When the music (and lease) stops, who will be left standing?

November 26, 2018

If there is one thing Singaporeans love more than their food, it is real estate.

 

So it came as no surprise that on a recent trip back home, everyone around me was fixated on the hottest topic of debate in the market – the 99-year shelf life of Singapore’s public housing leases.

 

This issue has been high on the public radar since early last year, after the government cautioned that not all old Housing Board (HDB) flats will be automatically eligible for a selective en bloc redevelopment scheme, where it “buys back” older housing estates sites to rejuvenate the land.

 

Flat owners in housing estates selected for the scheme are given a package comprising compensation and rehousing benefits. Homeowners were spooked, naturally.

 

Over 80 per cent of Singapore’s population live in HDB flats. Where they previously and confidently saw their property as a retirement nest egg they would own for life, they are now being told that their home prices would depreciate as their leases dwindle.

 

These 99-year leases extend to a good proportion of private housing as well. Singapore’s oldest HDB flats are about 52 years old. That leaves another 47 years before this first batch of flats “expire”. They will then be returned to the state. Interestingly, China has found itself in a similar predicament.

 

 

In China, citizens may own their residential property – for 70 years. This means that when the lease runs out, the land that their homes are built on would have to be returned to the landlord, the state.

 

Leases for commercial developments last for a shorter period of 50 years, while that for industrial projects are 40 years.

 

The first 70-year residential land leases are only expected to come due around 2030. But for many homeowners, the question of how the land lease will be renewed – if at all – remains a mystery.

 

China’s 2007 Property Law states that residential land use rights would be renewed “automatically”, but it was ambiguous and missing key details. Would leaseholders or homeowners, for instance, have to pay to extend their land use rights? For how much, and for how long?

 

Many are beginning to worry, just like Singaporeans, whether their property will be worth anything as they near the end of their leases.

 

It does not help that the market has seen discrepancies across different cities, too. Last December, officials quelled fears when they told homeowners in the coastal city of Wenzhou in Zhejiang province that they did not have to pay a renewal fee to continue residing in their homes, even though their 20-year leases[1] have expired.

 

This was a reversal from earlier statements that said homeowners would have to pay up to a third of their property’s total value to renew the land use. But the terms for Wenzhou were vastly different from other cities such as Qingdao and Shenzhen that had earlier faced similar lease expirations.

 

In Qingdao, Shandong province, land use renewal prices were set at around 30 per cent of the total asset price. Down south in Shenzhen, Guangdong province, the renewal cost was as low as less than 1 per cent of the total asset value.

 

A homeowner in Shenzhen, for instance, paid just 45,000 yuan for an 80 sq m house to renew its land use rights from 20 to 70 years, before selling it for a handsome 7 million yuan. That local governments have dealt with the issue so differently has only added to confusion, rather than set a national precedent.

 

To be fair, real estate lease expiry is a sensitive issue on all fronts – politically, socially, and economically. And it can be difficult to predict exactly how China will direct its policies.

 

In Singapore, the government is taking pre-emptive steps to address the issue. Prime Minister Lee Hsien Loong announced at his most important annual political speech in August that the government will take back some HDB flats from when they reach 70 years old to redevelop the housing estates, under a new scheme.

 

Ninety-nine years is a very long time,” said PM Lee. “This is the only way to recycle the land.” Details of the new scheme are still being worked out, given that it will only be implemented in about 20 years’ time.

 

Meanwhile, in China, all eyes will be on which route the country will take.

 

The good news is that Chinese Premier Li Keqiang said last year that a real estate protection provision is being drafted to ensure an individual’s access to property under a 70-year lease would be renewed unconditionally.

 

But more can always be done.

 

Not tackling the issue head-on or with more concrete terms now could lead to more anxiety in the market, putting a dent in the investor confidence that the government has taken pains to build up over the last few years.

 

What China needs is good, healthy debate. Specifically, China needs to start talking about what it can or will do about the lease expiry issue. And it has to do so by sending out a unified message, not mixed signals.

 

By delving into the issue early, China would not only offer homeowners reassurance but also create stability and clarity for investors – key strengths of the country that were pivotal in carrying the country through 40 tremendous years of market economy.

 

[1] Several parcels of land across China have much shorter leases of 20 years that were granted in the fledgling days of China’s Reform and Opening Up.

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