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New SERS Rehousing Options: What You Need To Understand About The Two Shorter-Lease Alternatives

A property with a short lease remaining, is a fast-deprecating asset

When HDB announced that it had selected blocks 562 to 565 Ang Mo Kio Ave 3 for Selective En bloc Redevelopment Scheme (SERS) on 7 April 2022, many thought that the current owners, consisting of 606 units, had hit a property bonanza. Unfortunately, in the days that followed, stories of unhappy SERS residents started to surface in the mainstream media.

Their main cause of unhappiness was the lower amount of compensation offered compared to the cost of purchasing the new replacement flat. It required many of the elderly and retired homeowners to top up (and in one case, up to $100,000), which was beyond their financial capacity and means.

Read Also: Understanding The SERS Process And Why Some SERS Homeowners Are Unhappy

In view of the discontentment on the ground, HDB announced on 2 July 2022 that it will introduce two additional rehousing options, starting with the Ang Mo Kio SERS site this year. The new rehousing options address the needs of current homeowners, particularly the elderly, who want a one-to-one replacement without having to pay extra money to live out their lives.

With these two new short lease rehousing options, it is expected that the 540 or so residents who are aged 45 years and above can move to a replacement of the same type without any need for top up.

Here’s what you need to understand about the new rehousing options that offer SERS flat owners a shorter lease option.

[New Option:1] SERS Flat Owners Above 45 Years Of Age Can Choose A Shorter 50-Year Lease Option  

The first new additional rehousing option offered to SERS flat owners is the option to purchase a 3-room or bigger new flat at the designated SERS replacement sites on a 50-year lease, provided it covers them till the age of 95. Meaning, the flat owners and their spouses must be a minimum of 45 years of age at the point of the SERS announcement to qualify for this rehousing option.

Illustration: A 4-Room Replacement Flat On A Shorter 50-Year Lease May Not Require A Cash Top-Up, Unlike For A 99-Year Lease

Taking reference from an example cited by HDB, the estimated market value of a 4-room SERS flat on the 6th storey is $415,000. On the other hand, the estimated selling price of a 99-year lease replacement new flat for the same flat type and at the 6th storey is $470,000 (after factoring the $30,000 SERS grant). This results in a shortfall of $55,000 that the SERS flat owner has to top-up in cash/or CPF.

In comparison, the same replacement flat on a 50-year lease would cost $359,000 (inclusive of a $30,000 SERS grant). In this scenario, the flat owner will instead net a gain of $56,000.

Example of a 4-room (92/93 m²) SERS flat owner buying a 4-room (90m²) new replacement flat
Estimated market value of SERS flat on the 6th storey $415,000
Lease term 99-year lease 50-year lease
Estimated subsidised selling price of new flat on the 6th storey after $30,000 SERS grant $470,000 $359,000
Remaining cash and/or CPF ($55,000) $56,000

Source: HDB – Additional Options For SERS households (Annex A)

Other Considerations For The 50-Year Lease Scheme

Flat owners would not face any restrictions on the future sale of the flat in the open market, make investment in private property or rent either the whole flat or spare rooms upon the completion of the 5-year minimum occupation period.

This option enables SERS flat owners to occupy the replacement flat on a similar tenure as their existing flat without any restrictions on their ability to monetise the flat upon completion of the MOP.

Moreover, the shorter lease option could be favourable to senior flat owners who may not wish to top-up for the 99-year lease but, at the same time, do not want to be curtailed in their ability to monetise their flat in their latter years.

Read Also: What Happens When Your HDB Flat Is Selected For SERS?

[New Option:2] Seniors Can Opt For Lease Buyback After SERS Announcement, Which Will Apply To Replacement Flat  

Previously, SERS flat owners could not apply for the Lease Buyback Scheme (LBS) once their flat was announced for SERS.

However, as part of the new rehousing options that are available to SERS flat owners, they can now consider the LBS option provided they are at least 65 years old and have not already taken it up for their existing SERS flat.

As with the LBS, flat owners can typically retain a lease-length of 15 to 35 years (in 5-year increments) that covers them (both husband and wife) until they are at least 95 years old, and then sell the remaining tail-end lease (at least 20 years) to HDB. The proceeds from selling the tail-end lease are then used to top-up the flat owners’ CPF Retirement Account (RA) and purchase a CPF LIFE Plan, which will provide a monthly pay-out for life.

The market compensation received for the lease retained for the existing flat can then be used to buy the new replacement flat of the same lease length and up to the same flat type.

Additionally, SERS flat owners who take up the LBS scheme will also enjoy a cash bonus of up to $30,000 for 3-room or smaller flats; up to $15,000 for 4-room flats; and up to $7,500 for 5-room flats.

