Valuation of Lease under Enhanced Lease Buyback Scheme

I would like to first thank the Minister for the very comprehensive enhancement to LBS to make it accessible for more elderly households and also making the scheme more flexible. I have two sets of supplementary questions for the Minister, specifically to how you calculate the value of the lease sold back to HDB.

First, even when the duration of the lease sold to HDB is equal to the duration of the lease retained by the owners, why are the sales proceeds to owners lower? How does HDB calculate the depreciation in determining the value of the lease that they purchased? Would they vary the depreciation rate depending on the years of lease retained? So, how is the calculation done?

The second question relates to the market value which Minister just spoke about. LBS proceeds are calculated based on market value. So, how can HDB mitigate against the volatility of property prices so that flat owners will not need to worry about short-term property cycles when exercising the option of using LBS to monetise their long-term asset?

Madam, first of all, assessing property value is a professional piece of work. As for how property values vary across the lifespan of a property, there are established ways of doing that kind of computation. It is certainly not a straight line. Using the example that the Member quoted, it does not mean that the value of the first "X" years of a lease to be retained will equal that of the tail end of the lease that the owner is selling to HDB. It is not a straight line. In fact, it tends to be an inverted "C". There are two reasons

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for it. One is time value for money. A thousand dollars today is worth more than $1,000 in 35 years' time. Secondly, properties with very short outstanding lease tend to depreciate faster than properties still with very long lease.

So, the end result is, if I may use the example the Member gave, the valuers are likely to value the first part of the lease which will be retained by the owner at about 60%. So, instead of a 50-50 split of the full value of the lease, it will be roughly a 60-40 split. In other words, the lease that they are selling is probably worth about 40% of the market value of the entire lease today.

How do we handle volatility? We have yet to find a way to eliminate volatility in property prices. At my age, I have lived through several property ups and downs. And I can guarantee you over the next 30 years, there will still be many property up-and-down cycles. At whichever time of the property cycle, it will affect all the monetisation options, whether it is lease buyback or right-sizing or sell your property to move to a Studio Apartment, all will be impacted.

The key is to make sure that there is proper counselling so that the owner or the potential participant in the Lease Buyback Scheme, or any other monetisation options, is fully aware of the various options and, specifically, how it would impact him or her so that he or she can then make a very informed, careful decision. He or she should not rush into deciding on whether right-sizing is the right option or the Lease Buyback Scheme is the right option. Think it carefully, discuss with your financial planner or your Member of Parliament, and seek proper expert advice and then make a careful decision because this is a long-term decision, whether you decide to opt for 30 years or 35 years. Not as long as a marriage, but same thing too when you decide on your mate, think carefully, otherwise you may regret halfway through the process.

I would like to ask the Minister if someone decides to go on the LBS, does it mean that to maximise the LBS value, it would probably be better for him to sign up at a high end of the property cycle rather than a lower end? Does the timing affect the value of the lease and hence, the payout?

I should not overplay my role. I am not a financial planner. Let us say we are at the high end of the property cycle, as I have said, it impacts all the various monetisation options. If you sell today to right size, and because you are at the height of the property cycle, you can sell high. It also means that when you buy your Studio Apartment, it will also be priced high.

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So, likewise, for LBS, if it is at the height of the property cycle, then the lease that you will be retaining will also be priced high. Likewise, the tail end of the lease. So, 60-40 share of "X" which will be large as compared to "Y", let us say, when it is at the low end of the property market. So, it will be a 60-40 share of "X" versus a 60-40 share of "Y".

It is very hard to play the market, to be able to judge the timing when "Yes, you find the exact sweet spot to make a decision". When you consider all the various options, think it carefully. The best outcome, as I have said before, is that you do not have to monetise it through Lease Buyback. The best outcome that we prefer is that your children are good and they ask you to stay with them so that you can rent out your flat which you continue to own, and every month collect a monthly rental. That, I think is the best outcome for the family, for the children, for the parents and for society at large.

I would like to ask the Minister why is there a requirement that the minimum lease to be sold to HDB must be 20 years. Does it mean that for those who want to sell a lease of 18 years or 19 years, they would have to make an appeal?

That is a fine print, a technical requirement in the scheme. In fact, it has no practical value at this point in time because all properties can meet this requirement because there is still substantial outstanding lease. But it is an important technical requirement of the scheme because we also want to make sure that the LBS proceeds would be of some significant value. As we have just discussed, if the outstanding lease is too short, the value is so little that when you convert into annuity or into upfront cash proceeds, it may not be too meaningful for the owner.