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Buying a Short Lease Property in Singapore – Must Know Facts!

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Many HDB buyers take the 99-year housing lease for granted and assume it is enough to live in their home for their whole lifetime. But those planning to make that HDB flat their ‘forever home’ where future generations will live and thrive might run into a problem.

If you put it into perspective, a 99-year leasehold can be your home for at most two generations. Therefore, HDB homebuyers must consider the remaining lease period when buying a resale flat.

This article will delve into the realities of purchasing a home with a short lease remaining in Singapore, providing a comprehensive roadmap to guide you through the intricacies and nuances.

Fun Fact: As of 2023, 78% of Singapore’s population resides in HDB public housing.

What is considered to be a ‘short lease’?

When you buy a leasehold property, you only own that property for the period of the lease. As time passes, the lease period gradually reduces, transforming some properties into ‘short lease’ homes. A common criterion to define a home with a short lease is one with 60 years or less.

Some homebuyers might not even consider your HDB flat when there are 60 years left as the bank loans are tightened, and CPF usage for paying home loans is restricted. A shorter lease often reflects poor confidence of the buyers and market sentiments. This number (<=60) is also relied on by banks and the CPF board when making mortgage or refinancing-related decisions.

If you ever ask a well-informed property buyer, they would avoid purchasing properties with shorter remaining leases. Ideally, do this for a house with a long lease of at least 75 years left. But why? Let’s discuss this.

What happens when a 99-year lease expires in Singapore?

In Singapore, all land belongs to the State and is managed by some of the governing bodies such as the Housing Development Board (HDB), Singapore Land Authority (SLA) and others like the National Environmental Agency (NEA).

Even though no HDB flat has reached the end of the 99-year lease, it will happen one day. Upon lease expiry at 99 years, the ownership of the land will be extinguished and reverted to the State or the original landowner. The land will automatically revert to HDB, and the value of the HDB flat will be zero. HDB will then recycle the older flats and rebuild them into newer HDB flats for the coming generations.

As your HDB flat approaches the end of its 99-year lease, finding a buyer willing to purchase it becomes increasingly challenging. Unless your flat possesses exceptional features that match the potential buyer’s priorities, such as a high floor, unobstructed views, or proximity to MRT stations. Even if you manage to sell your flat, the profit you gain from the sale might not be significant.

If you own private property, you lose the right to continue living in your apartment. You may even be legally charged with trespassing if you refuse to give up your home ownership. Reason? You are no longer the legal owner of that property!

SLA will compensate you only if your property is chosen for en bloc. If not, you might be forced out of your home without receiving anything in return.

What options do 99-year leasehold property owners have?

If you are an HDB homeowner:

  • SERS (Selective En bloc Redevelopment Scheme)

SERS can be a lifeline for homeowners approaching the end of their lease. Like private property en bloc sales, SERS is specific to HDB properties. It typically involves older properties selected by the government for redevelopment.

This decision is made when the government deems the land is not optimally utilised or holds strategic value. Under the SERS, the government compensates HDB homeowners in exchange for surrendering their homes.

While there is a possibility that your development is chosen for SERS, the chances are slim. Only about 5% of HDB flats are deemed suitable for SERS. Furthermore, the government decides which HDB blocks are eligible for SERS, so you have limited control over the outcome.

  • Purchase a brand new 99-year lease flat

Before the expiration of your 99-year lease, it is possible to sell your current subsidised flat and choose to purchase another newly built flat with a fresh 99-year lease.

If you decide to sell your HDB flat and opt for another HDB flat (such as a BTO flat) or an Executive Condominium (EC), a resale levy will be imposed. If you are single, you will have to pay half of the total amount.

The payment of the resale levy is necessary when you book your second HDB flat, and you have the option to use either cash or the proceeds from the sale of your previous flat to cover the levy.

If the resale levy seems burdensome, you can explore the alternative of purchasing a resale flat, which may cost less when factoring in the resale levy. However, opting for a resale flat means you won’t benefit from the full 99-year lease duration.

If you are a private property homeowner:

  • Lease top-up

Private property owners can pay a lease top-up to the SLA to extend their tenure back to 99 years. The amount required for the top-up is assessed by SLA’s Chief Valuer, considering factors such as the remaining years on the leasehold.

Approval for the lease top-up is not guaranteed and is at the discretion of SLA. They consider factors like alignment with the government’s long-term plans for the area and optimal space utilisation. If approved, homeowners can continue living in their homes. However, if the lease top-up is rejected, they must either move out when the lease expires or sell the property before it loses value.

