Why You Should Always Buy A BTO Flat – Part 2

Just a couple of days ago, I made a case for purchasing BTO flats instead of resale units. It also appears that I was caught with my pants down as I failed to take into account the possible differences in flat sizes in my calculations. The size of my 5 room flat is about 110 square metres, which is typically about 10% smaller than the 5 room resale flat as they come in at 120+ square metres. So yeah, new BTOs are generally much smaller than those older resale flats. No one can really deny this with a straight face, no matter how you present the statistics. And introducing a new term like living space/per person to argue against this will just attract more ire and scorn. Hopefully, the authorities have learnt a lesson. 

Luckily for me (it’s actually all part of a well-crafted storyline), there isn’t a need to go back and tweak the numbers since even older 5 roomers in Punggol are the same 110 square metres. But then how about other towns or examples? So instead of boring you with my relatively outdated flat purchase, let’s use an example from the latest July 2013 BTO launch to analyse if larger flat sizes could help to push the scale in favour of the Resale Flat.

Wow, there’s a an attractive Bukit Merah BTO project named ParcView in this round of BTO sales. It’s also pretty near to the Telok Blangah MRT station and a short distance away from VivoCity. As expected, the prices are not cheap and a 4 room BTO would roughly cost $500,000. I can hear the complaints coming in…“Half a million for a BTO project? HDB are blood suckers!”

In my honest opinion, it’s actually reasonably priced, considering that a 4 room resale unit in the same area (Telok Blangah Heights) costs about $550,000. The BTO would still command a $20,000 savings even after considering the CPF Resale Grant. However, I have to acknowledge that if you need a place immediately, and after factoring in the the potential rental costs, it would be cheaper to buy those slightly bigger Telok Blangah Heights flats which you could move into immediately.

The Lease Period

So, is there some mispricing going on for this BTO project that we could arbitrage on? Fat hope. The anomaly is down to a single factor, the lease period. Every flat is granted a 99 years lease period so theoretically, it could be argued that the price one pays for the BTO is actually an advanced payment for 99 years of rental. Since those Telok Blangah Heights flats were built in the mid to late 70s, this also means that there would only be 60 years of lease period left for the new buyer.

Based on simple math and logic, the price of the resale unit should be discounted by at least 30%! I know many of you might start to dismiss this factor since you might already be middle-aged and highly doubt you could live for another 60 years till 100 years old.

However, it’s time to wake up from this myopic view. Because who knows, 20 years down the road, you might need/want to relocate to another town. You put up this flat for sale, but realise it’s going to be sold at a distressed price. Interest in this flat would be limited with the remaining lease period of 40 years since a young couple in their late 20s would very likely outlive this flat.

“You’re being paranoid, and worse, ignorant. Haven’t you heard of the SERs En bloc Scheme? Older flats will be identified for redevelopment and HDB will compensate flat owners favorably. Moreover, you will have priority to choose another new flat with a new 99 years lease in a similar central location! It’s going to be a windfall.”

It’s true that many flats above 40 years old have already benefited from this SERs En bloc scheme. However, these flats were largely identified and probably carefully selected by the authorities due to their redevelopment potential (i.e. to double or triple the amount of units in the area through higher floors or density). Therefore, their numbers are really small in proportion to the entire resale market. Moreover, most of the flats you see today were built in the 80s and 90s and it’s unrealistically optimistic to expect the government to compensate everyone fully and provide us with a new subsidised flat with 99 years of lease! If that day were to come, either social mobility is going to go up in smoke or we will be living in 100 storey flats.

Ok, don’t panic. If you’ve already bought a resale flat, the good news is that it’s still going to fetch a pretty good value as seen from the recent transactions among those in Telok Blangah Heights. Otherwise, I sincerely hope that you will be identified for the SERs En bloc scheme before the lease runs out. But if you’re just starting to explore the possiblity of buying a HDB flat with your partner, unless you are an astute SERs En bloc picker or get really lucky, I really hope to change your mind to purchase that 40 year old Telok Blangah/Tiong Bahru/Kallang flat.

This is because as I have shown, the case for always buying a BTO flat is even stronger after factoring in the lease period. Citizens are given two bites of the BTO cherry and optimising them could easily be the single, most important booster towards an early semi-retirement.