Lease Decay Solutions (HDB 99 year lease problem solved!)

The Lease Decay issue is the problem of HDB flat owners in flats built more than 40 years ago, and now face falling prices for their flats.

As the original lease on their flat is 99-years, after 40 years or more, there is less than 60 years of lease on the flat and with the short lease there are constraints on buyers to get mortgages and to use their CPF to pay for the flat.

First, at less than 35 years of lease left when banks are unwilling to extend loans to finance their purchase. That applies to flats that are at least 64 years old.
Second, at under 30 years' lease remaining when CPF money cannot be used for down payment or to service the monthly mortgage (flats that are 69 years old). And third, when leases go under 20 years (flats that are 79 years old).
"When leases drop to 20 years and below, the prospective buyers will not be able to get HDB loans, bank loans or use CPF for the purchase. Everything has to be paid in cash in one go," Mr Ku noted.
The amount of CPF money that can be used to finance the flat purchase is also lower for units with a remaining lease of at least 30 but under 60 years.

So that in a nutshell, is the lease decay issue. How does the government intend to solve it?

Here are some solutions. First, let's look at what the government has suggested (PM Lee at NDR 2018):

VERS+. We should first let the govt work out how VERS will work. But here’s the basic assumption: Compensation for flats under VERS will be at least market value of the flat. With minimal additional grants. With SERS, there is compensation, and there is a replacement flat, and there is a grant of up to $60k (from my last research. This may be outdated by now.)

So, the first question is, what is the market value of a HDB flat with 20 years of lease or less left? If you put it out on the market, who will buy it and at what price?

Economically, the answer is the present value of the rental income of the flat for the remainder of the lease.

Say you looking for a home. Cheap. You are even considering renting. A 3-rm flat costs $1500 in rent (at today’s prices). If you rent for 20 years, you would eventually pay $360,000. But that’s paid out over 20 years. The Present Value of those 20 years of $1500 a month in rent is worth… about $300k or even as low as $250k (depending on interest rates). So if you have $250k - $300k in cash, you might try to convince the owner of a lease decaying flat to sell and you won’t have to worry about rent for 20 years.

So that’s the market value. Or rather, that’s the Present Value of the rental income of the flat over the remaining lease of the flat.

Based on today’s prices. If you could sell your old flat, you might then be able to afford a NEW 3-rm flat… costing between $310k to $350k. So you would be short by $10 to 100k.

So, how about a Grant to help these flat owners get a flat?

Well, the SERS grant is about $60k. VERS grant should be lower. Say… no more than $30k?

Or the shortfall to get the new flat, whichever is lower. So you if got $290k in compensation, and the new flat costs $310k, you would get a $20k grant (the shortfall).

So the options for the Owners of Lease Decayed flats are:

1) VERS with compensation at “market value” of their flats. (Where “market value” is defined as the Present Value of the Rental income of the flat over the remainder of the lease.) At least they can unlock the value of their flat by selling the flat. Without VERS, they may not have the option to sell.

2) VERS with a Replacement New Flat. Flat owners may choose to secure a new flat with a new lease of 99 years if they still require a home. With this option, the govt will provide a top-up grant if the compensation is less than the price of a new flat, up to a cap (say $30k). Of course, the VERS beneficiary could choose to downgrade to a smaller flat with a lower price than their compensation, and free up some cash (for renovation, etc). It is also possible that other family members (the adult children) may choose to help the VERS beneficiary buy a large (or larger) flat. (With a view to selling the flat later for profit, or moving in to the bigger flat as an extended family.)

Problem solved?

Yeah. If that's the extent of the solution, it's not going to convince the govt. Because they will have a question.

What is the govt to do with all the VERS flats they just bought at "market value"? What is the value of these old flats to the govt?

If they are to sell the flats, to whom? There are no buyers on the open market for lease-decayed flats with 20 years of lease or less. If there were, there would not be a need for VERS.

With SERS the value of the flat (to the govt/HDB) was that the govt/HDB could redevelop the land earlier by decades. In this case, that advantage is lesser because if the govt just waited 20 years, they would have the land free and clear.