Given the high cost, typically millions of dollars, most homeowners prefer to move out instead of paying a substantial sum to continue living in the house. Unless the property’s sentimental value outweighs the additional cost, it is generally more practical to seek alternative living arrangements.

  • En-bloc sale

Private owners can initiate an en bloc, a collective selling agreement if the majority of homeowners agree. The sale, to either a private developer or the government, can offer significant compensation but requires evacuation.

Despite losing property rights, it’s a more favourable option than leaving without compensation at the lease end. The process, however, can be complex, requires a collective decision, and is dependent on the developer’s approval, evaluating property location and potential profit from the redevelopment.

What are the advantages of a short lease?

There are many potential benefits of buying a short-lease property.

1. Affordable entry point to prime areas

The crux of the attraction to short-lease properties lie within the axiom of real estate investment: location, location, location. Mature estates or prime areas like Orchard, Tanglin, or Novena often have low lease projects where the lease might be nearing the halfway point or less.

Such homes can provide an affordable entry ticket into these coveted postcodes, with prices considerably lower than their newer or freehold counterparts. Depending on personal preference and taste, some people may also like the vibes of those older, rustic properties.

2. Renewal or redevelopment potential

Another factor could be the property’s inherent potential for renewal or redevelopment. Although the ticking clock of the lease creates uncertainty, the possibility that the property will be sold en bloc or the government could renew the lease adds a layer of speculation to the investment.

3. Relatively weaker competition for buying

Buying properties with shorter lease terms is less popular, leading to less competition among potential buyers. This lower demand often results in reduced prices, making these properties more affordable. Thus, one of the main reasons people opt for low-lease projects is the opportunity to secure a property with fewer buyers competing for the same apartment.

4. Potential for capital appreciation

As a property’s lease term decreases, the surrounding area may develop with the addition of amenities like MRT stations, shopping malls, hospitals, and schools. This development enhances the value of the land, potentially making it more valuable than the lease-limited property situated on it. Consequently, developers may be enticed to present en bloc offers, aiming to purchase and redevelop the land.

Additionally, if the government decides to renew the lease, this introduces an aspect of speculative interest, potentially further increasing the land’s value.

What are the risks of a short lease?

While the lower price tag of short-lease properties might seem attractive, there are crucial considerations affecting the overall affordability and investment value:

1. Limitations on financing

Since banks provide home loans based on LTV restrictions, they are generally less willing to process a loan compared to an older leasehold flat than their newer counterparts. You can get a maximum loan amount (LTV of up to 75%) for a newer flat with more than 75 years remaining on the lease. The remaining 25% of the flat’s transacted price has to be paid in cash or CPF.

However, banks might reduce your LTV to less than 75% for older flats. It is due to the less number of years left on the lease. This also means you have to fork out more cash, which may affect your monthly cash flow and other financial plans. Note that banks are most likely to reject a loan for any leasehold property, especially with less than 35 years remaining on the lease.

2. Lower CPF withdrawal allowance

CPF imposes certain limitations on buyers using their CPF monies to finance the purchase of an older HDB flat with less than 60 years remaining on the lease. One constraint is that if the remaining tenure of the lease on a flat isn’t sufficient to cover the youngest buyer up until at least the age of 95, the financing available for the home purchase will only be a proportional sum.

This effectively means that the complete amount can’t be used unless this age condition is fulfilled.

Let’s understand this with an example. Suppose Jen and Joe, a Singaporean couple is looking to buy an HDB flat with a remaining lease of 55 years. Jen is the younger, aged 27 at the date of purchase. Since the minimum age required to cover the individual is till 95 years, the minimum remaining lease should be at least 68 years for the couple to be able to withdraw the maximum CPF allowable.

But in this case, the remaining lease is only 55 years. It means the couple could use only prorated amounts of CPF funds. Use this CPF calculator to estimate the amount you can withdraw to finance your home.

Additionally, CPF has more stringent rules for usage on short-lease properties, possibly requiring a higher cash down payment. For example, CPF funds cannot be used to purchase a house if the remaining lease is less than 30 years.

3. Property value depreciation

It is believed that the older the flat and shorter the remaining lease, the lower the bargaining power and selling price. Such flats are often the last option for buyers who may not have the financial means to buy homes with longer remaining leases. The diminishing lease tends to drive depreciation in the property’s value, making it harder to re-sell in the future.

