How Can HDB Flat "Owners" Deal with Lease Decay?

The equity in old HDB flats used to provide financial security for owners whose flats were among those picked for the Selective En-bloc Redevelopment Scheme (SERS). But as a result of the government cautioning investors against speculating on state buyouts of such properties, these homeowners are now nervous. It is estimated that by 2068, about 10% of public housing in Singapore will be nearing the end of their leases. In the past 25 years, approximately 4% of all HDB flats (a total of 80 sites) were selected for SERS. 

Knowing that the value of your home could at some point be zero is a position no one wants to be in. This is why researchers have begun studying the ramifications of such a development. The goal is to find how dwindling leases affect HDB resale prices. So far, the findings have been unanimous – that decreasing resale prices are a fact of life with leases decreasing in length. This is exacerbated when limits on financing take effect.

Homeowners who are still selling their flats at a profit are only able to do so because their flats’ declining theoretical value is more than offset by how much economic growth Singapore has enjoyed since the 1960s, which has contributed to a growing property market as well.  

To mitigate the situation, the government has introduced the Home Improvement Programme (HIP) II, for flats when they reach the 60- to 70-year point in their lease. The government has also introduced a Voluntary Early Redevelopment Scheme (VERS) that would let owners vote on whether to have the authorities take their flats back for redevelopment when they reach the 70-year point on their lease. In our opinion, these steps will not come anywhere near solving the problem. 

Homeowners who resist selling for way too long will have a very difficult time finding a buyer looking for a resale flat. As your flat gets older, the less likely it is to attract prospective buyers as the availability of CPF funds for these units is restricted. The fund usage is pro-rated based on the number of years left on the lease, plus the (younger) buyer’s age totalling less than 95.  

Banks do not approve housing loans on flats with 30 years or less remaining on the lease. Once the number of years on your lease dwindles down to 20 years, you have no equity in your flat. From that point, you can’t use the Lease Buyback Scheme. So, if a retiree owns that flat and has no savings or investments, they may have to resort to renting out room(s) as a source of income. 

So, how can you prepare for this eventuality?

Have a plan in place for when the lease on your HDB flat dwindles down. 

1. Your flat shouldn’t be your only retirement asset. 

Many Singaporeans let the years slip by, planning to downgrade to a smaller unit at some point in the future. If they own a 5-room flat, they assume they can downgrade to a 2- or 3-room flat and have cash left over for their retirement. 

One way this would work would be to buy a Built-to-Order flat that comes with a fresh lease. Otherwise, you could buy a newer resale flat with a 94-year lease that is past the 5-year Minimum Occupation Period (MOP), instead of an older resale flat. What if you want all the benefits of residing in that old flat due to it being near your friends, family, and the best school for your kid(s), but you still want a comfortable retirement? Or, what if you’re in a position to buy a resale flat without worrying about the appreciation?

If you are determined to buy a resale flat nearing its 60-year point on the lease, you’ll need to have other investments to rely on for your future. To ensure your financial security, you could consult with a wealth manager or financial advisor. The idea is to build a diversified investment portfolio, which might include Real Estate Investment Trusts (REITs) or other equities. Your advisor may suggest putting more of your income towards your investments. It is important that you be proactive in planning your future, rather than counting on a depreciating asset to fund your retirement. 

2. Buy a Built-to-Order (BTO) Flat or Even a Sales of Balance Flat

With a resale flat you can move in right away, plus you can choose among many well-developed mature neighbourhoods. However, if the lease is running low, you really need to think about whether the amenities are worth it in the long run. 

But if you decide on a BTO flat, the wait time for moving in could be 3 – 4 years. On the other hand, you would get a fresh 99-year lease, which is plenty for your lifetime. You could pass it on to your children who could live there without the burden of a mortgage for decades. 

You might also want to consider buying a Sales of Balance Flat, which is simply an unsold BTO flat or one that HDB has repurchased. The wait time would be shorter, and you may be able to get an already built unit that you can move into right away. 

3. Relocate to a Much Newer Resale Flat.

If you currently own a resale flat with more than 60 years left on the lease, it would be smart to sell it before too long. Doing this will help you get a better price, since buyers won’t face any restrictions regarding CPF usage, HDB and/or bank loans. Then, try and find a resale flat with 90 – 94 years left on the lease to move into.  

4. Consider Buying Freehold Property.

If there is any way you can afford it, buy freehold property. There is no doubt that a freehold condo would be 10 – 15% more expensive than a similar unit with a 99-year lease. However, the freehold condo would retain its value better as it ages, whereas the leasehold property will not. The financial security this represents is well worth the higher price. 

In the end, just being aware of the pitfalls and proactively planning for the future can render a 99-year HDB lease a minor issue. The easiest way to approach a 99-year HDB lease is to go into it with your eyes wide open. Early on, determine how long you plan on staying there and whether you will upgrade or move out at some point.

With an HDB flat, if your plan is to live there permanently, then you’ll need to find a flat with a fresh lease. This could mean having to wait 3 – 4 years while it’s being built, and it may even be far away. If your plan is to upgrade to a larger or more expensive unit in 15 to 20 years, make sure you buy a flat that is under 10 years old.

At Pinnacle Estate Agency, we strongly believe in sharing our real estate knowledge to the public.⁠ For more content like this article, check out our Singapore Property Guides.