Impact from Sale of State Land on Reserves and Accounting Treatment of Cost of State Land for Public Housing

Parliamentary Questions by Mr Leong Mun Wai:

To ask the Deputy Prime Minister and Minister for Finance whether there is a net increase in the past reserves when state land is first sold and the sales proceeds are transferred to the financial assets, and when the land is sold again after reverting to the Government’s ownership upon the expiry of its lease.

To ask the Deputy Prime Minister and Minister for Finance whether Singaporeans are paying (i) the cost of state land used for public housing when initially acquired by the Government (ii) the difference between the higher land cost when the land was purchased by HDB for development, and that which the Government initially acquired the land for and (iii) taxes to cover the shortfall incurred by HDB from the land cost paid to past reserves at full market price, thereby amounting to triple payments for use of state land that are developed into HDB flats if the land acquisition and development.

Parliamentary Question by Mr Pritam Singh:

To ask the Minister for National Development in view of the POFMA Correction Directions issued on 14 October 2022 to an individual for his Facebook posts dated 4 October 2022, whether HDB will provide (i) a clear breakdown of the total development cost of all new flats henceforth and (ii) the value of the “generous subsidies” applied to the assessed market price of these new flats.

Parliamentary Reply by Second Minister for Finance & National Development, Ms Indranee Rajah:

Mr Speaker, may I take questions 3 and 4 addressed to the Deputy Prime Minister and Minister for Finance, and question 5 addressed to the Minister for National Development together as they relate to the same subject matter, namely the sale of State Land, how the proceeds are treated, and the reserves.

Mr Speaker, sir, before these questions can be addressed, it is necessary to understand the relationship between State Land, land sales proceeds, and our reserves. It has been explained before but it bears repeating and some elaboration.

Whether reserves are increased when land is sold repeatedly

Under our land laws, which trace back to English land laws, all title to land in Singapore is derived from the State. It is from this ultimate title to land (that is held by the State) that interest in land (such as leases) can be carved out and granted by the State to other persons. The leases confer ownership and possession of those lands to such other persons, but only for the duration of the lease. The State retains the interest in the balance of the lands not leased, and for lands which have been leased, in the rest of the period not granted.

In a case where the State has granted a portion of its interests (for example, under a 99-year lease) to other persons, the State holds the remainder of those interests (meaning, after the 99th year for perpetuity) – which we refer to as the “reversionary interests”.

Where the State has not granted any interest in a piece of land, or no one is named as the person owning the lease, that land remains “State Land”. 

Under the  Constitution, all State Land forms part of our reserves.

Land is a physical asset. My Speaker, just to help people understand, may I have permission to show some slides?

When we sell State Land, we convert the physical asset into a financial asset. For example, if we sell a parcel of State Land at its fair market value of, say, $1m, we no longer have the land for the term of the lease sold, but we have $1m.

After this transaction, there is no net increase in the reserves. We have merely changed the physical land in our reserves into an equivalent amount of financial reserves. There is no new value created and hence no addition to the reserves.

Now let’s see what happens to the cash and to the land.

The $1m cash now forms part of our financial reserves, which the Government invests (for example through GIC) to grow for the benefit of Singaporeans.

We use up to 50% of the long-term expected real returns on the investment every year in our annual budget. This amount is known as the Net Investment Return Contribution or NIRC.

The rest of the actual returns (that is 100% of the actual returns minus 50% of the long-term expected real returns) is re-invested. This rule strikes a balance between the needs of current and future generations of Singaporeans. It preserves the real value of our reserves and assures us of a rainy-day fund in the event of future crises.

Now let’s turn to the land that has been sold. 

As the State holds ultimate title to the land, the land automatically reverts to the State once the 99 years is up. It then becomes State Land again, and will be protected as past reserves once again.

When that happens, there is no net increase in our reserves either. This is because the reversionary interest in that parcel of land had all along formed part of our reserves. In other words, the financial proceeds that we had earlier received was to make up for the State’s loss of the use of the land for 99 years, not for the State giving the land away forever.

If the Government then carves out another lease of the same land and sells this land on a fresh lease, the same process as before will apply. Again, it would be a conversion of a physical asset to a financial asset to make up for the State’s loss of use of the land, for the period of that carving out.

