25 March 2007

Constitution; Gahmen policies

UPDATE post-Oct 2007: ____________________________________________________

1. Constitutional or not? - Is it even constitutional, I wonder? I hope I won't be hauled up for treason or something for merely asking. I seek your indulgence as I am a newbie at blogging.

Perhaps, it is only in this little red dot where a legislative amendment to the Land Titles (Strata) Act (LTSA) could be passed in 1999 with such equanimity by a Parliament of 82:2 mandating collective sale of Privately-Owned property based on 90% share-value and total-area majority if your estate is less than 10 years old from the date of issuance of TOP (Temporary Occupation Permit) or CSC (Certificate of Statutory Completion), for any building (not being common property), whichever is later (for 80% majority if 10 years or older, subject to approval by the Strata Titles Board (STB) who would NOT issue the collective sale order ONLY on the grounds of (a) financial loss and/or (b) lack of good faith.

2. Financial loss - Under the LTSA, "financial loss" is defined as follows: "if the proceeds of sale for his lot, after any deduction allowed by STB, are less than the price he paid for". Essentially, if you paid $1mn in Year 1 as the purchase price for your property and you are now getting exactly $1mn in, say, Year 15 as the collective sales proceeds AFTER the "deductions allowed by STB" - Presto, there is NO financial loss. As to what "deductions" are "allowed by STB", there is - Ooops - a deafening silence! For nearly over a decade since 1999, we have been (and still are) on this incredible "Journey of Discovery" as to which deductions are allowed and which are not. We are a tad slow, aren't we? Yet, this little red dot is supposed to be very "on", right?

Interest already paid to the bank (which over the common 15/20-year loan tenure may well comprise 50% of your aggregate acquisition cost for this property) is NOT allowed as a deduction - that's confirmed. If the collective sales proceeds are insufficient to redeem any mortgage or charge on the property, it would count as financial loss.

3. Have your cake and eat it too: not you, my dear; CPF of course - However, with the CPF change of policy in Sep 2002 reversing the priority sequence of CPF charge and bank mortgage, the bank mortgage would rank FIRST and the CPF charge would come SECOND if you took up a property financing or refinanced an existing bank loan after Sep 2002. Again, wittingly or unwittingly, this change of CPF policy in fact facilitates collective sales. Why? Because CPF will release its charge on your property even though the net sales proceeds after discharging the bank mortgage are INSUFFICIENT to cover the withdrawn CPF principal and/or the interest that would otherwise have accrued on the amount withdrawn. You see, CPF does NOT require members to top-up. That's what Mr Yeo Loo Keng and his wife, Cheryl Lim, of Waterfront View realised when they recently lost the collective sale appeal. In contrast: Under the old ranking, CPF would NOT release their 1st-ranking charge against the property UNLESS the withdrawn principal and interest that would otherwise have accrued on the amount withdrawn are setttled first and only then will the balance be available to pay off the outstandings owed to the bank. Hence, I reckon if the couple at Waterfront View did NOT refinance their bank loan after Sep 2002, they would have succeeded in using "financial loss" as a basis to defeat the collective sale.

Therefore, this CPF change of policy in Sep 2002 would reduce the incidence of owners successfully citing “financial loss” to STB as a basis to fob off enforced collective sales. Too bad if you now end up with less for your eventual retirement. Remember, CPF Board has always been telling you to take charge of your retirement financial planning - now, have you been naughty or what?

However, IF your net sales proceeds after discharging the bank mortgage COVERS the withdrawn CPF principal and/or the interest that would otherwise have accrued on the amount withdrawn, CPF now requires you to REFUND all or part of these amounts into your CPF account before releasing the remaining cash dregs (if any) to you. That is only prudent of course because your CPF is part of your retirement savings.

Why do I say CPF will have its cake AND eat it too? Just basing on this Sep 2002 policy - do you notice the difference between the two "cakes"??? If you are short after paying the bank, tough luck if your retirement savings are now less. BUT if you have extra after paying the bank, CPF will now ensure that you refund back to your CPF A/c to preserve your retirement savings in case you squander it away. It looks inconsistent technically. But it is prudent in the overall spirit.

4. Good faith - Under the Act, the "good faith" element is correlated ONLY to the following factors: sales price, distribution/apportionment basis for the collective sale proceeds and the relationship (if any) between the developer-buyer and any of the collective sale owners. When taken within the context of a self-appointed unregulated Sales Committee where the sales price and distribution formula are decided without objective mathematical foundations at ad hoc Sales Committee meetings with possibly skewered representation and voting power, it is - to me - kind of "fait accompli" by the time the requisite Extraordinary General Meeting (EGM) is convened in connection with procuring STB's collective sale order - there is a time lag which distinctly works against dissenters despite the protection of more stringent requirements inherent in an EGM. SEE MY OTHER COMMENTS UNDER (a) "SALES PROCEEDS FORMULA; DISTRIBUTION" and (b) "SHARE VALUES; SALES COMMITTEE" IN THIS BLOG-SITE.

