Wednesday, 18 July 2018

Lease Decay Issue - One Obvious Answer. One Easy Solution

If you have not heard about the Lease Decay issue, here is a brief summary.

HDB flats are on 99-year lease. That means that when you buy a HDB flat, you "own" the flat for 99 years. At the end of the lease, the land reverts to the state, and your flat has no value.

[Here is an excellent and clear explanation of what it means to own a freehold property, and own a leasehold property. HDB owners own a lease. That imbues the HDB flat owner with certain rights that a renter/lodger does not. But because it is a lease, there is a definite period to the end of the ownership.]

This is not a problem for the original buyers. Assuming they bought the new flat at age 25, by the time the lease runs out they would be about 124 years old.

Most likely dead.

The lease decay issue was highlighted because there were many couples buying old flats with short remainder of leases left.
"Short" however is subject to definition.

If you are 35 years old and you buy a flat with 55 years of lease left, you would be 90 when the lease runs out. You possibly might be dead by then.

Of course, there is a chance you might be 90 years old and find yourself evicted from your home of 55 years, just when you hope to die in your home.

What is the solution?

The Obvious Solution

Some buyers of old flats might have believed that the government would step in with the Selective En-bloc Redevelopment Scheme (SERS). That is, you buy an old flat, but the government will "rescue" you and your purchase before you run out of lease.

The govt has tried to disabuse the public of this hope.

SERS is, as the "S" in it says, "selective". It is no guarantee that EVERY flat will eventually be SERS-ed.

SERS seems like the obvious answer to this problem, but it is too expensive. To SERS every flat is to have a SERS programme for 10,000 to 20,000 flats every year.

Assuming the compensation for each flat is just $300k (for a 3 rm flat), 10,000 flats would costs $3 billion. And that's just for 3 rm flats which are the cheaper flats. Likely, the budget required would be closer to $5b, and that's just compensation for acquiring the flat. SERS has a lot more "goodies" for the owners, and correspondingly, more costs.

So SERS is the "obvious" answer, and it is the answer the public hopes for. It is the answer that would be GREAT for the public. But it is an unlikely answer because of the costs.

Sure, there will still be SERS, but it would still be selective, and the reasons for SERS will be for land use and planning considerations and not primarily to address the issue of lease decay.

The Easy Solution

But there is an easy solution.

Currently, the rules disallow AirBnB rental - or short term rental of residences. There are good reasons for that.

AirBnB tends to raise the prices of homes, because these homes now have commercial value.

At 10:03 of the video below, you'll hear about AirBnB making residential property unaffordable, and homes in SG are already quite unaffordable.

But AirBnB hosts can make in 257 days of rental, what they can make from renting to a long-term tenant for a year (from 12:32).

When the lease on your HDB flat is less than 20 years, the price of your flat has dropped, and it's appeal as a home is less. Few Singaporeans would buy your flat because of various constraints such as loan limits and use of CPF, and because the lease is only 20 years!

So allow flats (yes, even HDB flats) with less that 20 years of lease left to be allowed to be AirBnB-ed. This would raise the value of the flat because AirBnB distributed hotel wannabes will pay a premium for it. The value of the flat will be about 30% more because of the commercial value.

Owners stuck with the flats can either AirBnB their homes, or sell out and move to a new flat. AirBnB "tycoons" can buy up these decaying lease flats to start their "distributed hotel".


[Note: There will need to be changes to the rules. For example, HDB may have to change the rules to allow HDB flat owners to buy a second HDB flat if the second (or subsequent) flats have lease of less that 20 years. And with the understanding that these flats will be allowed for AirBnB. The Investors in these flats will then have 20 years or so to recoup their investment and make a profit. Then the lease expires and the flat reverts to HDB and the State.

This is NOT the only rule change. There will be more.]

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