Can Singapore public housing infrastructure trusts mitigate lease decay issues?
Incorporating Singapore’s Housing & Development Board (HDB) apartment complexes — the city-state’s public housing assets — into residential infrastructure trusts can mitigate the issue of HDB lease decay. Additionally, it has the potential to enhance retirement adequacy of its pension system, the Central Provident Fund (CPF), as well as deepening its strength in real estate investment trusts (REITs).
Often cited as an leading example of public housing worldwide for its replicability, it also exemplifies the technocratic governing philosophy of “think ahead, think again and think across”. But despite driving high housing ownership, such a social asset is encountering challenges as apartments age and Singapore’s economy and soceity restructures.
After Lee Kuan Yew’s death in 2015, the government confirmed HDB properties are worthless once leases end, as they are sold on 99-year leases. The state is the penultimate land owner. On expiration, the state can reposess and redevelop the land. This policy is reportedly impacting prices, with some apartments in older districts’ — a families’ nest egg — allegedly in terminal decline.
The HDB’s Lease Buyback Scheme (LBS) permits homeowners to monetise their flat in order to receive an income stream during retirement years, while continuing to live in it. Currently, the LBS allows owners to sell part of your flat’s lease to HDB and retain the length of lease based on the age of the youngest owner. These sale proceeds are used to top up the CPF Retirement Account (RA), which can then be used to join CPF LIFE, which will provide individuals with a monthly income for life.
Creating infrastructure trusts where HDB apartments aged at least 35 years are injected — sufficient time to nurture a family — can be marketed as trusts generating stable and sustainable cash flows from rentals. HDB flats are purchased on a 99-year leasehold basis from HDB but the government remains the penultimate landlord.
The Housing Development Board (HDB) or appropriaet agency can be positioned as the beneficiary owner of these housing infrastructure trusts. Operating it as a trustee-manager, proceeds can go to unitholders (i.e. CPF Board) while residents can commit to shorter and more affordable leases ranging from 10 to 35 years.
Incorporating HDBs into infrastructure trusts, offering shorter lease terms and exploring ways to to integrate existing schemes into Singapore equities can theoretically defray housing costs for younger Singaporeans; permit older residents to monetise their apartments in a transparent, market-driven manner while preserving their value; and serve to enhance CPF’s retirement adequacy of the CPF.
HDB infrastructure trusts
Investors in Singapore business trusts receive dividends in the form of annual or semi-annual distributions, with trustee-managers permitted to pay distributions to investors out of operating cash flows. HDB infrastructure trusts can leverage Singapore’s deep strength in property trusts and the strong domestic bias towards dividend-yielding counters to generate cash flows from rental income.
REITs were first introduced in 2002, followed by business trusts in 2004. This is governed by the Singapore’s Business Trusts Act (Chapter 31A of Singapore).
Essentially companies structured as trusts,a business trust is is established under a trust deed with a trustee-manager maintaining legal ownership of the underlying assets in the trust. The trustee-manager is also responsible for managing the assets for the beneficial owners of the trust.
The investing public reaps benefits in the form of distributions as business trusts are permitted to pay distributions to investors out of operating cashflow. This is unlike companies, which can only pay dividends out of accounting profits. As such, infrastructure companies are seen to be suitable candidates for the creation of business trusts.
This is due mainly to the nature of their businesses, which generally require high initial capital expenditure but which offer stable operating cashflow over the long term.
Singapore’s financial markets
By most accounts, Singapore’s financial markets are characterised by their transparency and safety. With a more turbulent world, Singapore can capitalise on a growing demand for safe assets, given the limited ability of the world to produce these assets.
As it stands, property trusts account for a third of the daily turnover seen in Singapore’s equity market, with REITs blossoming in Singapore and underwritten by a strong investor appetite for dividend-yielding counters, compared to havign cash remain static in a bank account. Its small and mature domestic economy, compounded by ageing demographics, also doesn’t offer many opportunities for investing in growth.
But it belongs to the select group of nations with a “triple A” sovereign rating and a clear advantage in supplying safe assets. This is exemplified in the flight-to-safety seen in Singapore equities market through 1H 2020 throughout the early stages of the Wuhan virus pandemic.
According to the REIT Association of Singapore (REITAS), 44 S-REITs and property trusts which have grown at a compound annual growth rate (CAGR) of 22 per cent over the last 10 years makes Singapore the largest REIT market in Asia (ex-Japan). REIT listings from Europe and US property trusts in recent years also signal Singapore’s emergence as a global REIT hub, though this will be challenged as more Asian regional exchanges enter the REIT space.
