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Credit Suisse: Private apartments projected to be a better store of value than HDB resale flats

A Credit Suisse report published on Wednesday (19 Sep) predicted an increase in the price difference between private apartments and Housing and Development Board (HDB) resale flats in the foreseeable future.

This prediction was made based on the expectation that the Voluntary Early Redevelopment Scheme (VERS) introduced by the Government might not be able to pacify buyers' apprehension regarding the possibility of the latter residential property bearing no residual market value at the end of the 99-year lease.

The report cited the decrease in the proportion of residents living in HDB flats in comparison to those living in private apartments, that is, from 88 per cent of households ten years ago to 79 per cent just last year.

“Rising affluence and household incomes” as well as a “steady private residential supply” from the government have contributed to the falling percentages.

Louis Chua and Nicholas Teh, the Credit Suisse research analysts who wrote the report, said:

“We believe it will likely take some time for residents to understand the evolving narrative on the nature of HDB flats — from one where HDB flats are a good store of value and attractive investment class that will continue to appreciate, towards one where we are likely to see a steady diminution in value as we approach the end of the 99-year lease, following which the flats will revert to the government.”

Touching on VERS, the report commented that while it is a "good starting point," as it will grant owners "partial autonomy in addressing the lease decay," it should note be viewed as a "panacea" to the issue of lease degradation of HDB flats.

The absence of “critical details” in VERS, especially regarding compensation, was one of the key issues raised in the report.

Another issue raised in the report is the inapplicability of VERS to 1 million units of HDB flats presently, and that flats with 10 years of lease left would be worth only half of flats with 30 years left, in theory.

The report warned: "As the nature of the 99-year HDB lease is increasingly better understood, we believe potential resale flat buyers would likely demand a greater discount to prevailing market prices, given the heightened risk of the flats having zero residual value at the end of its lease life."

Owners of private apartments, on the other hand, have the liberty to utilise a collective sale process in the event that developers wish to purchase the land for redevelopment, in that the developers are required to obtain the permission of at least 80 per cent of owners in the estate, which indicates that leasehold private residential propertiesare more likely to sustain greater value than HDB flats will, even as the leasehold private apartments' leases depreciate.

However, Director of the Institute of Real Estate Studies at the National University of Singapore Associate Professor Sing Tien Foo argued against the comparison made between private apartments and HDB flats in the report.

“It’s difficult to put them on the same level field to compare.

"Public housing is… meant to make housing affordable for the everyday man,” he said.

Speaking to TODAY Online, Assoc Prof Sing added that the evaluation made in the report was based on the consolidated value of both the buildings and the land upon which they were built.

He also argued that the projection rests upon the estimation that the combined value will drop to zero when the lease expires.

“Real estate is a unique asset, which consists of both building and land… unlike (a) car whose asset could depreciate to zero.

"Whereas for real estate, the land value could appreciate in value, if the redevelopment potential increases,” he said.