New Lease Buyback Scheme: A Detailed Analysis

Before we start, here is the official HDB press release on the new Enhanced Lease Buyback Scheme. Please do note the Annexes attached on the page as it provides some information which we will base our analysis on below.

Quick and Crucial Facts:

• 1 to 4-room flats
• Income ceiling of $10,000
• Need only top-up to half of minimum sum for households with 2 owners
• $100,000 cap on maximum cash proceeds, excess must be topped up into Retirement Account(RA)
• Flexible Lease from 15 to 35 years depending on age of youngest owner.
• Starts from 1 April 2015.
• There is a LBS cash bonus scheme applicable based on the household’s total CPF topup.
• All owners must be at least be at CPF Draw-Down Age(currently 63 years old).Fulfilled MOP of 5 years.No 2nd property.At least 1 citizen owner.

Detailed Analysis:

Lease

The most crucial part of analysis here is the lease.Based on the examples given in Annex A, the standard example given here is a couple who are 65 years old and living in a flat with 65 years of remaining lease left.

Due to depreciation(which unfortunately HDB will not dwell into further explanation on how their valuations are exactly calculated), HDB will definitely value the tail-end 35 year of your lease less than the more upfront 30 year lease that you will retain. For the 4-room flat, the 35 year lease buyback is valued at $190,000 out of total flat valuation of $450,000, leaving your 30 year balance lease valued at $260,000. For the 3-room, it’s $148,000 for the buyback out of valuation of $350,000, leaving the 30 year balance lease valued at $202,000. As you can see, both figures were arrived with the 35 year lease buyback valued at approximately 42.2% of your valuation for a flat with 65 years lease left. This will have some implications in our further analysis below.

To many, this doesn’t sound too appealing. The buyback is valued at approximately 72%-73% of the balance lease, despite being 5 years less. Although depreciation is expected to take place with ageing of buildings and infrastructure, did we really see HDB flat prices becoming cheaper all these years as they become older? Many mature estates were built in the 1970s and 1980s, and the trend so far has been an upward one throughout the years, with inflation and rise in income more than offsetting a depreciating lease and building. Substantial government upgrading efforts such as the Main Upgrading Programme(MUP) and Home Improvement Programme(HIP) as well Estate Renewal Programme(ERP) has results in much rejuvenation of these older estates, and treasured among Singaporeans who dislike the concrete jungle feel of the non-mature estates. Although with the nature of leasehold properties we cannot expect this trend to last forever, it is indeed true that we expect nominal income to be much higher 30 years from now, and the nominal price will be higher too for the lease which was bought back. What is then comparable will be how well the CPF Life scheme will pay you back with the money you get now than holding it out forever.

And if this was not a complicated enough calculation, the government has added in a huge mixture of options by allowing leases from 15 to 35 years for the different age groups. One can only imagine how confused we will be and many owners might not be pleased with the figures that they will be quoted by HDB. There is also no formula revealed(although for the sake of our pioneer generation, this is far too complex, even for some of their children to help them plan properly). If you are intent on LBS, you should really quote the full range of options available to you before jumping on the irreversible ship. You also cannot put up this flat in resale market to sell if you need money urgently and you cannot sublet out the whole flat and living with your children anymore(which is very different from renting out a room financially).Imagine an elderly who needs their children to take care of in their children’s flat but the children can no longer help the elderly rent out the whole flat because it is already under LBS.

A bigger, more invisible consequence of all these Lease Buyback Scheme will be how buyers value the 99-year lease from now on, especially when comparing Built-To-Order(BTO) flats to Resale flats. The common perception on the ground has always been that Singapore will never chase you out of your flat, leave you homeless, or ask you to buy a new flat one day even when you already have one. I even hear of many agents saying “this old mature flat has SERS ENBLOC potential” about many old flats. Unfortunately, this has not been, and should probably not be as well on a grand scale, with the only recent exception being the lucky owners at Tanglin Halt. As how things stand now, with all these complicated LBS, your flat will dwindle down to 0 years lease and you will have to buy a new flat then. For example, a flat at Blk 84 Commonwealth Close has a lease starting from 1967. By 2015, the balance lease left is 51 years. A flat at Blk 302B Anchorvale Link has a lease starting from 2007. By 2015, the balance lease is 91 years. The difference is a whooping 40 years, or 40% of the entire lease duration. Yet the current market prices at these areas certainly do not suggest such a disparity, in fact rather similar prices psf. Just imagine the difference in LBS payout when the owners of these 2 flats take up the scheme. By taking a standard example of 30 year balance remaining for owner, HDB will only purchase a maximum of 21 year LBS from the Commonwealth owner, while the owner at Sengkang will be able to sell back 61 years lease back. Even after taking into account depreciation, I expect almost double the payout, assuming prices are fairly similar psf.