As of November 2019, 86 percent of Singapore-listed property trusts own properties outside across the Asia Pacific, South Asia, Europe and the USA, with many paying quarterly or semi-annual distributions. Bloomberg data indicates that with a yield of 6.2 percent and the highest payout among all sectors on the Straits Times Index, Singapore-listed REITs are more frequently traded than most other Singapore blue-chip stocks.
Bloomberg observed in February 2020: “These REITs have outperformed the city-state’s benchmark index by a wide margin in the past two years, as the nation’s investors have a penchant for high-dividend stocks. The FTSE Straits Times REIT Index has gained 18%, compared with a drop of 9.4% for the Straits Times Index. The former reached a 12-year high this month.”
Singapore’s public housing & pension reconfiguration
Public housing generally requires high initial capital expenditure and if strctured into housing infrastructure trusts, can offer stable long-term operating cash flows. This will certainly appeal to pension funds and others oriented to dividend investing.
However, this will have to be coupled with reforms to how its HDB apartment ownership is structured, such as implementing sustainable and affordable rental fee structures, which need to be determined. It must also be structured to generate income that can flow into CPF accounts and other unitholders. Income proceeds generated from rentals can also defray lifecycle construction and maintenance costs as estates age, being an asset enhancement initiative (AEI).
To reconcile HDB apartments as homes and as retirement assets, income from these housing trusts can be distributed to the ageing segments of its population — 50 years and upwards perhaps — as annual, semi-annual or quarterly dividends. This must be coupled with reforms to how CPF money is used to pay for HDBs.
The Dutch pension system, consistently ranked by the Melbourne Mercer Global Pension index as a global leader due to its adequacy, sustainability and integrity, adheres to an emphasis on collective risk-sharing, a necessity for this to work.
“Pension funds in the Netherlands”, by Kemna, Ponds, and Steenbeek, published in the Journal of Investment Consulting in 2011, notes how pension plan redesign is inevitable, with pension funds increasingly linking benefits to financial market performance. Such redesign is essential, especially with global pension systems pressured by unprecedented life expectancies and the need to ensure retirement adequacy.
For instance, younger flats should have their price reduced by reducing lease terms to 35 years, making them more affordable. Upon reaching 35 years, these apartment complexes can then be transferred into infrastructure trusts, where they can become dividend-yielding investment assets contributing income to the CPF of Singaporeans. But such a move requires deeper investigation and financial structuring to assess feasibility.
Convergence: Singapore’s capital markets & housing
In his book “The Third Pillar: How Markets & the State Leave the Community Behind”, Raghuram Rajan, a University of Chicago economist and former Governor of the Reserve Bank of India (RBI), argues as his central thesis that the critical components of a “well-functioning capitalist society” are markets, the state and the community.
In a July 2019 interview with Wharton Business School, Rajan highlighted: “When you lose your job, when you run out of your savings — where did people in Southern Europe, for example, go during the Great Recession? They went back to their families. They went back to their villages, because that was the structure that supported them.”
“And similarly in the U.S., we have this phenomenon of many kids not leaving home and living in their parents’ basement post-Great Recession, because they simply couldn’t find jobs.So the community in a sense is both pre-market preparation — helps you become adequate market participants — but also it’s post-market support. It’s a kind of safety net,”
Singapore lacks such fallbacks. Leveraging its capital markets and the state’s effective monopsony on land ownership, HDB infrastructure trusts can be part of a long-term solution accessible to foreign investors.
There are parallels to China’s opening of its debt markets to foreign investors in recent years. This comes as it grapples with public and private debt estimated at US$34 trillion in 2018 by Bloomberg and seeks to shift away from debt-fuelled growth.
Rajan argues that the way to deal with the differentiated impact of technological disruption and globalisation is to focus on repairing communities.
Structured appropriately, HDB trusts can be a community-focused approach enabling market participation. In “Government and Markets in a Well-Functioning Economy”, published in 2011 by Singapore’s Civil Service College, it highlights how the global financial crisis in 2007–2009 “prompted a major rethink of the relationship between the state and markets”.
Both capital markets and public housing require proper public supervision and regulation to function efficiently, especially given the “critical interdependence of governments and markets”.
Markets and the price movement also signal scarcity and the need to allocate resources between competing claims. Well-functioning markets operate while being embedded in an environment where macroeconomic stability; trust and confidence in contracts; measures to curb monopoly power; and wide acceptance of market operations are enabled. These facilitate the optimal functioning of societies and economies.
In Singapore, where governmental continuity and rule of law are generally assured, HDB infrastructure trusts are a possible solution given the state’s monopsony on land ownership. Such infrastructure trusts can help ameliorate the challenges of sustaining CPF retirement adequacy and ageing HDB estates, while also leveraging the strengths of its capital markets.
But whether such a prospective — and potentially unorthodox — solution is politically or socially palatable and even workable in a financial engineering sense remains to be seen.
