VERS versus SERS

Tackling the issue of ageing HDB flats and depleting leases

Earlier this year, semi-retired, part-time university lecturer Mrs Irene Tay sold her HDB double-storey terraced house on Jalan Bahagia for $685,000. She and her husband had purchased the 840 sq ft, three-room house for $420,000 in 1997 when their son was enrolled in St Andrew’s Junior School in nearby Potong Pasir.

However, the HDB terraced house has a 99-year lease from 1972, which translates into a remaining lease of 53 years. Tay was concerned that if they did not sell the property, the pool of buyers would shrink further as the lease runs low.

The HDB terraced houses on Jalan Bahagia that once fetched close to $1 million are now priced around $700,000 (Picture: Albert Chua/The Edge Singapore)

This is because in 2013, the government made a few policy tweaks with regard to buying HDB flats with short leases. Buyers of HDB flats with less than 30 years on their remaining lease are not allowed to use their Central Provident Fund savings, said Ray Teo, PropNex Realty branch district director, at an EdgeProp homebuyers’ seminar on Aug 16. That applies to private residential property too.

Those buying HDB flats with a remaining lease of less than 60 years are subject to restrictions on their use of CPF. Teo calls it “the 80-year rule”, that is, the combined age of the homebuyer and the remaining lease on the property has to be at least 80 years. For instance, if a homebuyer is 40 years old, he will only be able to purchase an HDB flat with a remaining lease of at least 40 years.

CPF restrictions for ageing flats

The restrictions on CPF use for ageing HDB properties with less than 60 years on their leases “had a significant impact on property prices, especially the HDB terraced houses and flats on Jalan Bahagia”, notes Teo. “Before the policy came into effect in 2011, the terraced houses saw resale prices of close to $1 million,” he says. “Since the rule came into effect, prices have been hovering at around $700,000.”

It also affected the kind of buyer who would eventually be able to purchase HDB properties with shorter leases: those who are also older, notes Teo. In the case of Tay’s HDB terraced house on Jalan Bahagia, the eventual buyer fit that profile: a middle-aged bachelor and his mother.

Read more about Reviewing CPF use for purchase of shorter-lease flats, in our story here.

The concern over ageing HDB properties has preoccupied most Singaporeans living in such properties for much of the past 1½ years. On March 24, 2017, a blog post by National Development Minister Lawrence Wong cautioned homebuyers not to assume that all old HDB flats would be automatically eligible for the Selective En bloc Redevelopment Scheme (SERS). He noted then that only 4% of HDB flats had been identified for SERS since the programme was launched in 1995.

Prime Minister Lee Hsien Loong addressed the concern of the declining lease on HDB flats in his National Day Rally speech on Aug 19. “SERS is a very limited scheme. It is meant for selected HDB blocks or precincts which have high development value we can unlock.”

Progressive renewal

Because of the high value that can be unlocked through SERS, HDB is able to “share this value with residents through generous compensation”, Lee said. As land is acquired compulsorily under SERS, HDB decides which precinct is earmarked for SERS and residents do not get to vote.

Only around 5% of flats are suitable for SERS, according to HDB estimates. “Many projects with high redevelopment potential have already been done because HDB chose the promising ones and did them first,” explains Lee.

The prime minister outlined a new scheme called Voluntary Early Redevelopment Scheme (VERS). “When HDB towns grow older and the leases on the estates are nearing expiry, we have to redevelop the towns,” says Lee. “But we need to do them in an orderly way. In the early years, because of the housing shortage, HDB often built in a tremendous rush.”

(Credit: Gov.Sg & Ministry of Communications and Information)

He points to several HDB estates that were built within short periods, especially in the 1970s and 1980s: Marine Parade between 1974 and 1976, Ang Mo Kio and then Bedok, which were built within six to seven years. “Therefore, if we do not plan ahead, 99 years later, all the leases in such towns will expire around the same time, and all the flats will be returned to the state within a few years,” says Lee. “We will have to find new homes for a lot of people at once. HDB will have to tear down and rebuild the old flats in a hurry, just like when we first built Marine Parade, Ang Mo Kio and Bedok. I do not think that is a good idea.”

He feels that the old HDB towns should be redeveloped progressively over 20 to 30 years, rather than within four to five years. He reckons that VERS should start with HDB flats that are at least 70 years old, and the estate should be renewed progressively. “There will be more new and younger residents moving in and the estate will become more vibrant,” he adds. “Those moving out will have somewhere to go to, and those staying will have rejuvenation to look forward to.”

Residents whose flats are taken back early under VERS will be compensated, and the government will help them get a new flat to live in. “But their terms will be less generous than those under SERS because there’s less fi nancial upside,” Lee points out. “There’s social merit in it, there’s community merit in it, but there’s not so much financial upside. So, it’s voluntary. If you don’t get SERS-ed, you can hope to be VERS-ed.”

