ST : HDB flats - a plump investment option

Oct 14, 2010

HDB flats - a plump investment option

No surprise, given their great locations and high rental yields

By Dennis Chan

LAST week's news of an HUDC flat in Bishan changing hands at $1.1 million has ignited fresh discussion on public housing among keen property watchers.

Should a 24-year-old public flat on a 99-year lease be worth so much?

To be fair, it is a misnomer to equate the record-setting Shunfu Road flat at Block 315 with public housing - although technically, it is correct.

HUDC estates are an anachronism from the 1970s, a hybrid housing type to meet the needs of middle-income Singaporeans who did not qualify for Housing Board (HDB) flats but could not afford private property. Only 18 such estates were built before the HUDC programme was stopped in 1987 due to falling demand.

Since then, all HUDC estates, with the exception of Braddell View, have been privatised or earmarked for privatisation.

This explains the $1.1 million price tag for the 1,668 sq foot apartment, which works out to $659 per sq foot (psf). The Shunfu HUDC estate is in the midst of being privatised, explaining the high price. The value of an HUDC flat usually rises when the estate is privatised and ownership restrictions are lifted. Some estates also gate up their grounds and build a clubhouse and swimming pool, increasing the value to buyers.

The price paid is reasonable for a private apartment in District 20, a short walk to the Marymount MRT station.

But for a true reflection of the value of an HDB flat, you have to look at HDB transactions in that area.

A bigger HDB executive maisonette at Block 301, even closer to the MRT station, fetched $760,000 or $447 psf.

These two Shunfu transactions, registered last month, were likely inked around July - before the Government's Aug 30 measures to cool the property market. Since then, HDB estimates that transaction volumes last month have fallen by a quarter compared with the previous month.

Under these circumstances, we are unlikely to see an HDB flat cross the psychological threshold of $1 million soon. The record of $900,000 for a penthouse maisonette in Bishan Street 24 transacted in July should remain safe for a while.

In fact, some property analysts are predicting a slide in HDB prices, following the tightening of credit and changes in rules making it harder for private property owners to buy an HDB resale flat.

Based on lower upfront cash demanded by sellers, ERA Asia-Pacific associate director Eugene Lim estimated prices have softened by 5 per cent.

While the recent cooling measures may dampen prices for a while, market fundamentals will take over. So long as the economy hums along and the population continues to grow, prices of HDB flats will remain firm, as they are good investment options with high rental yield.

Take a three-room flat in Toa Payoh. Based on HDB data, the median price is $300,000 while the median rent is $1,550 a month. This works out to a rental yield of 6.2 per cent. And if the Toa Payoh flat price were to fall by 10 per cent, the yield will rise to almost 7 per cent.

Consider that banks pay a measly 0.125 per cent for deposits, and that home financing costs hover at 1.5 per cent to 2.6 per cent interest - and it seems almost a no-brainer to buy an HDB flat, fulfil the requisite minimum occupation period (now five years) and then let it out.

There is a simple reason why HDB flats attract such good yield.

They tend to be well located, with many within walking distance of MRT stations, and with an abundance of amenities such as schools, markets and eating outlets nearby. Buyers also have the confidence that even an ageing HDB estate will be well maintained.

Moreover, HDB flat prices are, in a sense, artificially depressed because of ownership restrictions. Buyers must stay in a flat for five years. Only citizens and permanent residents are eligible to buy HDB flats.

HDB flats thus exchange hands at prices lower than what they could fetch if those ownership restrictions were lifted.

In contrast, rental rates for HDB flats reflect the full market value of their excellent location and surrounding amenities, which is why HDB flats, on a psf basis, can be rented out for as much if not more than private condos in far-flung estates.

When rental rates are high while sale prices are depressed, the rental yield becomes more attractive.

The Government's commitment to public housing and its constant injection of funds to spruce up HDB estates, means an HDB flat here has enormous stored value, unlike public housing elsewhere.

It was baffling to hear some analysts advising owners to sell their flats, on the premise that prices have peaked, with little upside expected.

Between selling an HDB flat for capital gain and keeping it for long-term rental income, I would plump for the latter.

So what if someone offers you $50,000 more than what your flat is worth today? You can make back that same amount by letting it out for less than three years, if you take the example of the three-room Toa Payoh flat above.

Just how much stored value there is in HDB estates can be estimated by looking at the Pinnacle@Duxton development in Tanjong Pagar. A recent classified advertisement had an asking rent of $4,500 a month for a five-room unit. The eventual rental may be a tad lower, but the asking price is indicative of the attractiveness of HDB flats in prime locations.

The Pinnacle, with its excellent location and ground-breaking architecture, sold at an average price of $335,000 for four-room flats and $395,000 for five-room flats at its 2004 initial launch. Leftover flats were sold at average prices of $486,000 and $590,000 respectively last year. The priciest was a 49th-storey unit sold at $645,800.

Pinnacle flats should be available on the resale market from end-2014 when the five-year minimum occupation period is up. If there is one HDB development that can breach the $1 million mark, the Pinnacle is it.

And remember, you read it here first.

dennis@sph.com.sg