government,” said Credit Suisse research analysts Louis Chua and Nicholas Teh.
The Credit Suisse report pointed out the gaps in the government’s assertion that Housing and Development Board (HDB) flat is a “good store of asset value” and the uncertainty over Voluntary Early Redevelopment Scheme (VERS).
Prime Minister Lee Hsien Loong in his 2018 National Day Rally Speech introduced the VERS. He said, “it makes sense for the Government to take back flats progressively over several decades, starting from about 70 years onwards, and stage out the redevelopment. We will need a new scheme for this. Of course, we will compensate the residents whose flats are taken back early. We will also help them get another flat to live in, just like we would if their leases had run out. But the terms will be less generous than SERS, because there will less financial upside. There is social merit in it. There is community merit in it but there is not so much financial upside.”
Chua and Teh said that the introduction of VERS was a good starting point in giving homeowners “partial autonomy in addressing the lease decay”. It added: “Rather than a panacea however, we believe the announcement… will bring about a paradigm shift in our understanding of the nature of HDB flats, where lease decay is a real and pertinent issue.”
The report further noted that “critical details” of VERS, particularly relating to compensation, were missing at the introduction of the scheme and said that a a key concern was that VERS is “not applicable” to the entire existing HDB stock of about 1 million units today.
HDB townships will be redeveloped “over 20 to 30 years, rather than within four to five years, progressively” under VERS. Noting this, the report pointed out that flats with 10 years of lease remaining would theoretically be worth only half of flats with 30 years left.
A report published in the Straits Times in April 2017, pointed out that a 43-year-old five-room resale flat in a mature estate with 56 years left on the lease and bought at a price of $860,000, may only be worth less than $100,000 at the 10-year mark before the lease expired.
Chua and Teh said: “As the nature of the 99-year HDB lease is increasingly better understood, we believe potential resale flat buyers would likely demand a greater discount to prevailing market prices, given the heightened risk of the flats having zero residual value at the end of its lease life,”
Pointing out that there was already a trend in more people moving to private apartments from HDB as they realise that private homes are better store of value for the future, the report said that the proportion of residents living in HDB flats will continue to decline.
According to the report, the the proportion of residents living in HDB flats has fallen from 88 per cent of households in 2000 to 79 per cent last year. It attributed the trend to a “steady private residential supply” introduced by the government, as well as “rising affluence and household incomes”.
Chua and Teh said that people who move from HDB flats to private apartments know the distinct difference of the move, in that there is an established collective sale process for owners of private properties. The collective sale process allows owners of private apartments to sell their property to developers for land redevelopment purposes. This allows owners of private apartments to retain greater value as their leases depreciate as compared to HDB flats, the report said.
Considering the distinct advantage private property owners have over public housing leaseholders, the report suggested that the price gap between HDB flats and private apartments will widen over time.
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