Minimum occupancy of ten years, clawback of resale proceeds - but PLH flats can still be fantastic deals

Nov 07, 2022

One has to ask if premier location public housing (PLH) flats aren't quite popular among eligible Housing and Development Board (HDB) build-to-order (BTO) flat buyers. In the most recent BTO exercise, the application rate for four-room apartments among first-time non-elderly applicants was 3.7 times for PLH flats in Bukit Merah, compared 17.2 times and 8.7 times for non-PLH flats in Tampines and Ang Mo Kio, respectively.

When the details of the PLH model were revealed just over a year ago, I was ecstatic since the PLH model intends to ensure that new public housing built in prime, central areas like the city centre remains inexpensive, accessible, and inclusive for Singaporeans.

Buyers of PLH flats face more stringent requirements. Before they can sell their apartments on the open market or invest in a private property, PLH flat owners must occupy their flats for at least 10 years - the minimum occupancy period (MOP). Under the BTO model, the MOP is five years. While PLH flat owners can rent out their extra rooms, renting out the entire property is not permitted, even after the MOP, unlike under the BTO model, renting out the entire flat is permitted after the MOP.

Buyers of PLH flats from HDB will pay HDB a percentage of the higher of the resale price or valuation upon the sale of their flats as new PLH flats are priced with larger subsidies. For the PLH units at Havelock Hillside and Alexandra Vale in Bukit Merah, the cost is fixed at 6%.

Furthermore, resale PLH flats are reserved for customers who match the current eligibility requirements for purchasing flats directly from HDB. Households with solely permanent residents, singles aged 35 and older, and couples whose monthly income surpasses the S$14,000 income cap are among those who can purchase three-room and bigger HDB resale apartments but not resale PLH flats.



Simulation

One could argue that buying a new PLH or a new non-PLH unit is basically equivalent financially.

I compare the prospective returns after a 10-year holding period of purchasing a four-room new non-PLH apartment versus a new PLH unit. I omit housing grants and assume a 3% yearly increase in resale prices.

I use S$410,000 as the purchase price and S$608,000 as the beginning market price for the non-PLH unit. Prices for four-room BTO flats in Sun Plaza Spring and equivalent resale flats nearby are S$410,000 and S$608,000, respectively.

I use S$626,000 as the purchase price and S$846,000 as the initial market price for the PLH unit. The midpoints of the price ranges of Alexandra Vale's four-room PLH apartments and comparable resale flats nearby are S$626,000 and S$890,000, respectively. To arrive at the aforementioned beginning market price, I apply a 5% discount to S$890,000 to account for the implications of a smaller pool of eligible purchasers for resale PLH properties. After ten years, I deduct 6% from the resale price to account for subsidy recovery.

As a result, the absolute price gain after ten years is S$443,000 for the PLH unit against S$407,000 for the non-PLH unit. However, the percentage gain from the non-PLH unit is greater than that from the PLH unit. Certainly, the simulation may be fine-tuned in a variety of ways, such as to reflect return on equity or to account for scheduling variances in new home construction.

Furthermore, the outcomes are affected by a variety of factors. The price appreciation during a ten-year period may vary by area. Also, how significant is the impact of a smaller pool of qualified buyers for resale PLH units?

Resale PLH units are in high demand

The resale market for PLH units may be promising. To begin, a household earning S$168,000 (12 times S$14,000) per year that is comfortable paying six times yearly income for a property may be fine paying S$1 million for a home. The HDB's income ceiling currently does not account for bonuses received by paid employees.

Furthermore, any increase in the income threshold for purchasing HDB apartments directly would mean increased purchasing power for resale PLH units. The income limit has been raised three times in the recent decade, in 2011, 2015, and 2019.

Second, even if an income ceiling is applied to buyers of resale PLH flats, there may still be buyers with considerable purchasing power. For example, some young couples who meet the income ceiling criteria may be eligible for parental assistance in purchasing resale PLH units. Some BTO sellers may be willing to recycle revenues by purchasing well-located PLH units.

Additionally, some people who transition from private to public housing may choose a PLH unit that is conveniently placed. These individuals may have received a windfall from the selling of their primary residence. Buyers of PLH flats must not own or have sold a private house within the last 30 months.

Third, when a PLH unit purchased from HDB may be resold after ten years, valuation will not be impacted by concerns about probable land lease degradation. According to a Singapore Property Authority table illustrating leasehold prices as a percentage of freehold value, the price difference between land with 94 years land lease outstanding, which is relevant to a BTO unit that achieves its MOP, and land with 89 years land lease outstanding is roughly 1.2 percent.

While the restriction on renting out the entire PLH apartment decreases the possibility to earn rental money, if one needs a place to stay, one may only be allowed to rent out spare rooms. Because of their central position, rooms in PLH flats may be popular with tenants.

The transaction and relocation costs of shifting houses are not insignificant. If one obtains a PLH flat, residing in the unit for at least 10 years is not burdensome because one gets a house in a desirable area. Perhaps there is even greater reason to apply for a PLH apartment if PLH flats are not significantly overcrowded.

In the approaching BTO exercise in November, candidates should carefully consider the benefits of applying for any PLH flats that may be available.