Into the future

Residents in a precinct can vote for VERS the way they do for the Home Improvement Programme (HIP) for HDB flats that are more than 30 years old. “If residents vote ‘yes’, we will proceed,” Lee explains. “The government will buy back all the flats in the whole precinct and redevelop, and the residents can use their proceeds to help pay for another flat. If the residents vote ‘no’, then they can continue to live in their flats until their leases run out.”

The new high-rise HDB flats on Kim Tian Road in Tiong Bahru were developed under the Selective En bloc Redevelopment Scheme (Picture: Samuel Isaac Chua/The Edge Singapore)

However, VERS is a long-term plan, and will only start 20 years from now. “We need time to work out how to select the precincts, how to pace the redevelopments, the specific terms of the government’s offer and so on,” Lee explains. “We also need to study how to afford VERS for the long term. But I think such a scheme is necessary, so we will start planning for VERS now.”

VERS offers the best solution to the yearlong debate on HDB’s decaying lease issue, says Tricia Song, Colliers International head of research for Singapore. “This helps to assure owners of ageing HDB flats that they would be able to cash out when the lease runs down, and have more exit options other than a sale-and-leaseback to the government or an outright sale in the resale market. We expect this to have a positive impact on HDB resale flat demand and prices.”

Issues raised

However, Song says the details on VERS still need to be ironed out, such as the minimum level of consent needed, how compensation is determined, and on the fiscal level, how the scheme is going to be funded.

Chua Yang Liang, head of research and strategy at ARA Private Funds, agrees. “As a concept, VERS is a comprehensive approach to redevelopment that could spur urban regeneration in a precinct,” he says. “However, the proverbial devil is in the details.”

There is also the issue of how to deal with objectors or minority owners who do not agree to the voluntary en bloc scheme, adds Chua. Lee has indicated that they would be allow to stay on until their leases run out. “If these households are isolated and distributed all over the precinct, is HDB going to continue to maintain the vacated units and common areas just for a few residents living in those blocks?” asks Chua. “Or could they end up being relocated to a single block that will be refurbished? The idea of a more gradual redevelopment and renewal of precincts requires the land to be available and ready for new projects progressively over time.”

Read more about the HDB lease buyback scheme expanded to five-room and bigger flats, in our story here.

VERS is definitely a possible solution in addressing the issue of a declining lease, says Nicholas Mak, executive director of ZACD Group. “It gives assurance and brings back confidence to the market. But it still doesn’t change the fact that when your lease runs out, your land must be returned to the state.”

Another question is with regard to compensation. “What if there are owners who say they require a higher compensation for their unit, as they purchased it recently in a resale, and therefore do not enjoy the same uplift as those who bought their flats much earlier?” asks Mak. “Some are wondering whether the payout under VERS will be sufficient for them to buy a new replacement flat.”

The other issue is who decides on VERS. “Is it HDB, or can the owners form their own en bloc committee? HDB is the only buyer of these sites,” says Mak.

Another issue is time: Those who are most concerned about their ageing flats and depleting leases are those in their 50s and 60s. “Twenty years from now, they will be in their 70s and 80s,” says Mak. “A lot of things could happen in 20 years.”

Preserving value

HDB homeowner Mrs Tay agrees. “I don’t think VERS is very relevant to my husband and me because it will take 20 years before the scheme is implemented,” she says. “If I choose to sell my flat at that time, I’m likely to sell it on the open market and move in with one of my children. I don’t need the government to provide me with another house or a smaller flat.” She adds that she will consider VERS only if the compensation is better than what her property could fetch on the open market.

The government is also looking to expand HIP to 230,000 flats built between 1987 and 1997. HIP was launched 10 years ago, and until now, the scheme covers flats built up to 1986.

Toa Payoh Central, one of the more mature HDB estates built in the 1960s, has undergone renewal over the years (Picture: Samuel Isaac Chua/The Edge Singapore)

The government is also offering a second upgrade called HIP II that will be extended to all flats that are 60 to 70 years old, says PM Lee. That scheme will start 10 years from now. In the current HIP, the government foots up to 95% of the bill, with residents paying the remainder. “After upgrading, the flat value usually goes up,” says Lee.

With most HDB flats likely to be upgraded twice before their lease expires, Singaporeans may not need to worry too much about the depreciating value of an ageing flat now, says Christine Sun, head of research and consultancy for OrangeTee & Tie.

Sun says these schemes ensure that older flats are rejuvenated when the time comes and in turn “help existing flat owners maintain a high standard of living and continue to retain the value of their flats”.

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