Commentary: Is now the right time for seniors to cash out their HDB nest eggs with the Lease Buyback Scheme?

SINGAPORE: Housing and Development Board (HDB) flats as a nest egg for retirement. There has been a lot of discussion recently surrounding the affordability of HDB flats, with two motions on public housing policy debated in parliament in February.

On Mar 26, Prime Minister Lee Hsien Loong in a speech at a groundbreaking ceremony spoke of flats as valuable nest eggs for retirement and of striving to make all HDB towns highly liveable.

Public housing is a perennial hot-button topic in Singapore. While HDB flats are generally considered affordable compared to private housing options, there are concerns about a mismatch in demand and supply as well as surging prices.

In the 11 quarters since Singapore emerged from the major “circuit breaker” in June 2020, the HDB resale index has surged 29.5 per cent.

For seniors in retirement or approaching retirement, might this be a good time to cash out on their HDB nest egg? 

MONETISING FLATS

HDB flats are home to 80 per cent of Singapore's population, which is rapidly ageing. By 2030 - that’s barely seven years away - one in four Singaporeans will be aged 65 and above.

As retirement comes calling for this group of Singaporeans, what avenues are there for them to live out their silver years comfortably? With a large proportion being asset-rich and cash poor, how can they monetise their flats for retirement?

Nearly 10,000 senior households have done so by selling a portion of the flat’s lease back to HDB.

The Lease Buyback Scheme, initiated by the HDB in 2009, allows elderly Singaporean flat owners to monetise a portion of their remaining lease by selling them back to the housing authority. This allows seniors to receive a lump sum payment while continuing to live in their flats for the rest of their lives.

The proceeds from the sale of the lease, after paying down outstanding mortgage loans, will be used to top up the owners’ Central Provident Fund (CPF) Retirement Account. Any excess above the owners’ CPF Retirement Account top-up requirement will be paid out to them in cash - up to a maximum of S$100,000 (US$75,400) per household.

There are several advantages to this scheme. The first is obvious - additional income. Elderly homeowners will receive an additional source of “monthly income” through the CPF Life payouts, which will greatly boost their retirement comfort.

Second, continued occupancy. Seniors can continue living in their homes, in a neighbourhood they are familiar with for the rest of their lives. In their retirement years, this enhances their sense of security and stability.

Third, bonus money: Seniors who sell their leases may receive a Lease Buyback Scheme bonus of as much as S$30,000.

Since its inception in 2009 until the end of 2022, about 9,700 households have signed up for the Lease Buyback Scheme, said the HDB in February. That works out to an average of about 690 cases per year.

Since 2020, the yearly take-up has remained steady at around 1,500 households. Perhaps the global pandemic in 2020 contributed to the surge. But there are some drawbacks to the scheme that perhaps might be preventing more people from taking it up.

THE TAIL-END

One limitation is flexibility. Once the sale of the lease is completed, owners will not be able to sell the flats in the resale market, rent out the whole unit, or transfer them to their children until they pass on.

Second, since the scheme only allows for the sale of the “tail-end” lease, it is not as financially attractive to those who are looking to sell their property for its full market value. The “tail-end” lease refers to the final part of the 99-year lease of the HDB flat whose value, due to depreciation and financing constraints, is generally much lower in value than the “retained lease” that owners will retain for their use.

Third is reduced inheritance: By selling a portion of the lease, owners will reduce the value of the flats, which could impact the inheritance they leave behind. Should they live another 20 years, perhaps with little cash and needing financial support, and then bequeath the flat with 20 to 30 years of lease remaining, then the residual “tail end” value inherited by their loved ones may not amount to much.

On balance, however, the Lease Buyback Scheme is a viable option for elderly homeowners who are looking to monetise a portion of their remaining lease and continue living in their homes for the rest of their lives.

It is especially feasible for retirees who are planning forward and who realise that they may have to tighten their belts in the near future, as they belong to the relatively large demographic segment of baby boomers who are “asset rich, cash poor”.  

For these flat owners, there is no better timing to do a partial cash out on their nest egg as HDB resale values have climbed significantly in the last three years, as the value of the Lease Buyback Scheme should be higher now than it was before this price surge.

With increased property cooling measures, higher interest rates, stubbornly high inflation, headwinds in employment for banking and tech sectors as well as a big supply of Build-To-Order (BTO) flats and private residential completions, HDB resale prices are likely to be at a new peak now, with more downside risks than up for the rest of 2023 and well into 2024.

HDB resale prices in the first three months grew at its slowest pace since COVID-19 struck; flash estimates for the Resale Price Index show growth at 0.9 per cent in the first quarter, slower than the 2.3 per cent increase in the fourth quarter of 2022.

As with all major decisions, it is always a good idea for seniors to discuss their financial needs with their families and loved ones. A well-planned retirement nest egg can serve as a beacon of financial security and independence for seniors in Singapore, giving them peace of mind.

Ku Swee Yong is a director at real estate consulting firm International Property Advisor Pte Ltd and a researcher with the Singapore University of Social Sciences focused on autonomous vehicles and urban planning.