HDB valuation: Mindset change needed?

Last week, a Housing and Development Board (HDB) executive flat in Queenstown was sold on the resale market for a new record price of S$1 million, the first time that the magical number was achieved for public housing.

The deal broke the previous record reached only a week earlier, when a Bishan executive maisonette was sold for S$980,000.

While the price tags may have raised eyebrows, it was a long time in the works for those of us who are familiar with the HDB resale market. To us, it was only a matter of time, with the resale market hit by a supply crunch that will continue to bite for some years.

The HDB’s new-flat building programme had been drastically curtailed in the last decade and it was not only until last year that construction was ramped up again.

As the flats are being built and as new owners satisfy the HDB minimum occupation period, there will be significantly less resale supply entering the market over the next several years. By my estimates, this may be between 50 and 75 per cent fewer. Most of these flats will be offered by upgraders who sell their HDB flats to pay for their new private homes.

Yet, in today’s low interest rate environment, more are able to keep their HDB flats as investment properties, meaning resale supply can only tighten further.

At the same time, the renewed activity in the en bloc private housing market has added to the numbers of downgraders. These collective sale beneficiaries have no problems putting up the cash for the high cash-over-valuation (COVs) for the HDB resale flats.

What caught my attention in the two record-breaking deals was not the absolute prices in themselves but the very high COVs.

For the S$1 million Queenstown flat, the COV was S$195,000, meaning that the selling price was more than 20 per cent above its valuation. The same was true for the S$950,000 Bishan executive maisonette.

One of the oft-quoted reasons for the existence of COVs was that valuations were always playing catch-up in a rapidly rising market. But the HDB resale market has been relatively stable for several months now.

The high prices for some HDB flats can be traced to the special market attributes of these units, be they the size, view or interior decor.

Did the valuers for these two flats overlook these special attributes? If not, did they undervalue them? While I can accept a 10 or even 15 per cent difference, to be more than 20 per cent off the eventual selling price – I think – is stretching the subjective nature of valuation a little too far.

These valuations go through HDB in-house valuers who act as quality controllers and who from time to time send them back to the valuers for review if they suspect the numbers are too high or too low.

On a personal level, I feel that high COVs – not just the S$200,000 or so COV – are occurring far too often, especially in a stable market.

Part of the problem lies in the fact that the private HDB valuers, as well as the HDB officials who oversee them, view HDB flats as being highly homogenous. As a result, flat values are compressed together, with little difference between flats in the immediate vicinity

While I agree that an HDB flat in Bedok does not differ too much from one in Ang Mo Kio, public housing flats are actually less homogenous than private flats within its own immediate cluster.

Private apartments are usually sold with fixtures and fittings and in move-in condition. But it is different with HDB flats, with almost all owners having carried out some renovation.

Some drastically alter the interiors with the advice of professional interior designers while others do relatively minor works in consultation with their contractors. And they pay hefty fees running into tens of thousands. Yes, there are also those who do nothing at all.

If you think about it, there is more in common between a private apartment and another in a different block in the same project than between two HDB flats in the same or nearby blocks. And as you know, valuers adjust their numbers based on transactions of comparable properties in close proximity.

Personally, I feel it is time for all those involved in HDB valuations to change their mindset – or do we have to wait for the day when COVs are more than 25 or 30 per cent of their eventual selling price?

By Colin Tan – Head of Research and Consultancy at Chesterton Suntec International

Source : Today – 21 Sep 2012

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