Shorter tenures for more affordable private homes?

The jury is still out on the impact of recent tweaks to the seller's stamp duty (SSD) and the total debt servicing ratio (TDSR) framework on residential home prices and volumes. What we do know is that Singapore's private home prices have headed south for 13 consecutive quarters since peaking in Q3 2013, declining by about 11 per cent, the cumulative effect of a series of cooling measures introduced since September 2009, and more recently, the looming prospect of rising interest rates and a slowing economy. This is a relatively milder correction compared to the sharper 25 per cent fall over four quarters during the sub-prime crisis in Q2 2008.

So far, market watchers widely agree that the recent announcement has lifted sentiment going by the apparent strong showing at showflats. However, buyers will still need time to assess exactly how the changes might affect their decision to purchase or sell. The fact remains that the majority of buyers are subject to the TDSR and that the SSD applies, albeit the holding period has been shortened and the rate reduced. Prices of mass market homes located in the Outside Central Region (OCR) are still high, mainly driven by too many developers chasing after a limited number of development sites. At the end of the day, affordability remains a key concern of home buyers.

Historically, the rationale for providing 99-year leasehold homes is to offer a more affordable housing option compared to freehold homes. Not surprisingly, there is always a price gap between the two classes of properties (Charts 1 and 2).

Based on caveats lodged for new non-landed private homes sold in OCR for the whole year of 2016, the median price quantum for a freehold unit was S$1.1 million while a 99-year leasehold home was priced at S$973,000, a difference of 13 per cent. Comparing the unit rate on strata area, the difference was 18 per cent between the price of S$1,476 psf for freehold and S$1,251 psf for 99-year leasehold homes.

Developers responded to higher costs as well as loan curbs with quantum play. For the period 2013-16, the median price per unit of 99-year leasehold non-landed private homes has remained below S$1 million. They adopted the strategy of rejigging unit sizes to keep prices of mass market homes below this affordability threshold. The bulk of these units ranged from 550 sq ft to 750 sq ft in size.

There is, however, a limit to how much smaller the units can get and still remain a decent liveable space. Perhaps it is time to consider another strategy to keep homes affordable.

In November 2012, URA sold a residential land parcel at Jalan Jurong Kechil with a 60-year leasehold tenure. The residential project developed onsite is called The Hillford. Comparing the prices of residential land sold around the same time period, the site cost some 40 per cent less than the freehold site of The Creek @ Bukit (Toh Tuck Road) and over 20 per cent less than the 99-year leasehold site of The Skywoods (Dairy Farm Road). The lower land price of The Hillford reflected the adjustment for the shorter tenure.

Furthermore, when the three projects were launched for sale from late 2013 onwards, the median price of The Hillford was 31 per cent below The Creek @ Bukit and 12 per cent below The Skywoods. With sizes ranging from 398 sq ft to 657 sq ft, all 281 residential units of The Hillford were sold in a few days. The price range of S$388,000 to S$770,000 was perceived as very affordable due to its "Upper Bukit Timah" location despite the small unit sizes.

The case for shorter tenure In Singapore, many people still prefer freehold properties to leasehold ones. The reasons revolve around notions of ownership, inheritability and the stigma attached to a shorter tenure. This stigma stems from a few reasons, mainly the uncertainty following the expiry of the 99 years. There has been limited precedent cases on what happens after the expiry of a leasehold tenure. At the same time, the renewal of the tenure of the property remains unknown as well as the level of compensation offered upon expiry.

While the topping up of the tenure back to 99 years may present an option for some developments, this is not guaranteed. For example, owners of The Arcadia, whose 99-year lease commenced in 1979, applied to extend its lease in 2011 but was rejected by the Singapore Land Authority. In any case, topping up the lease means extra costs for developers who would then pass the costs to buyers.

Nevertheless, in view of limited land resources and affordability, it is worthwhile to explore the option of shorter tenures. If regulatory changes can provide more certainty on what happens when the lease expires, it may help to reduce the price gap between freehold and leasehold properties. With the predominant supply of 99-year leasehold residential sites from the Government Land Sale Programme, such sites are close to becoming the norm. Freehold sites are a bonus.

On the demand side, going forward, attitudes towards longevity in tenure have changed. The millennials may be more open to leasehold properties compared to their parents and grandparents. Most of them are already living in leasehold properties now and are probably more concerned with location and accessibility rather than tenure. Being well travelled, they are aware that homes in some densely populated countries such as China have shorter tenures of 50 years.

A shorter tenure is one of the effective tools to lower land prices. In the case of industrial land, from mid-2012 onwards, industrial landlord JTC has been observed to have stopped offering land on 60-year leasehold tenure, possibly to help end users contain land prices. From mid-2015 onwards, only sites with 20-year tenure are offered on the confirmed list of the Industrial Government Land Sales Programme so far. Smaller plot sizes were also offered to target owner-occupiers. In the end, the shorter tenures reflected lower land prices.

The provision of homes with shorter tenures has already been tested by the Housing & Development Board (HDB). In August 2015, HDB introduced the "two-room flexi scheme", which allows home buyers aged 55 years and above to choose between the full 99-year lease or shorter leases ranging from 15 to 45 years. The flats are priced according to the lease tenure. Of the 6,070 such flats offered so far, 2,101 flats were booked by the elderly on shorter leases, while 366 elderly citizens opted for the full 99-year lease.

As this housing option works for public housing, it is possible to provide shorter leasehold tenures for private housing, especially when the ageing population (65 years and above) is expected to reach 900,000 by 2030.

HDB's eligibility criteria ensure that only the right target group can buy the flats with shorter leases. The setback for private housing is that there is currently no regulation to ensure that affordable homes are bought by the target groups and not by opportunistic investors. In the case of The Hillford, the 281 one- and two-bedroom units were intentionally built as housing for retirees as allowed in the tender document. However, it was reported that the buyers are not only made up of elderly end-users but also younger buyers who saw this as an investment opportunity because of the attractive pricing and good location.

There is also a need to look into the financial system to allow buyers to fund the purchase of properties of shorter tenure.

Currently, CPF (Central Provident Fund) savings can be used to finance the purchase of properties with a remaining tenure of between 30 and 60 years, on the condition that the age of the buyer using CPF savings plus the remaining tenure of the property must be at least 80 years. If the youngest buyer using CPF savings is aged below 55, the shorter the tenure, the lesser the amount of CPF savings all owners can use, and thus, they will have to fork out more cash.

Once the Central Provident Fund Board sets the tone, financial institutions will likely follow suit.

It is not possible to depend on market mechanisms alone to ensure unbiased results. Government involvement and regulations are needed to find the middle ground between keeping housing liveable and affordable, while maintaining economic growth in a competitive global economy, as the recent tweaks in the property measures have shown yet again.

Cooling measures are one of the many levers that the government can use to keep home prices affordable, to rein in rising prices and instil prudence in making a property purchase. The introduction of a shorter tenure may be one of the levers that the government can pull in the midto long-term to complement the existing measures to give buyers another option for affordable housing.

Han Huan Mei is associate director and Desmond Sim is head of Singapore & South-east Asia at CBRE Research