The "market value" computed for the purpose of VERS is based on the present value of rental income over the remainder of the lease. So... maybe HDB can rent out these flats? To whom? At market rates? At subsidised rates for low income families, perhaps?

If they demolish the flats to redevelop the site, they just paid "market value" for flats just to demolish them? That is wasteful of govt (and so, taxpayer's) money!

So that is actually the main flaw of VERS - it could simply be a bailout for owners of lease-decayed flats. It does not appear to be economically sound or fiscally sustainable or financially prudent. (Or is it "... nor financially sustainable nor fiscally prudent"?)

It would simply be political.

But there may be something in that "rent the VERS flat to low income families" or other disadvantaged target groups. We will come back to that later.

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The next solution was actually suggested by PAP MP Cheryl Chan (Fengshan) who said:

“As HDB flats are typically built precinct by precinct, so rather than selling new land plots for private property, allow the private developers to top up the land lease of HDB flats for future development,”

In other words,  (from a FB comment):

"... 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."

The main hurdle to SERS every lease decaying flat is... the cost to the govt. So... let private developers SERS or Private En-bloc Redevelopment Scheme (PERS) the end-of-lease flats.

That way the private developers will pay the govt to top up the lease, and compensate the owners of the old flats. The govt gets paid for the lease top up. The developer foots the bill, and the owners of the flat gets the market value (maybe more) of their flat.

Sound, sustainable and prudent!

Will there be blue skies for owners of older flats?

BUT... are we ok with selling off HDB land to private developers? Will that mean LESS land for public housing? Well according to this link:

"As at Dec 31 last year (2017), HDB manages a total of about one million flats. The vast majority of the flats have more than 60 years of lease remaining...
About 9 per cent of the flats (or 90,000) have leases that commenced more than 40 years ago, it added."

So 9% of the land could potentially become private developments... for 99 years!

Is losing 9% of HDB land too much? Well, since private developers are taking over HDB land, then land earmarked for private development, could be re-zoned (sufficient to meet the need) for Public Housing. This is the obvious solution.

[I am assuming most if not all owners of Lease-decayed flats will jump at the chance to get PERS, but... will private developers even offer that option to ALL such flat owners? Maybe they won't?]

Secondly, would HDB continue to be the dominant (and only) supplier of public housing? Are Singaporeans keen to continue to live in uniform, public housing? Or do they want to have more variety, with differing standards and price points? And would this adversely affect our egalitarian values or shared common experience? If this is even a thing.

Third, should public housing continue to be the predominant housing option for Singaporeans? And in what form? Would private developers be able to better meet the needs of the market?

And fourth, would private developer see this as a good return on their investment? How high would the prices have to be for them to get that "good returns"? And would that price their developments out of reach of most Singaporeans?

The answer to these questions are elusive - depending on how society, values, aspirations, and economic growth develops.

That is, assuming SG continues to grow economically, assuming Singaporeans would still value and want the things that we value and want today, assuming Singaporeans still care to buy their homes, assuming Singaporeans have the resources to buy their home, assuming HDB or developers can provide affordable housing for the masses... yeah. Lots of assumptions.

This also means that PERS need not be unconditional.

There may be several variations of PERS.

Basic PERS would be similar to Enbloc sales, where the developers buy out the existing owners, top up the lease to 99 years (paying the govt), and then develop private properties (condos) or perhaps something similar to the defunct DBSS flats. The developer's consideration will be purely commercial and there would be NO govt subsidy or concessions.

"Govt-aided PERS" (GAPERS?), would have some component of government support - either concession (for say the lease top-up), subsidy or grant (additional compensation to flat owners). This would be in consideration of the developer meeting some social or non-commercial objectives, like including housing for low income, or elderly.

Perhaps a purely commercial for-profit business would NOT be able to meet the social objectives. The developer would then need to partner some charity with experience and understanding of the social needs of some target group - it may be low income families, elderly, or disabled adults.

Perhaps to address the ageing society, the initial projects could be to build an integrated senior citizens village.

So a PERS with a social objective or social enterprise? Sounds idealistic. I am sure there will be lots of issues to resolve.

The scheme is complex and complex scheme can be fragile.

