Monday, 28 May 2018

Beyond SERS - The Decaying Lease Issue

Singapore's 99-year lease HDB flats are a ticking time bomb, politically. 

But the bomb will not go off for another 50 years or so, when the first 7% of flats (about 70,000 flats if there are about 1 million flats) reached the end of their lease, if nothing is done, and the flat owners will have to surrender their flat with NO COMPENSATION.

Which would be political suicide.

Some "common sense" suggests that
"technically, the government should pay" to recover the land your flat is on. After all, even if your COE expires, when you scrap your vehicle, there is still some "compensation" for the scrap value. So shouldn't you get at least some scrap value for your home?



"Technically"? What "technically"? What scrap value does your flat have? Tearing down a building does result in debris, and if done with a view to recycling, the scrap salvagers could recover metal from window frames, gates, various fixtures, copper wiring, before demolition. But first the infrastructure will have to be demolished, and the debris will need to be carted off, and all that will cost. The salvage or recycling fees received is unlikely to be sufficient to cover the demolition and the debris removal fees.

Legally, the lease has expired and title reverts to the State. Legally, the state has no duty or obligation to compensate you for the land. 

One explanation from FB comments:
"Previously, the land and the house can have separate titles. So a house (or any building) on a land has a separate title from the land. This happened to my father's home. He owned the terrace house, but he rented the land from the landlord. So he paid land rent every month. My neighbours who owned neither land nor house, paid rent for house and land. Which was considerably more.

Subsequently the law was changed. The rationale being that the building on the land was not movable and so was an integral part of the land and that ended the separation of land and infrastructure.

So... at the end of the lease, the title of the land reverts to the State. Your flat being part of the land and immovable is integral to the land and so reverts to the state as well."
So yeah, that's the law, but that still means that the time bomb will still go off. For 70,000 owners of old flats, they will find themselves without a home which, depending on when they bought the flat and  whether they bought resale or direct from HDB, they would have paid between thousands and hundreds of thousands of dollars.

The solution? Again, from FB (I spend too much time on FB!)
The OBVIOUS answer (to almost everyone) is to systematically SERS all the old flats. As the lease is 99 years, if just 2% of flats are SERS each year, there is NO PROBLEM.
PROBLEM: SERS costs money. A lot of money. And the govt is already in deficit if the budget does not already include revenue from NIRC. If you do not know what that means, it means the govt is already dipping into our reserves. Well, the income from our reserves, and just half of it, but that still means that our reserves are not growing as fast as it could.
[Note: Recently, I found out that land acquisition under SERS may be funded through our reserves:
Past Reserves are used to fund land-related projects such as land reclamation and the creation of underground space2 like the Jurong Rock Cavern as well as land acquisition projects like Selective En-bloc Redevelopment Scheme (SERS)3 . This is a conversion of Past Reserves from one form (financial assets) to another (State land). The land and space that is created or acquired forms part of our State land holdings and is hence protected as Past Reserves. Further, when such land or space is subsequently sold, the proceeds accrue fully to Past Reserves. There is thus no drawdown of Past Reserves.
So technically, SERS is still possible, and we are not constrained by our budget and budget surplus. BUT, SERS is still an expensive undertaking and it may not make financial sense to draw down on our reserves. The PAP may say that they are doing so to safeguard or return the retirement savings of the flat owners. BUT, it can also be said that the PAP is using the Reserves to BUY the support of flat owners. It is interesting and noteworthy that the PAP actually thinks this is something to consider. If they were simply political animals, there is no question as to what they should do - raid the reserves to secure the support of voters.]
If nothing is done, then in about 60 years, the lease on the first 7% of HDB flats would run out and the govt will lose 7 percentage points of votes. In about 70 years, another 30 percentage points. And the PAP govt will be out. If they are still in govt up to 70 years from now.
Therein lies the answer or the reason why nothing may be done about this "problem" - it may not be the problem for PAP to solve! Would the PAP still be in power in 50 years? If there is another govt in 50 years, the govt of the day might well let the time bomb "explode" because they will catch no flak, or they can easily deflect the voters' anger. And they might not be in a position to solve the problem anyway.

And that may actually tell you something - the PAP may simply let another party take over in about 40 years time. And when this time bomb explodes, they can campaign on the promise that if they are returned to power, they will solve this problem. How?

This was the suggestion:
The other solution is to let pte developers En Bloc HDB estates. MND and HDB will need to come up with a plan and scheme. First, a precinct will be identified for Pte En Bloc Redevelopment. The blocks in the precinct should be at least 40 years old. Second, the residents will be surveyed if they want PER for their block and neighbourhood and what is the "reserve price". If more than X% (say 80%) is in favour, HDB/MND will call for a PER tender. Third, the tender will cover the purchase of the remaining lease of the current owners (to be paid to the owners), and a Lease top-up charge (to be paid to MND). Or MND/SLA can simply state upfront what is the lease top-up charge. So the pte developer can just bid on their best offer to the owners.
PER can be for a completely pte development (condo, etc), or it could be a DBSS. Maybe for a start, it should all be DBSS.
PER will also have fewer "benefits" than SERS. Other than compensation for acquisition of the flat with the remaining lease, there would be none of the other SERS benefits. Except maybe some priority for HDB BTO selection.
This was actually suggested by the MP for Fengshan, Cheryl Chan. She suggested that private developers be allowed to enbloc redevelop HDB blocks.

On consideration, this would mean allowing the private developer to unlock the value of older blocks for the residents, without costing the govt anything.

Great solution all around right?

Almost. If 7% of flats are more than 40 years old, and another 29% of flats ar 30 - 40 years old, then in about 50 - 60 years time, for all these flats to be PERS-ed, HDB would lose approximately 36% of its land bank.

In effect, this is a policy to mimimise HDB's role in housing. Or it would have that effect, intended or otherwise.

One possibility is to tweak the PERS plan.

In 40 years time, would home ownership still be desired?

Should we move away from home ownership as a social policy to rental housing to liberate the citizenry to be more entrepreneurial?

Maybe to encourage entrepreneurial spirit, we should if not actively discourage home ownership, promote schemes and development that would make rental more viable and affordable?

And what about retirement villages - a place for the elderly to spend their golden or silver years?

Can these two needs be met?

Could THAT be the solution?

Let a social enterprise comprising a charity and a developer (for expertise) get crowd funding and buy-in from the existing residents of a ageing precinct (say less than 30 years of lease left) to develop the precinct enbloc.

The development should include Studio Residential Units for the elderly residents/owners of the existing flats (those with less than 30 years of lease), Rental Studios that is open to the general public for application, Elders Living with Family Units which would larger units accommodating seniors and their family members, and Assisted Living Units for Seniors who require some assistance in Daily Living, but are otherwise semi-independent. These units could also be rented to adults with disabilities who also require some assistance with Daily Living. All these units and the facilities within the development will form an Integrated Retirement Village

The original owners who contribute their flats (with 30 years of lease remaining) will be eligible to stay in the new Integrated Retirement Village development as fully paid-up members. They will be considered to have exchanged their flats for full board at the new development which includes one meal a day.

Rental Studios would be available for the general public. The tenants rent will go towards the maintenance and day-to-day running of the Village.

Should an independent elderly subsequently require Assistance in Daily Living, their CPF Life should be sufficient to cover the necessary charges.

And should they require nursing home care, the Village will arrange for the elderly to move into a nursing home within the village, and rent out their unit. The rental will then be used to cover their Nursing Home stay.

[To be continued.]

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