Friday, June 24, 2011

Time to slay the DBSS 'monster'

THREE years ago, when prices of flats under the Housing Board's Design, Build and Sell Scheme (DBSS) started hotting up, my colleague Chua Mui Hoong called for a stock-taking of the programme. She warned that when public housing is built by the ...
THREE years ago, when prices of flats under the Housing Board's Design, Build and Sell Scheme (DBSS) started hotting up, my colleague Chua Mui Hoong called for a stock-taking of the programme.

She warned that when public housing is built by the private sector, the Government will have a tricky time balancing the interests of home buyers and developers. The DBSS could become 'a monster of the market's making', she wrote, with developers profiting from high premiums slapped on homes and buyers seduced by unrealistic expectations of capital gains.

Today, the 'monster' is rearing its ugly head - in the form of a record-setting $880,000 five-room flat.

This was the 'indicative' price that developer Sim Lian Group had put on the highest-end units in its DBSS project Centrale 8 in Tampines.

A public uproar ensued over the prices. Three days ago, Sim Lian released a 'confirmed price range' of its Centrale 8 units with five-room units costing up to $102,000 less, at $778,000. Its three-room flats are now priced up to $445,000, down from $510,000 before.

Sim Lian insists the initial prices were just 'indicative' anyway. But property analysts say it is unusual for any developer to lower prices by such a big margin, and that the developer was bowing to public pressure.

Going by the complaints online and in letters to the press, the fundamental issue seems to be this: DBSS flats are built on HDB land and subject to HDB eligibility rules, and are public housing. If so, why are private developers allowed to profit from building them and charging sky-high prices?

And the nub of the issue: Who does the DBSS scheme benefit ultimately?

Back in 2005, the DBSS was announced by then National Development Minister Mah Bow Tan. The scheme essentially had three objectives.

First, to give private developers a slice of the public housing pie (the property market was in the doldrums then). Second, to pave the way for HDB projects to be gradually outsourced to the private sector. Third, to allow for more innovation in building and design, and give better value-for-money to flat buyers.

It was called a 'bold experiment'. For the first time, private developers would set prices for public housing. Previously, they could design and build them, but prices were set by HDB.

In the years that followed, the scheme won the support of the market. Developers were keen to bid for the land, often sited at excellent locations. They could price the flats to get buyers, who liked their designs and convenient locations.

The first DBSS project launched in 2006, The Premiere @ Tampines, also developed by Sim Lian, had flats priced from $138,000 for two-room units to $450,000 for five-room flats. Parc Lumiere in Simei launched in 2009 attracted long queues.

Why is the scheme in disrepute now?

For one, market conditions have changed. There was no supply crunch then. Families could buy new flats directly from HDB from its stock of unsold flats, or from its new Build-to-Order (BTO) projects. They could also buy from the resale market. The steady supply kept DBSS flat prices in check. Developers knew predatory pricing would leave them with unsold units.

Today, a tight supply situation has caused prices of new and resale HDB flats to soar. HDB's stock of completed flats are snapped up, and there are many buyers jostling for new BTO flats.

Developers naturally want to maximise profits and will price their flats at the highest levels buyers can bear.

Sim Lian paid about $260 per sq ft (psf) for the land. Analysts estimate the break-even cost for Centrale 8 at about $450 to $500 psf.

At this range, and at the original price of $880,000, or $750 psf, Sim Lian's mark-up was 50 per cent to 67 per cent. Even at the lowered price of $663 psf, the premium is still a hefty 33 per cent to 47 per cent.

Compare that to The Premiere, where land cost was about $114 psf, break-even cost was about $240 psf and the average selling price was about $300 psf - a profit margin of about 25 per cent.

So ,to answer the question of who benefits from the DBSS scheme, it seems that even if the HDB gets higher land tender prices from developers' bids, the developer is the biggest winner.

What of buyers? They were supposed to benefit from having more choices in HDB flat designs. But HDB flat buyers these days have many choices: Standard flats under the BTO scheme, or premium BTO flats with better finishes.

There is also the Design and Build scheme, where private architects design and build the flats. HDB has also built several high-profile BTO estates such as Dawson and the iconic Pinnacle at Duxton designed by award-winning architects.

Some buyers might have been lured into paying high prices for DBSS flats believing in their capital gains potential. But agents are sceptical about this, pointing out that DBSS estates are not gated like private condominiums or even executive condominiums. They do not have facilities like swimming pools.

The raison d'etre for the DBSS in 2005 must be reviewed in the light of today's market conditions and expectations.

That DBSS flats can still find buyers at prices of $700 psf is immaterial.

The bigger question is whether HDB should take back its role as developer of public housing. Implicit in the DBSS concept was the notion that HDB might eventually want to 'outsource' more of the developer's role - and risk - to the private sector.

While this may sound attractive, it ignores the reality that voters in an era of rising inflation and stagnating or slow wage growth want affordable public housing. They prefer the state, not the market, to provide this.

In any case, citizens will hold the Government - not private developers - to account if prices of public housing become unaffordable. It is thus politically illogical for the state to devise a scheme which lets private developers set high prices and enjoy fat profits from public housing, when the political price for those high prices will be paid by the Government.

The DBSS was indeed bold and risky. The risks are only beginning to be understood. The Government should just be bold again - and pull the plug on it.

The only losers will be developers, which can no longer look forward to 60 per cent profit margins from public housing.

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