5. NMP Simon Tay - Back in late 1998, NMP Associate Prof Simon Tay spoke out strenuously in Parliament against this legislative amendment but to no avail. He voted against it but was of course outvoted. Several other MPs also had their reservations, especially in respect of the tender 10-year criterion for real estate.

I am in the course of trying to extract Prof Tay's parliamentary speeches from the Singapore Parliament Reports (as soon as I can find the time to do so). Then I will try to figure out a way to post or extract it on this blog-site (a raw newbie, remember?). If anyone has the pedigree to speak on the various facets of this 1999 legislative amendment, it would be Prof Tay (LLM from Harvard and LLB from NUS), Faculty of Law of the National University of Singapore (NUS), especially given his research interest in the "Governance" arena.

6. Lay-person's view - To me as a lay-person, a property transaction inherently has two legs: First, an acquisition, and then eventually, a disposal. Laws in Singapore do NOT have retrospective effect. Therefore, should an owner who BOUGHT (viz, 1st leg) a private property PRIOR TO the enactment of this law be forced to SELL subsequently (viz, 2nd leg) under a collective sale by a 90% / 80% majority promulgated only IN 1999 under the legislative amendment? And without even so much as an OPTION TO OPT-IN (ie, accepting the retrospective effect of this law because maybe his apartment is already quite run down at 40 or 50 years old and he wants to facilitate en bloc interest from developer-buyers)? SEE MY OTHER COMMENTS UNDER "MAJORITY VS MINORITY VS INDIVIDUAL" IN THIS BLOG-SITE.

7. CPF investments - Again, context is important. The Central Provident Fund (CPF) Board has been exhorting us to be prudent in our use of CPF monies, to take charge of our financial planning as CPF savings are our retirement nest eggs. More so than in any other country, home ownership has been and continues to be an integral cornerstone of Singapore's social policy with deep political implications.

CPF Board has a whole matrix of policies to discourage speculation, preserve principal capital and minimize investment expenses. Even for unit trust investments (the scale of which is generally a fraction of real estate investment in private property) using CPF monies, the CPF Board distinguishes between funds which could be bought with monies from Ordinary A/c, Special A/c or Supplementary Retirement Scheme, depending on the asset volatility, expense ratio, fund performance, etc. There are also legislative requirements to discourage frequent asset-switching as investors and financial advisers are obliged to declare if the switches are done at the behest of financial advisers who - as INTERMEDIARIES - have a vested interest in earning sales commission arising from each switch.

Traditionally, in the use of CPF for the purchase of residential property, the policies for second/multiple property purchases (on the basis that it would be for investor-ownership) are invariably MORE STRINGENT than for single property purchases (on the assumption that it would be for owner-occupation). CPF Board and the Monetary Authority of Singapore (MAS) as the central bank acting in concert would previously tweak the quantum of financing and/or cash deposit, etc, evolving to the present policy requirements for (a) the cash component of the Minimum Sum to be first set aside and (b) a lower percentage of Valuation Limit for investor-owners.

8. Collective sale law vis-a-vis other Gahmen policies - 85% of Singaporeans live in very decent PUBLIC housing flats built by the Housing & Development Board (HDB), a statutory board under the Ministry of National Development. Hence, the remaining 15% who live in PRIVATE housing - which is expensive real estate by world standards due to this island's land-scarcity - is considered "so-called privileged". However, the cumulative effect of this 1999 legislative amendment and all other nicely dovetailed policies would turn us (owners of only ONE private property) into Squatters, Refugees, Downgraders, Downsizers ... so much for our Founding Father's 1984 vision of Singapore to be the "SWITZERLAND OF THE EAST" by 1999 ... sigh! Time flies, doesn't it? What a Classic Irony, eh? 1999 also happens to be the date that this fundamental change in private property law came into effect! SEE MY OTHER COMMENTS UNDER "ONE-FOR-ONE EXCHANGE" IN THIS BLOG-SITE.

It is now 2007 and thanks to the 1999 LTSA amendments, my prudent investment in a single PRIVATE property now EXPOSES me to:

(a) the spectre of an asset disposal at a time and price beyond my control (any investment guru will confirm it sucks - who in their right mind will invest in such an asset?);

(b) the certainty of an accelerated rate of asset depreciation or deterioration with the inevitable lack of maintenance (whether of individual units or common property) as collective sales go into an infinity cycle and pressure tactics are applied by the consenters or frugality measures are adopted as a precautionary measure;

(c) the possibility of churning my investments as I sell-and-buy, dipping into my CPF account to pay hefty legal fees and stamp duties, benefitting only the INTERMEDIARIES of lawyers and Gahmen many times over if I evolve to be a REFUGEE;

(d) the likelihood of compromising my accumulation of retirement savings if I choose NOT to be a Perforced DOWNGRADER or DOWNSIZER, COMPOUNDED by the change of CPF policy in Sep 2002 reversing the ranking of bank mortgage;

(e) the risk of a lower-quality asset IN ADDITION to losing a roof over my head and thus ending up as a SQUATTER although I should derive cold comfort that I am not likely to be left "roofless" because ...