The buyers of your property will also have to face limitations on financing and CPF withdrawal for mortgage repayment. For HDB flats, once the remaining lease drops below 60 years, the property’s value may decline sharply and becomes harder to sell in the future. Once it drops to below 20 years, it is assumed to have lost its lustre.

When the entirety of a 99-year lease comes to an end, it’s important to note that your property rights and value will, unfortunately, reduce to nothing. This essentially means that once the lease has expired, your ownership and the associated value of the property are no longer recognized.

If you are already in your 40s or 50s, lease expiration may impact your retirement plans. If your flat has exhausted its entire lease duration without SERS initiatives, you would have to go through the hassle and pain of finding an alternative housing arrangement.

4. Inadequate compensation under SERS

Under the SERS initiative, homeowners are compensated based on several factors such as prevailing market conditions, cost of new housing, etc. However, the compensation you get is highly subjective. The adequacy of the compensation for purchasing your new home may not be enough, depending on the market value of your current home.

Moreover, there is no guarantee that SERS would sweep in to save you. But if SERS does not occur, the value of your home and the pool of potential buyers will continue to decline as the lease years diminish.

5. Possibly not eligible for HDB Lease Buyback Scheme (LBS)

This initiative by the government is targeted towards senior residents who may want to boost their retirement funds by selling a portion of their lease back to the HDB in exchange for cash. However, there are a few conditions attached. The homeowner should be above 65 years, and the minimum remaining lease must be 20 years.

To understand it better, let’s assume the same couple, Jen and Joe, is purchasing a resale flat with 55 years remaining on the lease. Since Jen is 27 years old now, it would take the couple another 38 years to reach the age of 65 years – the minimum qualifiable age.

It means the remaining lease on the flat would be 5-10 years. This renders them ineligible for the HDB lease buyback scheme, given the minimum remaining lease requirement is 20 years.

6. Fewer amenities

The older flats with a short lease remaining have fewer and poorer amenities, while the neighbourhood composition mostly populated with seniors. The tastes, preferences and lifestyle choices of younger couples may not align well with the senior residents. However, this is a personal decision that may vary based on your current financial needs.

Things to note when buying a short-lease property

If you have reached here, you now know that buying a short-lease property is not a simple, straightforward endeavour. Below, we provide some steps to help guide your decision-making process.

Evaluate your financial position. Understanding your financial health is pivotal. Ensure you can afford the down payment, factoring in the restrictions on CPF usage, and you are comfortable with a potentially shorter loan tenure and higher monthly repayments.

Investigate the property’s en bloc potential or lease renewal. Engage a property lawyer or a professional to investigate the potential for en bloc sales. It can provide insights into the likely future of the property once the lease runs low.

Factor in depreciation. A short-lease property is likely not the best choice for those looking to make a substantial profit on resale. Be prepared for depreciation and have a strategy to manage the impact.

Secure a professional real estate agent. Given the complexity of purchasing a short-lease property, securing a competent agent familiar with such transactions becomes imperative. They can offer expert advice and guide you through the maze of legal, financial, and market conditions.

Is it worth buying a short lease property?

The decision to purchase a property with a short lease remaining in Singapore depends on individual circumstances, financial capability, and risk tolerance. For some, buying a short-lease property might be an affordable way to enter prime locations. For speculative investors, it might provide an opportunity for capital appreciation, especially if the property has the potential for redevelopment or lease renewal.

However, there are significant risks associated with short-lease properties. These include limitations on financing, lower CPF withdrawal allowances, property value depreciation, uncertain compensation under SERS, ineligibility for HDB Lease Buyback Scheme (LBS), and fewer amenities. These risks may erode the property’s value over time, making it difficult to sell in the future.

Therefore, while short-lease properties can potentially offer certain advantages, they are not suitable for everyone, particularly for risk-averse homebuyers or long-term investors. It’s recommended to thoroughly consider your financial situation, engage a competent real estate agent, and potentially seek legal advice before making a decision.

Final Thoughts

Ultimately, the decision to purchase a home with a short lease remaining in Singapore should not be taken lightly. While there is no clear ‘right’ or ‘wrong’, it requires a delicate balancing act of gauging the potential rewards and the inherent risks.

Navigating the maze of short-lease property purchases demands courage and wisdom, a willingness to explore uncharted territories, and the acumen to discern opportunity from risk. This journey is not for everyone. But for those ready to take the plunge, it could open doors to a uniquely rewarding real estate adventure. Start planning for it early so you don’t land at a dead end.

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