Illustration: A 65-Year-Old Couple Buying A New 4-Room Replacement Flat May Have A Cash Positive Outcome By Applying For LBS Of Existing Flat

To illustrate how this might apply to SERS flat owners, HDB provided an example of a 65-year-old couple for a fully-paid 4-room SERS flat. Assuming the estimated value of a 4-room flat on the 6th storey is $415,000 and the couple chose to retain a 30-year lease, it would give their flat a value of $253,700. The remainder amount of $161,300 would form the LBS proceeds, which would be used for CPF LIFE.

The couple would also receive an additional $15,000 LBS cash bonus for taking up the LBS option. The replacement flat, which will also be on the same remaining 30-year lease at the same 6th floor level and 4-room flat type, is valued at $220,000 (after deducting the $30,000 SERS grant). Based on the valuation of the existing flat of $253,700, the couple does not need to fork out any cash when purchasing the replacement flat. In fact, they would receive another $33,700 ($253,700-$220,000) in cash proceeds.

Other Considerations For The Lease Buyback Scheme

SERS flat owners who take up this option would not be able to sell the flat on the open market and instead have to return it to HDB if they no longer wish to stay in the flat. They would be reimbursed for the remainder of the lease, which would be prorated on a straight-line basis. Hence, taking up this option would be akin to buying a 2-room Flexi-flat, with the only difference being you are able to stay in a bigger size (3-room and above) flat, similar to your existing flat type.

Another restriction that SERS flat owners on LBS would face is that while they may rent out spare rooms, they are not allowed to rent out their whole flat. This would limit their options in terms of monetising their flat.

This option could be suitable for elderly flat owners who have little desire to switch houses or have the intention of monetising their flat in their later years.

Read Also: What’s The Difference Between Private En Bloc VS HDB SERS

No Cash Outlay Is Required For Shorter Lease Flats, But It Will Affect Future Resale Value

The new rehousing options may benefit the more senior SERS flat owners who may not wish to do a top-up for their replacement flat. Hence, by having a flat on a shorter lease, it allows them to continue living out the remainder of their lifetime without further financial commitments.

Nevertheless, SERS flat owners must also understand the implications that come with a flat on a shorter remaining lease.

The Shorter The Remaining Lease, The Lower The Property’s Valuation

In Singapore, in order for the Government to determine the value of the remaining lease on a piece of leasehold land, the SLA uses the Leasehold Table, also known as “Bala’s table”. It shows the value of a parcel of land with different lease terms remaining as a percentage of its value assuming it were freehold.

As illustrated by the Bala’s curve in the chart below, a 99-year leasehold is equivalent to 96% of the freehold value. The leasehold value drops gradually to 80% at the 60-year mark, before it starts to drop steeply from the 50-year mark onwards. At the 15-year mark, it is equivalent to 40% of the freehold value.

Source: Centre for Liveable Cities – Determining The Value Of Leasehold Land: A Closer Look At “Bala’s Table”

It is for this reason that a longer leasehold flat is always worth more than a shorter leasehold flat, all things being equal. And this is also why the current SERS flat owners at the Ang Mo Kio Ave 3 site are facing the dilemma of having to top up for their replacement flat, which previous SERS owners didn’t have to contemplate. Their flats have aged more (completed in 1979) compared to the past SERS sites.

Hence, should SERS flat owners take up the short-term lease rehousing options, they would be faced with a similar situation to what they are in now. Their new flats would depreciate faster and, as a result, be valued much lower than their neighbours, who are on a 99-year lease.

Shorter Lease Will Also Affect The Size Of Buyer Pool    

The shorter lease of the flats will affect the available pool of buyers, as they will be affected by the use of CPF funds for housing. Looking at the table below, it shows the maximum amount of CPF savings that can be used based on the remaining lease of the flat, which must cover the youngest owner till age 95.

Source: CPF – Maximum Amount Of CPF Savings That Can Be Used For Property

Given the restrictions on the use of CPF savings, younger flat buyers could find such flats less affordable despite the lower price quantum as they may have to fork out more cash for these shorter lease flats compared to the higher priced but longer leasehold flats. Therefore, due to the small group of available buyers, owners of flats with short remaining leases may face difficulty cashing out in the future.

Hence, SERS flat owners who take up these shorter lease options may find their flat to be a depreciating asset instead of an appreciating asset unlike their neighbours who took up the 99-year lease option.

Read Also: How Have Past SERS Beneficiaries Benefited From The En Bloc Of Their HDB Flats ?

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