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Property BT: Chasing Restriction-lite HDB Resale Flats in Popular Locations

This article is a transcript from an podcast that premiered on The Business Times interviewing our Chief Research Officer Nicholas Mak. The transcript has been edited for readability on this web platform.

Are tighter restrictions on Plus and Prime flats excessively burdensome?

Welcome to Property BT, a podcast series by the Business Times. I'm senior correspondent Leslie Yee, and I'll be your host as we gather insights on all things Singapore property to help you in your property investment journey. Starting from the second-half of 2024, we will have standard Plus and Prime flats.

Plus flats are in choice locations and Prime flats the best locations. Plus flats enjoy more subsidies, and Prime flats, the most subsidies. The catch is, Plus and Prime flats come with tighter restrictions. There is claw back of sale proceeds when BTO buyers sell their homes. There's a longer minimum occupation period of 10 years. Also, a flat cannot be rented out whole.

Sale of the units in the resale market are restricted to buyers who meet the existing income ceiling to buy BTO units. Moreover, permanent resident households cannot buy resale Plus or Prime flats.

The new standard Plus and Prime model for BTO units aims to keep housing affordable, including in choice locations and to reduce the lottery effect of some BTO buyers making windfall gains.

But if you are clever, why not just buy an existing HDB resale unit in a good location that does not come with restrictions applying to plus and prime units?

Today I dive into the topic of restriction-lite HDB resale flats in popular locations with a veteran in the property field, Nicholas Mark.

Nicholas is Chief Research Officer of Nicholas, thanks for joining us.

It's my pleasure to be here.

Has there been more interest in large HDB resale flats in central locations and mature estates because of the introduction of the new HDB Standard, Plus and Prime models?

Based on our research, in the eight months leading up to the announcement of this new classification by the Prime Minister at the National Day Rally, we compared the proportions of large flats in prime locations versus what happened in the last three months, and found that there's actually only a very slight take up in the number of flats, especially big flats in the central location.

For example, prior to the announcement, about 9.1% of all transacted flats are for big flats in central regions and after the announcement that proportion only rise to 9.46%. So it's just a 0.3% increase. The increase is slightly more significant for smaller flats in the central regions, but in the other regions, what we call outside central regions (OCR), there's been a slight fall in preference for larger flats by about 0.8%. So the changes are not really that significant yet.

Interesting observations, Nicholas. I think in Singapore we do complain a lot about many things, including about why homes are so expensive. We probably complain too much. We have world class public housing in Singapore, HDB homes are well built and well designed. Many HDB towns are well served by public transport and many amenities.

People desire to live in HDB homes, hence there's a vibrant resale market. In the resale market, some bars pay top dollar to get a spacious home in central and well established locations. Their HDB homes that sell for princely sums of close to 1.5 million Singapore dollars.

What is the profile of the buyers who pay top dollar in the HDB resale market?

The profile of buyers who are willing to pay top dollars for HDB resale flats can vary quite widely. They can be young families who are buying their first home and some of them may not, because their income level is so high, they are not qualified to apply for BTO flats.

Others may need financial assistance from their parents, all the way to even senior citizen or retirees, who may have sold their private condominiums and then decide to downgrade to buy a HDB flat. But because they could sell their condominiums for a few million, they may keep half of it perhaps for their retirement and they are willing to pay more than $1,000,000 for a spacious HDB flat. There are also other groups, like for example new citizens, who have waited for a while as permanent residents and when they are issued their pink Singapore IC, they are now qualified to buy our public housing.

And to them, the quality of our public housing is practically as good as private housing in some other countries.

So we do have quite a wide range of buyers who are willing to pay top dollar in the HDB resale market. Home buying is a major decision for many households. It is a big ticket item. Buyers want a good home and also want to make money.

A good location helps, but within a choice location, should one choose existing resale flats with fewer restrictions or Plus and Prime flats with much tighter restrictions. I think it is tough. HDB has exciting plans for new homes in great locations, such as the Greater Southern Waterfront, but these homes could be classified as Plus or Prime and come with numerous restrictions.

