Sunday, April 25, 2010

What to invest in? Try new HDB flats

For those who are eligible, there are many tangible benefits to be reaped

As I am a financial journalist, one question that is regularly asked of me at gatherings among relatives and friends is: What to invest in?

An equally popular follow-up is: Where are prices headed?

Heck, even my hairdresser asks me that whenever I pop by the salon, about once a month, for a haircut. 'Hard to tell,' is my usual response, accompanied by a sagely nod.

When it comes to stocks and shares, can anyone tell the future accurately and consistently?

That is not to say I do not have some bright ideas about investing. Getting a new HDB flat is a perennial favourite of mine when asked for advice by people who do not already own one.

'Is that it? Aren't you preaching to the converted?' some of you may rightly ask, given that more than 80 per cent of Singaporeans live in HDB flats.

To a certain extent, I am stating the obvious. But this 'wisdom' may not be apparent to all, especially to those who have certain notions about public housing.

And even among those who do not mind public housing, there are some who simply cannot countenance living in the outlying areas like Sengkang and Punggol where most of the new flats are being built.

For them, nothing less than a flat in a mature town will do. I do not doubt many of them have legitimate reasons for sticking to their stand.

As the mainstay of the HDB building programme is in the suburbs, those who insist on a home in a mature estate must realistically turn to the resale flat market.

But from an investment point of view, getting resale flats during a property boom often translates to paying frothy prices. It is not a smart thing to do, especially when one is starting out on a marriage.

Consider the expenses a courting couple usually face once they decide to get married.

Walking down the aisle is just a first step, not the fairy-tale ending that romance novelists like to write about.

A successful wedding proposal is like a city winning the rights to host the Olympics.

First, there is the euphoria: The man may dance a little jig of delight while his bride-to-be swoons over her quail egg-sized diamond ring. But then comes the hard planning and budgeting.

Get it right and the couple may bask in everlasting warmth and glory like the 1984 Los Angeles Olympics, often cited as the most financially successful Games.

Mess it up and they can expect to carry a lasting millstone like Montreal 1976 (It took the Canadian city 30 years to pay off its Olympic Games debts).

Similarly, money woes can make or break a marriage.

A couple tying the knot will typically need to set aside money for four major cash-flow draining events: the wedding, honeymoon, home purchase and renovation.

This is not an issue if they have wealthy parents who are willing to underwrite all or part of the expenses. But for those who have to finance their own way, prioritising and allocating resources judiciously are critical. Invariably, cash will be tight.

Under such circumstances, the right thing to do is to choose an affordable flat and to pay as little cash as possible.

The idea is to save as much of your salary as possible. The accumulated savings can then be channelled to other investments.

In other words, you do not want to be putting all your eggs into one investment - a house that also doubles as your home. You should also avoid getting mired in debt by buying an expensive home, as this could put stress on the marriage.

One way to acquire an inexpensive home is to choose a resale flat that is unpopular. A flat on a low floor or in an unpopular estate is more likely to be sold at a price that is close to its valuation. As HDB loans are pegged to valuation, a flat that is sold at close to its valuation price or lower may allow the buyer to borrow up to 90 per cent from the HDB.

A big advantage of buying from the resale market is the immediate occupation it affords: The buyer can choose to move into the flat the moment the sale is completed.

But if one can wait, a better alternative is to buy a flat directly from the HDB. Unlike resale flats, there is no haggling over price with the seller. This can be a source of comfort to a buyer who is unfamiliar with the property market and who is not confident he can negotiate a good deal in the open market.

The chances of getting a new flat are pretty good as the HDB has continually ramped up its building programme as well as reserving the bulk of its flats for first-time buyers.

So what if the new flats are mostly found in Sengkang and Punggol? They are fast growing into thriving townships, much like what Tampines, Jurong West and Woodlands have become.

New flats are affordable and priced significantly below the market. Take, for example, the price of a four-room flat at Punggol Emerald and Punggol Waves, which the HDB launched for sale last week.

They are being sold at between $243,000 and $323,000. In comparison, prices of resale flats nearby ranged from $355,000 to $385,000.

To help reduce out-of-pocket expenses on renovations, the HDB is also giving the buyer the option of having the flooring of his flat done up at an additional selling price. For a four-room flat, that amounts to $3,250.

As added icing on the cake, a new HDB flat generally comes with a 99-year lease at the time the HDB hands over the keys to the buyer.

In comparison, the clock on a leasehold property sold by the Government to a private developer starts running down from the date of full payment of land price by the successful tenderer, which is typically within 90 days from the date of award of tender of the land parcel.

Factoring in the time for construction and other delays, the buyer of a 99-year leasehold condominium is usually left with 94 to 95 years by the time he gets the keys to his flat.

It is worse for land that was sold at peak prices in 2007.

Take, for example, the South Beach mixed development at Beach Road. The 99-year leasehold site was won by a City Developments-led consortium in a government tender in 2007, but construction has been delayed as a result of the financial crisis. There are plans to start construction by next year.

Any further delays could shave the initial lease by up to a decade by the time the development is ready for occupation. The consortium has up to 2016 to complete the project.

Some people see such delays as insignificant as there are many other factors that determine the value of a property. But at the end of the day, tenure does matter as it is what differentiates a leasehold property from a freehold one.

To recap, some of the benefits of buying a new HDB flat are that it:

  • Is more affordable;
  • Requires less cash upfront;
  • Is sold at a fixed price. No bargaining is needed;
  • Affords buyers a fresh 99-year lease;
  • Cannot be seized by creditors to pay off debts in the event of bankruptcy provided the purchase was not financed by a bank loan. This protection also applies to resale flats; and
  • Is much cheaper than comparative homes in the market. This means there is a built-in protection against falling prices in a market downturn.
In conclusion, I would advise those who are eligible for public housing to buy a new HDB flat as a first step to investing in their future, even if they aspire to live in private homes eventually.

This is because the HDB home ownership programme provides tangible benefits that are available only to Singaporeans. Citizenship has its privilege.

Source: Sunday Times, 25 Apr 2010

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