New HDB flats, also known as Build-to-Order flats, have been a popular choice for couples and families looking to buy their first homes. For one, they are sold at a subsidised price, which is at a substantial discount to comparable resale prices.
They are cheaper and come with a fresh 99-year tenure. There is also a sense of entitlement attached to BTO flats, as Singaporeans are entitled to purchase these flats only twice from HDB.
While a majority of BTO flats appear to be held for long-term occupation, analysis by The Edge Property shows that 15% to 20% of them were either sold or rented out within two years of fulfilling their minimum occupation period (MOP). More were sold than rented out, averaging 12% and 4% respectively.
Source: HDB, The Edge Property
BTO buyers are required to stay in their HDB flats for a period of at least five years before they are allowed to sell or sublet their properties. The five-year MOP starts from the date that sellers collect the keys to the flat. As these dates are not readily available, they are estimated based on the flats’ lease start dates less one year.
Punggol and Sengkang saw the highest proportion of BTO flats being sold shortly after fulfilling their MOP. Over the past five years, an average of 13% of BTO flats in Punggol and Sengkang were sold within a year of fulfilling their MOP. In other towns, the proportion was less than 10%.
Source: HDB, The Edge Property
Cashing out of Punggol and Sengkang
The findings are somewhat expected, as Punggol and Sengkang residents might wish to cash out their properties before other BTO projects hit the market upon fulfilling their MOPs.
Currently, Punggol and Sengkang BTO flats also command the highest profit margins. Over the past five years, four-room BTO flats in Punggol and Sengkang have been yielding an average profit margin of 186% and 164% respectively.
In absolute quantum, they amounted to $320,000 in Punggol and $310,000 in Sengkang. The average profit in each town was computed based on the actual prices of the BTO flats when they were first launched and their resale prices upon MOP.
These gains are expected to shrink when more supply enters the market from subsequent BTO projects. Prices of four-room BTO flats between 2008 and 2013 have jumped 26% to 78% in Sengkang compared with those offered between 2003 and 2005. In Punggol, prices have surged 65% to 96% over the same time period.
Profits aside, residents in non-mature towns might also aspire to upgrade to mature towns or central locations where many popular schools are located, especially as their financial status improves over the years.
The proportion of BTO flats rented out shortly after fulfilling their MOP is relatively small compared with the disposal rate even in mature towns. This sounds counterintuitive, as BTO flats can command an attractive rental yield of 10%. HDB upgraders could use the rental income to offset their condo mortgage.
It seems that HDB upgraders prefer to dispose of their flats and use the proceeds to purchase a private property. Some upgraders may even split the proceeds as upfront payments for two private properties.
Consideration of three options
Assuming a couple aspires to own two properties and have accumulated enough saving for a substantial upfront payment, is it better to dispose of BTO flats to buy two condos or to rent them out to offset the monthly mortgage payment? If the couple lives in a mature town, the latter is more viable as illustrated below.
In Option 1, the couple sells their four-room BTO flat in a mature town for $600,000. After deducting their outstanding loan, they use the remaining proceeds of around $400,000 as down payment for a $1 million condo and additional $100,000 from personal saving. They also put in an additional $200,000 cash from personal savings as down payment for another $1 million condo. Assuming they can meet the total debt servicing ratio requirement, their loan-to-value will be 50% and 80% respectively.
They then stay in one of the condos and rent out the other condo at $3,200 a month. After 10 years, the couple sells both condos at $1.3 million each, assuming the capital appreciation is 2.5% a year or similar to the inflation rate.
The net present value (NPV) for Option 1 is the lowest. The couple is also exposed to higher risks since they are taking on a much bigger loan and would be in trouble if one of them loses his or her income. Option 1 is for couples who desire prestige and higher social status by owning two condos.
In Option 2, the couple retains their BTO flat in a mature town and leases it out at $2,500 a month. They also put in an additional $200,000 cash from personal savings as down payment for a $1 million condo. After 10 years, the couple sells their HDB flat for $840,000, assuming the price appreciation for HDB flats is slightly higher than condos at 3.5% a year. They also sell their condo at $1.3 million.
The NPV for this option is higher than Option 1. The couple can take advantage of their BTO flat’s strong capital appreciation and rental yields. Over the past 10 years, the resale price index for HDB flats rose 83% from 73.6 to 134.7, translating into an annualised gain of 6.2% over 10 years. On the other hand, the URA Property Price Index for private non-landed homes increased 59% from 85.7 to 136.6 over the same period. The annualised gain works out to 4.8%.
In addition, gross rental yields for HDB flats could be in the region of 10% while those for condos are usually below 4%. Similar to prices, HDB rents have also increased faster than condo rents over the past decade.
Option 3 actually yields the highest NPV. Under this option, the couple stays in their HDB and rents out their condo. However, they sacrifice the enjoyment of living in a private property.
As a final note, the computation should not be construed as the actual gain the investor is expected to reap, but is used for comparison purposes. For example, the additional buyer’s stamp duty is omitted, as all the options presented will incur the same amount of ABSD.
NPV for Options 1 to 3
| |
Option 1 - Sell BTO, buy two condos
|
Option 2 - Rent out BTO, stay in condo
|
Option 3 - Stay in BTO, rent out condo
|
HDB sold on
|
6th year
|
15th year
|
NPV cash inflow
|
HDB sales proceed ($)
|
447,729
|
384,814
|
Condo 1 sales proceed ($)
|
595,545
|
595,545
|
Condo 2 sales proceed ($)
|
595,545
|
NA
|
Net rental income ($)
|
200,520 (one condo)
|
165,948 (HDB)
|
200,520 (Condo)
|
Total inflow ($)
|
1.84 mil
|
1.15 mil
|
1.18 mil
|
NPV cash outflow (Downpayment, mortgage, outstanding loan)
|
HDB ($)
|
262,953
|
262,953
|
Condo 1 ($)
|
687,319
|
647,770
|
Condo 2 ($)
|
670,156
|
NA
|
Total Outflow ($)
|
1.62 mil
|
911,000
|
NPV ($)
|
219,000
|
236,000
|
270,000
|
Source: The Edge Property
This article appeared in The Edge Property Pullout, Issue 730 (May 30, 2016) of The Edge Singapore.
By Esther Hoon & Feily Sofian | May 27, 2016 10:22 AM MYT
Source: The Edge Property