[And also potentially controversial. HUDC flats were privatised so as to allow the owners to consider enbloc sale. And now normal HDB flats with decayed lease are also allowed to?]

How about a simpler idea?

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In cities where AirBnB has "invaded", one of the effects or result was the rising cost of homes.

Why?

Studies have found that an AirBnB unit could make in 200+ days of short term (Air-BnB) rental the annual long term rental of the unit. (According to this YouTube video, just 257 days.)

In other words, if you have an apartment that you can rent out long term to a tenant for $1000 a month, you would make $12,000 in a year.

However, with AirBnB the same apartment could be rented for, say $50 a day, and in 240 days, you would make $12,000. This means in a year, if the unit is fully AirBnB rented, your rental income could be over $18,000. That's 50% more than what you would get renting to a long-term tenant.

This means that the apartment is worth more to you (as an AirBnB 'asset') than someone looking to find a place to stay (i.e. 'home'). Which means that you (as an aspiring "distributed virtual hotel" operator, are willing to offer a higher price for the apartment, and that leads to the rising cost of housing.

So why not take that "disadvantage' and leverage on it?

Here's the simple solution: allow HDB flats with 20 years (or less) of lease left to be AirBnB-ed.

Ah! But what if the old couple living there doesn't want the hassle of renting out their flat to tourists?

Then they can sell to anyone who wants to run an AirBnB "hotel". And the entrepreneur will pay them more than "market value" as computed from the present value of renting out the flat. (Because the value of the flat to him is more than the value in renting it out to ONE tenant long-term.)

The authorities will need to loosen some rules and restrictions. Like the "Minimum Occupancy Period" before one can rent out a HDB flat. Understand that the value of flats with less than 20 years of lease left is greater as an AirBnB unit, and allow these entrepreneurs buy out the owners, and turn these blocks into AirBnB "hotels".

(Much like how young couples would buy resale flats and finance the retirement of older couples in the mainstream resale market.)

The owners get a windfall from these entrepreneurs, these entrepreneurs get a return on their investment, and the govt gets the land back in 20 years time without having to fork out compensation to the old owners or facing a political crisis.

Win-win-win.

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These are just general themes or solutions and these can be tweaked. I have used the assumption that these schemes will be applicable only to flats with leases of 20 years or less. But what about flats with less than 60 years of lease left? There are already some constraints (loans and use of CPF) which makes such flats undesirable and which depresses their market value.

Should these options be phased in instead of waiting until there is 20 years o less on the lease?

For example, When there is 25 to 30 years of lease left, HDB/MND could list the precincts eligible for PERS and allow the private developers to approach the owners of flats in those precincts to propose PERS.

Or if a site with flats with leases of less than 50 years is particularly desirable to developers, they could be allowed to poll the owners as to whether they want an enbloc sale. However when the lease is more than 40 years, more than 90% of the owners must agree to PERS before it can proceed. The percentage voting for PERS can be lower for precincts and flats with shorter remaining lease.

VERS can be the scheme of last resort. And it should be because it will cost the govt probably billions.

Of the three options, allowing lease decayed flats to be AirBnB-ed is the simplest to implement. It simply takes some regulatory changes, and "investor-entrepreneurs" will finance the retirement of older flat owners.

Moreover if the precinct is approved for AirBnB when the lease is reduced to less than 20 years, the value of the flats will appreciate even when it is only 25 years from lease expiry as some investor-entrepreneurs may bid up the prices of these flats, hold on for a few years, and then AirBnB the flats when they are de-regulated.

The PERS option is the most complex but also offers the most in terms of customisation and incorporating social objectives.

Perhaps the PERS developer will be required to partner with a charity that has expertise and experience with ageing clients. They could be required to develop an integrated community with housing and services for the elderly and those with mobility issues. So a percentage of the housing will be for elderly, or disabled, and the rest are open to the public.

Or the developer is to include low income housing that will be sold to the Govt, who will in turn sell or rent the flats to low income families or elderly or even for housing the homeless.

All of these conditions will be negotiated in exchange for concessions to the developers.

[This post still subject to edits and amendments.]