The above scenario paints a grim picture. Many Singaporeans love staying in mature estates. Many of these flats are old. Despite best efforts to build more BTO flats in these areas, they are still quite a minority so far. If you want a BTO flat, you will have much better chances getting one in a non-mature estate. It seems like especially for older flat owners who are near the age to be eligible for the LBS, it’s likely a choice of either staying in their old flat and enjoy the convenience of living in a mature estate, or move to a new flat, and enjoy a bigger payout in the future due to a bigger LBS payout(hopefully living long enough to receive many many payouts!) but sacrificing what they loved about mature estates. Trust me, it is a BIG deal to the elderly. This also explains why BTO flats in mature estate, which is a rarity, are so sought after and even the resale prices are really astronomical even in downtimes like now. Living in a mature flat in Ang Mo Kio, I do hope that the government can be more reassuring for all of us living in older flats as the idea of using formulas and calculations for everything, while being effective and efficient, really hurts the idea of home ownership and passing down from one generation to another. It is almost heartbreaking knowing that your grandchildren will never really fully grow up in your old flat as the lease would have expired for some by then! Personally I wish there is some form of lease extension(maybe a LEASE SELLBACK?)I am sure many Singaporeans would lovely do so as well.

N.B. Please just take note that despite saying all the above, from a pure investment point of view a 3-room flat in mature estate is still WELL WORTH the money. a $350,000 flat with 65 year lease remaining can be entirely sublet out after 5 years. With an average rental of $1,800, you can recoup at least $20,000 a year!Discounting inflation the nominal payback period is 17.5 years, which is much much less than whatever lease you have in balance. So please do not be alarmed. Furthermore, having personally experienced living in both mature and non-mature estates, I would vouch that it’s definitely worth the money for all the convenience and great hawker food! For estates like Ang Mo Kio, I simply cannot envisage an entire estate being old, redundant, and depreciating in value when the government is busy adding the multi-billion dollars Thomson-East Coast Line(TEL),Cross-Island Line(CRL) and the North-South Expressway(NSE). A good location will always be a good location, and all transport nodes will always choose to go through here without a doubt. So please do not hit the panic button, sit down, relax, and think again.

On a sidetrack, all these LBS have also led to an interesting point about BTO flats, especially 99-year 2-room flats vs 30-year studio apartments. Let’s take a look at this example. The studio apartment has a typical price of $110,000 for the 47 sq metre unit, which is close to the size of a 2-room flat. There are already some fixtures and furniture provided in the unit. The location is also prime beside Admiralty MRT. It has a lease of 30 years. It is not eligible for any LBS. Your resale levy for your previous subsidised flat can be offset for this purchase of studio apartment. You cannot resale your flat and you cannot sublet your entire flat after MOP.

Here’s the example for 99-year lease 2-room flat.The typical price is $110,000 as well. The floor area is the same too. However there is an optional component scheme(OCS) if you want some of the renovation and fixtures to be done prior to moving in. This will cost $3,000. The location is not as good, some distance away from Marsiling MRT. You will have to pay a resale levy. This 2-room flat will eventually be eligible for lease buyback, which even at a low valuation of let’s say $180,000, can still confidently fetch you at least $50,000 back in LBS after you have completed MOP and discounted resale levy. The same can be said for BTO flats of other sizes.

Of course we all know the intangible disadvantages of BTO flats. You can’t choose your neighbours, you lose touch with old friends, you have to adapt to new surroundings, new renovations, everything new. Old folks might not warm to this idea. This is where LBS stands out.

Cash & CPF Retirement Account(RA)

A huge change here is that as long as you have at least 2 owners in the flat, you only need to top-up till half the age adjusted prevailing Minimum Sum(MS). This is A LOT OF CASH DIFFERENCE. As you can see from the examples, the owners both have very little left in their RA to begin with, with not much to expect from the CPF LIFE payout.

Since 2 halves of 2 owners’ MS is more than $100,000, I can see most owners being able to cash out a maximum of $100,000, although personally I have not verified if the Silver Housing Bonus (SHB),which comes with a maximum of $20,000 cash bonus when you move into a smaller flat, is part of this limit or not.

It is then up to the prudence of the owners as well as their children to advise them wisely how to deal with this sum of money, although I do have a bad feeling that many may loan to their children so that they can afford to buy their own flat to start a family.(The above is my own wild guess).