HDB resale flats to become less attractive, as buyers look for better store of value: Credit Suisse report

SINGAPORE — Stating that the proposed Voluntary Early Redevelopment Scheme (Vers) is “not a panacea” to the public housing lease decay issue, a Credit Suisse report released on Wednesday (Sept 19) expects the price gap to widen between Housing and Development Board (HDB) flats and private apartments over time.

Increasingly, those who can afford it will also turn to private homes as a better store of value. As a result, the proportion of residents living in HDB flats will continue to decline.

According to the report, the proportion 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”.

“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, who penned the report.

The report described the Vers announcement — which was made during this year’s National Day Rally — as a “good starting point”. This is because it recognises that the majority of HDB flats will not qualify for Selective En bloc Redevelopment Scheme (SERS),  and hence will be returned to the government by default, while giving homeowners “partial autonomy in addressing the lease decay”.

“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 said.

It noted the absence of “critical details” of the proposed scheme, particularly relating to compensation.

Still, a key concern was that Vers is “not applicable” to the entire existing HDB stock of about 1 million units today.

Noting that one of the stated aims of the scheme is to spread out redevelopment, the report pointed out that flats with 10 years of lease remaining would theoretically be worth only half of flats with 30 years left.

“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,” the report said.

In comparison, there is an established collective sale process for owners of private properties, through which developers can acquire the land for redevelopment purposes, subject to the consent of at least 80 per cent of owners in the estate.

The report argued that this means leasehold private residential properties would retain greater value as their leases depreciate, as compared to HDB flats.

SOME ANALYSTS DISAGREE

Property analysts TODAY spoke to, however, felt that the report’s predictions were premature.

Associate Professor Sing Tien Foo, who is the Director of the Institute of Real Estate Studies at the National University of Singapore, also pointed out that private properties and HDB flats have different objectives. Hence, it does not make sense to compare both types of properties, he said.

“It’s difficult to put them on the same level field to compare. Public housing is… meant to make housing affordable for the everyday man,” he added.

Assoc Prof Sing said the projections made in the report were based on the combined value of both the buildings and the land, and the assumption that this value will become zero when the lease expires.

However, he noted that the land still has a value, even if the value of the buildings sitting on it falls to zero upon lease expiry.

“Real estate is a unique asset, which consists of both building and land… unlike (a) car whose asset could depreciate to zero. Whereas for real estate, the land value could appreciate in value, if the redevelopment potential increases,” he said.

With the Government reviewing whether to relax financing regulations for older HDB flats, Suntec Real Estate Consultants director of research and consultancy Colin Tan added: “Financing restrictions on loans and use of Central Provident Fund savings have a crucial impact on prices because property is a very big ticket item… We must remember that the most important characteristic of property is location.

"So if financing are lifted, the first to benefit would be well located properties,” he added.