Should a HDB upgrader consider an EC over private resale property?
By EdgeProp Singapore
/ EdgeProp |
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The growing disparity in condo and HDB home prices have made it increasingly difficult for HDB homeowners to make the jump toward private properties.
The price gap is expected to grow wider as HDB resale prices continue on a downtrend, with the ongoing supply of new Build-To-Order (BTO) projects and the recent announcement that not all older HDB flats will be eligible for Selective En bloc Redevelopment Scheme.
On the other hand, private property prices have been on a steady uptrend, spurred by strong collective sale activities and bullish bids for land sales by developers.
For those with budget constraints, the surge in private home prices may push them in the direction of the executive condominium (EC) market or the resale market for older condos in the suburbs, where prices have not risen as quickly as newer projects.
Prices of new homes in Outside Central Region (OCR) rose to an average of $1,360 in 2018 from $1,228 in 2017. In comparison, resale home prices for OCR properties averaged at $968 psf in 2018 from $925 psf in 2017.
EC or older resale condos – what are some considerations?
1) Pricing
ECs are a public-private hybrid type of housing that caters to the sandwiched class. They’re a lot like condominiums, but come with added restrictions.
However, because they fall under the HDB umbrella, EC applicants are eligible for certain CPF Housing Grants. For instance, first-time applicants who are Singapore citizens and are applying as a couple can get up to $30,000 worth of housing grants (full list of grants here).
Of course, the main appeal is that ECs are typically priced significantly lower than private properties, but tend to come with similar amenities such as a swimming pool, a gym and BBQ pits.
In 1H2018, prices of resale condos that were completed up to 10 years ago in the Outside Central Region (OCR) averaged at $1,068 psf.
In comparison, EC resale prices averaged at $813 psf within the same time period in 2018. However, the April 2018 launch of the new EC, Rivercove Residences has set a new high for EC prices, at an average of $965 psf.
The beauty of EC projects is that they are privatised 10 years after completion, after which restrictions such as buyer eligibility and resale conditions will be lifted.
2) Eligibility
For new ECs: Only Singaporean couples and Singaporean/permanent resident couples are eligible to buy a new EC unit. The couple must also not exceed the household income ceiling of $14,000 a month.
This is also provided that buyers only own or owned one of the following units prior to their application: flat bought from HDB, EC or DBSS flat purchased from the developer, and a HDB resale flat bought using a CPF Housing Grant (only applies to first-time applicants). In short, an eligible buyer is allowed to purchase the above properties twice in total, not twice per type of property.
For resale ECs: EC owners who have met the five-year minimum occupation period (MOP) can sell their EC in the open market. The five-year MOP is calculated from the date of issuance of the Temporary Occupation Permit (TOP).
From the sixth to the 10th year after the MOP, ECs can be sold to Singapore Citizens (SCs) or Permanent Residents (PRs). Unlike a new EC unit, resale ECs can be sold to individuals (as opposed to a family nucleus), provided they are SCs or PRs aged 21 and above. However, buyers of resale ECs are not eligible for CPF Housing Grants.
3) Supply
According to URA data, a total of 2,213 EC units were completed in 1Q2018, with another 1,917 units in the pipeline throughout the rest of the year. But this number is expected to drop to 1,386 in 2019 and to 628 in 2020.
Source: URA
Source: URA
With supply of new ECs expected to remain tight in the near future, coupled with an increase in demand, HDB homeowners who are seeking an upgrade may have little choice but to turn to the private resale market.
4) Location
Aside from supply issues, upgraders who wish to live in a central location face limited choices when it comes to new EC buys.
Over the last five years, the bulk of new EC launches have been focused on the North and North-East regions, followed by the West and East regions. The last time an EC was launched in the Central Region was with Bishan Loft in 3Q2001.
Bishan Loft has been the only EC launched in the Central Region since 2001
Incidentally, based on an Orange Tee study, Bishan Loft managed to achieve the highest returns among EC projects at privatisation. It achieved an estimated 166% increase in profit after it achieved its MOP in 2008. This was attributed to the project’s location and surrounding supply available, which resulted in steeper capital appreciation, which we will look at in greater detail below.
5) Potential gains
With a substantial price difference between ECs and private condos, buyers stand to achieve greater capital appreciation once the EC is fully privatised.
According to the study by Orange Tee, prices of ECs tend to “catch up” with private properties after the five-year and 10-year mark. The study looked at a basket of comparable ECs and condos, and found that the average price gap between new ECs and condos started at around 20% (or more). This means that a new EC is typically sold at 20% less than a comparable new private condo.
The price gap is attributed to the various sale restrictions imposed on ECs and the difference in land and constructions costs. But because ECs still fall under the purview of the government, developers have to be conservative in their pricing.
Upon fulfilment of MOP and at privatisation, the gaps narrows to 9% and 5% respectively. At the end of the MOP, ECs can be sold to Singapore Citizens (SCs) and Permanent Residents (PRs).
The Orange Tee study noted that because most ECs are located in OCR - where demand is largely driven by Singaporeans and PRs - much of the capital appreciation tend to be achieved immediately after the five-year MOP is completed. While ECs can be sold to foreigners upon privatisation, the increase in demand is not substantial, and the price gap only narrows marginally after the 10-year mark, the study suggests.
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