(i) in Jul 2006 CPF has relaxed the Minimum Lease Period from 60 to 30 years so that I can use my CPF savings for my next downgraded short-lease property (so better don't exercise and eat healthily because I may outlive my lease tenure OR if I get really sick and need to liquidate my asset to pay for medical expenses, the short-lease asset is not even marketable, eh?) - viz, moving from freehold property to 30-year lease, and

(ii) in Mar 2007 HDB has helpfully relaxed the Minimum Occupation Period for sub-letting the entire HDB flat so that I will have more rental options - viz, from owning private property to renting HDB flat.
Wah lau, suddenly all these stat boards are so "coordinated"!

I say the above half-seriously of course in a bizarre worst-case scenario but - based on investment principles - it really sucks! And Singaporeans are "prudently investing" our CPF savings in increasingly more pricey apartments!

In fact, the people who benefit the most from the LTSA amendment and CPF policies are those who are investor-owners as they reap a windfall by forcing everybody else to sell (instead of just selling their own unit based on their own investment/cashflow or relocation needs) whilst they continue to keep a roof over their own heads.

There is another interesting development that may have fuelled to some degree the en bloc fever. In Jul 2005 CPF changed their policy to allow non-related singles to use CPF for purportedly their "first and only" property purchase if they have not used CPF monies or have refunded such CPF monies previously used (ie, "currently not using CPF for any existing property"). Even married persons are getting into the act by partnering with parents/siblings in various permutations. Hence, the CPF figure of "only 3% of members using CPF to finance properties have two or more properties" may BELIE a larger reality because CPF Board has confirmed that this piece of statistic is sliced based on the member using CPF savings for both/all properties.

MORAL OF THE STORY: Maybe I shouldn't heed Gahmen exhortations in future, ugh?

9. Whiter-than-white -
As our Parliament has a 82:2 composition, it is all the more important for the People's Action Party (PAP) to ensure a “whiter-than-white” approach to legislation and policies. Nice pun, eh, given PAP's all-white attire as party colours? Lest I be misunderstood - let me state categorically that I fully agree with the top marks accorded by international rating agencies (PERC, BERI, etc) to our Gahmen for its "whiteness".

Nonetheless, it cannot be “anything goes just because we say so”. So what even if the 1999 LTSA amendment was debated, gazetted and published? As Dr Martin Luther King, Jr, said: “There are two types of laws: JUST and UNJUST”. The PAP can be technically right in substance and yet wrong in spirit (in contrast to what I said earlier about CPF Board having its cake and eating it where the Board may be off-mark technically but spot-on in spirit).

Perhaps, the following example will help me in elaborating on this point:

Consider these two FAQs that I downloaded from CPF website:

Q1: If I buy my property under RPS in September 2002, will I be affected when the Valuation Limit is gradually reduced to 120%?

A1: No, the CPF Withdrawal Limit applicable at the time of purchase will apply throughout the loan repayment period. Therefore, in your case, the amount of CPF that you can use for your property is 150%, subject to AHWL. This Limit will not change even if you refinance your loan subsequently.

Q2: I bought my property under RPS before 1 September 2002. What happens if I refinance my housing loan which was also taken before 1 September 2002? Will the new housing rules - the revised CPF Withdrawal Limit and financier's first charge on the property apply to me?

A2: When you refinance your housing loan (i.e. there is a new contract between your bank and you), your new CPF Withdrawal Limit will be capped at x% of Valuation Limit, subject to sufficient AHWL. The x% of Valuation Limit corresponds to the date you re-finance your loan (determined by the date you sign the contract with your bank - please refer to Table A below for schedule of x%). When you sell the property, the sale proceeds will first be used to pay off your housing loan, followed by the CPF principal amount and accrued interest. [Table A showing various time periods and withdrawal limits.]

In both cases, it involves (i) loan refinancing and (ii) CPF Withdrawal Limit. For property bought IN Sep 2002, the “CPF Withdrawal Limit applicable at the time of purchase will apply” and “this limit will not change even if you refinance your loan subsequently”. However, for property bought PRIOR TO Sep 2002, the “new CPF Withdrawal Limit will be capped at x% of Valuation Limit” and “the x% of Valuation Limit corresponds to the date you refinance your loan” because CPF says in this 2nd case that “when you refinance your housing loan (ie, there is a new contract between your bank and you)”. But, hang on ... when you refinance your loan in the 1st case, there is no new contract between your bank and you???

Somehow, the logic escapes me but the intent is not lost on me (ie, CPF is credibly fostering prudence in real estate investments). But it goes to prove my point that “anything goes just because we say so”.

Hence, my plea that (A) this 1999 LTSA amendment cannot be rammed-down the throat of buyers who entered into sales and purchase agreements for private properties pre-1999 WITHOUT so much as an option to opt-in and (B) even with the provision of majority consensus, there must be many more buttons and levers by way of legislation, policy or regulation (eg, 30-year time bar for new buildings, calibrated time-bar to next en bloc attempt, exchange units, mathematical apportionment, re-calibrated compensation, etc) to balance the needs of the individual against the larger societal demands, prevent abuses and distortions and ensure equity and justice.


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