Thus the answer to Mr Leong’s first question is:

a. There is no net increase in the reserves when State Land is first sold and the sales proceeds are transferred to the financial assets. It is just a conversion of one asset form to another.

b. There is no net increase in the reserves when the land returns to the State after the lease expires, as the value of the lease did not include the value of the reversionary interest;

c. There is again no increase in the reserves when the land which was returned to the Government is sold again. As before, that is merely a conversion of one form of asset to another;

d.There is an increase in reserves when the Government invests and grows the financial assets. This is the outcome of careful and prudent management of our reserves by this Government and should not be taken for granted.

Alleged triple payment for HDB land

I move on to Mr Leong’s second query.

There is no “triple payment” by Singaporeans for the land used to develop HDB flats.

From time to time, the Government may need to compulsorily acquire land for public housing. In that event, the following steps occur.

First, the Government will acquire the land and compensate the landowner for its value. Since 2007, the compensation is based on fair market value. This compensation may be funded from past reserves or government revenues. Land acquisition through SERS, for instance, is funded by past reserves.

Second, HDB will purchase the land from the Government. HDB pays fair market value for it, just like any other buyer of State Land. Why do we do this? Why don’t we simply transfer the land to HDB at zero cost since it is a transaction between government and a government agency?

The reason is because the transfer to HDB for developing public housing results in the land being taken out of the past reserves.

If fair market value is not paid in exchange for the land, the past reserves would be depleted. There would be no corresponding financial asset to replace the physical asset, and no land sale proceeds to invest and generate returns for use in the form of the NIRC.

Requiring HDB to pay fair market value for the land cost thus preserves the value of our past reserves for the benefit of all Singaporeans, both present and future.

The third transaction is when HDB sells flats to Singaporeans.  HDB does so at a discount from fair market value to keep flat prices affordable. The difference between the fair market value and HDB’s posted price is the market subsidy. In addition, the Government provides generous grants to eligible applicants, to purchase flats below HDB’s posted price.

Because of these grants and subsidies, HDB’s effective selling price is typically much lower than the total cost of development, which results in a revenue shortfall.

This shortfall is covered by a government grant to HDB which is funded by NIRC and taxes which are paid not only by Singaporeans but also by PRs, foreigners working and living in Singapore, tourists and companies and other tax-paying entities.

The answer to Mr Leong’s second question therefore is that:

a. The Government does not profit from the sale of State Land developed into public housing;

b. There is no triple payment by Singaporeans for State Land used for public housing;

c. Singaporeans buy BTO flats at a discount from their fair market value, and in addition eligible first-timer flat buyers can enjoy the Enhanced CPF Housing Grant (EHG) of up to $80,000;

d. This can be seen from the fact that a private property of similar size and in a similar location would cost significantly more, and also the fact that after the Minimum Occupation Period, HDB flat owners are typically able to sell their flats at comparable or higher prices than they paid when they purchased their flats from HDB.

Development cost and subsidies for new flats

Mr Pritam Singh asked whether, in view of the POFMA Correction Direction issued on 14 October 2022, HDB will provide a breakdown of the total development cost of BTO flats, and the value of the subsidies applied to them.

The POFMA Clarification states that “HDB does not price new flats to recover the cost of land and construction. Instead, it prices flats significantly below market value using generous subsidies to ensure they are affordable to Singaporeans.”

This is indisputable, for the reasons I have just explained.

It is also confirmed by the fact that the vast majority of first-timer families are able to buy new BTO flats in non-mature estates, and service their monthly mortgage instalments using their CPF, with zero or minimal cash outlay.

Finally, it is evident from HDB’s audited financial statements which are publicly available.

The financial statements contain information on the costs incurred in its Homeownership Programme. They show that the total amount that HDB collects from the sale of flats is less than the cost of its building programme and the housing grants it disburses each year. As a result, HDB incurs a net deficit in the development and sale of new flats.

For the Financial Year (FY) 2021/2022, HDB recorded a deficit of $3.85 billion in its Homeownership Programme. The average deficit incurred by HDB in the last three years (FY2019/20 – FY2021/22) was about $2.68 billion a year.