What are the pros and cons of buying existing resale flats in sort after locations versus Plus and Prime flats?

Well, I'll start off with the advantages of buying resale flats in some of the prime locations and one of them is the shorter waiting time because the flats are already completed so the buyers can actually take possession of the flats and move in after all the legal paper works are settled.

Secondly is that you are basically buying what you see. What you see is what you get. So there are no hidden surprises. However, some of these existing flats in prime locations tend to be older. For example, in Queenstown, they can be even 30 to 50 years old. So the remaining lease is much shorter. Secondly, the older designs may not come with some of the amenities or perhaps the layout is a bit dated. On the flip side is that if you were to buy the new BTO flat, in some of these prime locations, of course you get a fresh 99 year lease. You will get a new building, new design with new amenities. However, they do come with a longer MOP (Minimum Occupation period), which is one of the bug bears of some of the potential buyers of such flats.

Another advantage of buying a brand new flat, be it a Plus or Prime HDB flat, is that the price is cheaper than buying a resale flat in the same locations because these flats are subsidised by the government. Although if the buyer decide to sell the flats subsequently down the road, they may have to pay part of the resale proceeds to the government as a subsidy claw back. But I think to some of the buyers that I've encountered, they don't mind the subsidy claw back. But what they're more concerned about is the longer MOP, which is stretched out to 10 years.

Thanks Nicholas for some very useful advice on how restriction like HDB resale homes stack up against Plus and Prime Flats. For many young couples getting their first BTO home is exciting.

Being a home owner suddenly makes one feel all grown up. But choosing what to buy can be stressful. Which set of parents should they stay near? Which partner's workplace? What about being near a popular primary school? Added to all this, bars should evaluate if going for BTO Plus or Prime Flats still makes sense.

Still to come, how mindful should one be of when these decay of HDB resale flats?

In property obsessed Singapore, many of us dream of being a landlord. Sit back, relax, and earn money from the tenant to finance one's lifestyle. What a dream.

With restriction-lite HDB resale flats in good locations, one may find it easy to rent out a whole unit for a good return. Perhaps one can retire in a neighbouring country where cost of living is lower while earning Singapore dollars from renting out one's HDB home. What are the returns make from renting out a whole flat? In a popular location, is it a big drawback if one cannot rent out the whole flat?

Well, Leslie, I'll start with your second question first. It depends on the requirements of the landlord, because some landlords may still want to live in their flats while renting out the spare rooms. Some of them could be retirees, empty nesters whose children have already married and moved out. So to them, renting out the entire flat is not an option, They may choose to rent out the rooms for additional income. However, in Singapore, because our HDB flats are cheaper than private condominiums, so the rental yield is actually higher than renting out a private condominiums.

The typical range of rental yield for private condominiums can be as low as 2% to about 4%. However, the gross yield for renting out a HDB flat can range from 5% to even as high as 7.5%, especially for three room flats. So the smaller flats can command higher rental yield than the larger flats, such as five room flats.

However, this high rental yield is anomalous because rentals in Singapore have actually increased significantly in the past two years. Take for example, last year alone, rental rates has increased by some 30%, which is one of the fastest rate of growth since 2006.

However, I expect rental rates to start cooling off this year. It may even decline by 10 to 15% in 2024. So this high rental yield that we've seen in the HDB rental market may not persist.

Some of the yields on HDB flats look very interesting indeed. But I suppose you're right to point out that maybe rents will come down and so those yields may not be as fat as what you have pointed out. HDB homes typically sit on 99 year leasehold land. This is no different from many private homes. However, with older private leasehold homes, en bloc sales can pave the way for new developments and provide an exit, possibly with a windfall for existing home owners. With older HDB homes, a small fraction gets selected to undergo the Selective En bloc Redevelopment Scheme (SERS) but what about many older HDB homes that are not chosen to undergo SERS?

Could a problem arise one day that the flat will be worth nothing when the land lease expires? The idea of the Voluntary En bloc Redevelopment Scheme (VERS) has been surfaced, though many details and VERS have yet to be unveiled. When should one worry over a HDB flat's remaining land lease running down?

