A majority of Singaporeans live in public housing. According to the Census 2020, 78.7% of resident households live in HDB flats. Many of them also see their flat as more than a home. Some Singaporeans assume their flat will provide for their retirement.
The idea is that, when they get older and need less space, they can sell their flat (which would have appreciated in value), and buy a smaller one. Coupled with their CPF, it should see them through their twilight years. But is this really a safe assumption with all HDBs having just a 99-year lease?
The 99-year lease
Some would argue that HDB flats are not so much owned as they are rented. The reason is the 99-year lease on these units. During a Parliamentary session on 20 January 2014, then Minister of National Development Khaw Boon Wan confirmed that, at the end of their 99-year lease, HDB flats will revert back to the landowner (HDB). The land will then be turned over to the state. This means the value of a HDB flat at the end of the lease is zero.
To most Singaporeans, this is an abstract principle.
To date, no HDB development has reached the end of its 99-year lease. Instead, we’ve seen older flats being chosen for Selective En-Bloc Redevelopment Scheme (SERS).
Is SERS the answer to the time bomb?
SERS was launched in August 1995, and is — by official definition — a programme to rejuvenate aging housing estates. We note that neither HDB nor the Ministry of National Development has explicitly stated that SERS is meant to renew housing leases, although it has served that function in its implementation.
SERS provides residents with compensation based on a valuation of their flat, as well as rehousing benefits. These benefits vary according to each resident’s situation. Some of these include:
- Guaranteed availability of a flat, at a planned replacement site
- A subsidised price for the replacement flat, with S$30,000 grant
- Compensation equal to the market value of the resident’s flat
- Cover reasonable expenses to help with the moving
Before 2004, residents affected by SERS could choose new units only at a given replacement site. From 2004 onwards, residents could choose flats from other estates, without losing their rehousing benefits. As of 2011, residents affected by SERS also receive priority when applying for a new flat anywhere.
HDB often rolls out SERS when an estate is about 40 years into its 99-year lease. Since its inception in 1995, 77 SERS projects have been completed.
So there is no need to worry about the 99-year lease time bomb, right?
To be blunt, we would worry anyway. The two reasons are:
- No guarantee of SERS happening
- No guarantee of adequate compensation
No guarantee of SERS happening
The locations targeted for SERS are not disclosed until the final announcement, in order to prevent speculation. This means you cannot buy an old flat (one with 59 years or less on the lease) with any confidence that SERS will happen. The fact that it has happened for some HDB projects is not a guarantee that it will happen for all, and the government does not seem to have any obligation to use SERS.
In fact, the number of SERS projects has decreased over the past decade, with the last one announced in 2018. Then Minister of National Development Lawrence Wong has also said in 2017 that only 4% of HDB flats have been identified for SERS since its launch.
Singaporeans who buy old flats — 40 years or more into the lease — should be wary of assuming it provides for their retirement.
Say you are are 35 years old when you buy such a flat. By the time you retire at 65, there will only be 29 years lease left on the flat. Most of your CPF money would have gone into servicing the loan for this flat, but you would be lucky to make even half of what you’ve paid upon resale.
In our experience, few buyers are interested in sinking hundreds of thousands of dollars into a property that will only last another 30 years or so.
Even if there are interested buyers, the prospective pool is limited due to loan limitations. There are banks that will not give out loans for flats with less than 40 years left on the lease. In addition, the CPF withdrawal limit is pro-rated if the flat does not cover the youngest buyer up to age 95.
There’s the Lease Buyback Scheme that you can bank on to supplement your retirement, but it has its drawbacks as well.
So here’s our recommendation: do not fork out high prices for flats with expiring leases, even if the location seems great. If you insist on buying a flat with 30 or 40 years left on the lease, do not count on it to supplement your retirement. SERS may not come around to save you.
No guarantee of adequate compensation
HDB conducts a satisfaction survey for each SERS event, which is posted on their website. The latest survey, published in 2013, had an 87% approval rate. While this is not solely related to financial compensation, we can safely assume that being adequately compensated (i.e. at least being able to purchase a replacement flat) is reflected in this.
However, there is no guarantee that overall compensation will suffice. Even if market valuation is paid for the flat (and we assume it has not drastically declined at the time), it may not be sufficient to pay for a new property in the given market.
We assume that HDB will do everything in its power to mitigate this, such as through the subsidised prices for new flats. But for retirees who are thin on savings, a low valuation — or an inflated property market at the time — can eat into their already meagre funds.
What’s the way to go, then?
Ultimately, regardless of the property type, it falls to each property owner to be financially savvy, and to pick their property investments (or home purchases) with foresight. In the case of HDB flats, it’s best not to bank on SERS if you’re buying an old flat.
Would you buy an old HDB flat (eg. with less than 50 years of lease)? Let us know in the comments section below!
If you found this article helpful, 99.co recommends Leasehold property in Singapore: What happens when the 99-year lease runs out? and Flat owners: What you must do before your 99-year HDB lease runs down.
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