Is the Voluntary En bloc Redevelopment Scheme going to give much relief to flat owners concern over land lease running down to zero?

I think many flat owners have not reached the stage where they have to worry about their lease running exceptionally low. But come the day when the flat owners could not sell their flats or the banks refused to finance the purchase of a flat because the remaining lease is to low. That's when we are going to see problems arising in the HDB resale market, but so far we have not reached that stage yet and I believe the government is trying to prevent the whole market approaching that particular stage.

Regarding the VRES, the Voluntary En bloc Redevelopment Scheme, I think that the government has not released a lot of details about it yet. At the moment we are all guessing in the dark. It is quite likely that the government will be mindful that the least of the flats should at least extend to the point where it will be at least a decade above the average lifespan of most Singaporeans. At the moment is about 83 years old for men and 85 years old for women.

As many estates built in the 1970s age, the issue of land lease decay, and whether VERS works well will loom larger in the years ahead.

Meanwhile, only a small proportion of HDB resale homes fetched the magical $1,000,000 or more, but the number of $1,000,000 HDB flat transactions is rising. Many estates have seen $1,000,000 deals. Still many people are being rational in paying big bucks for HDB resale homes. Top dollar HDB resale homes are way cheaper than private condominiums.

A new 1000 square foot condominium unit in the suburbs, roughly the size of an HDB 4 room flat, could cost over 2.2 million Singapore dollars. Indeed, as Singapore ages, expect many retirees to trade private homes for spacious HDB homes in popular locations, as you pointed out earlier. Is the rise in $1,000,000 HDB resale flat transactions inexorable? And does it make sense that many estates islandwide have $1,000,000 HDB resale flats?

Since the transactions of the 1st $1,000,000 HDB flats in 2012 ,and they are located at Bishan, we've seen that this number of $1,000,000 flats grown each year over the last decade or more. And one of the reasons is because of inflation, just general inflation. Things just get more expensive.

The price of our favorite hawker center food has also risen over the past decade. Another reason is household income. Our general household income has also increased so people can actually afford to pay more for choice locations HDB flats.

Another key reason is the increase in prices of private condominiums. You find that in many of the locations where there are a significant number of $1,000,000 HDB flats, the prices of private condominiums, especially 3 bedroom condo units, tend to cost more than $2,000,000. Some even as much as $2,500,000 to $3,000,000.

So for a household who needs a three bedroom apartment, they have a choice whether they pay $2,500,000 to $3,000,000 for a private condominium 3 bedroom unit.

Or to pay something that's half the price at 1 to $1.5 million for a HDB flat, and usually the size of the HDB flat is much larger than that of the private condominium by even as much as 20 to 30% larger. And another reason is that the HDB flats tend to be on higher floors. In our warm humid climate, if you are home is on the higher floor, you tend to enjoy cooler breeze and of course a nicer view.

Taken all this into considerations to some buyers, paying $1,000,000 for a well located HDB resale flats on a high floor with a nice view and more space tends to make sense.

I think you're right. You can get 3 bedrooms in the HDB 4 room flat with close to 1000 square feet in size. With some of the newer condominium units, 3 bedrooms are somehow packed into 800 square feet or so.

Maybe we'll soon be immune from going goo goo gaga over $1,000,000 HDB resale flat transactions. Still while existing restriction-lite HDB flats in good locations, especially unique ones such as Pinnacle at Duxton are attractive. Please exercise caution. Land lease running down for HDB resale homes is something to bear in mind.

Also, there can be bars in future who opt for resale Plus or Prime flat, because such homes are competitively priced. Remember too, the global economy is shaky. Also, buyers have greater choice in the BTO market, where more homes are being built, including in good locations. Keep cool when chasing after your restriction-lite HDB resale home, be disciplined in any property purchase as tycoon Kwek Leng Beng advises in his recent biography.

Thank you to my guest, Nicholas Mak.

Thank you Leslie, for inviting me.

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