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The question of land sales for HDB development, and whether the government increases its reserves when state land is sold, was answered on Nov. 7.

No, reserves do not increase when state land is sold, as the physical asset is merely converted into a financial asset, Second Minister for Finance and National Development Indranee Rajah explained.

Question on impact on reserves when state land is sold

Non-Constituency Member of Parliament (NCMP) Leong Mun Wai of the Progress Singapore Party (PSP) asked 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.

In response, Indranee began by setting out the relationship between state land, land sale proceeds and Singapore's reserves.

In Singapore, all title to land is derived from the state. Interests in land, such as leases, can therefore be carved out by the state and granted to others. The leases confer ownership and possession of those lands to other persons, but only for the duration of the lease. The state retains the interest in the balance of land not leased.

Under the Constitution, all state land forms part of the reserves. Land is a physical asset. When state land is sold, the physical assets are converted to a financial asset.

Example of the relationship between the sale of land and the reserves

Indranee used an example - if the government sells a parcel of state land at its fair market value for S$1 million, it no longer has the land (for the term of the lease).

However, the government now has S$1 million, and 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," she said.

Financial reserves are invested

The cash now forms part of the financial reserves, which are invested, she said.

The government uses up to 50 per cent of the long term expected real returns on the investment every year in the annual Budget. This amount is known as the Net Investment Returns Contribution, or NIRC.

It strikes a balance between the needs of current and future generations of Singaporeans, Indranee said, preserving the real value of the reserves and ensuring a "rainy day fund" in the event of a future crisis.

Reversionary interest

Indranee next addressed the question of land that has been sold. As the state holds the ultimate title to the land, it ultimately reverts to the state once the 99-year lease is up, it becomes state land once more, and will be protected as part of the reserves.

When that occurs, there is also no net increase to the reserves. Indranee explained:

"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 use of the land for 99 years, and not for the state giving away the land forever."

Indranee said that there is no net increase in reserves when state land is sold, as it is a conversion of physical assets to financial assets, and there is also no net increase in reserves when state land goes back to the government, as the value of the lease does not include the reversionary interest.

Indranee added that there is again no increase in the reserves when the land which was returned to the government is sold again. This is because it is merely a conversion of one form of asset to another.

However, the reserves do increase when the government invests its money and grows the financial assets held by the state.

Second question on so-called "triple payment"

In another question, Leong also asked whether Singaporeans are paying:

• The cost of state land used for public housing when initially acquired by the Government.
• 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.
• 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 occurred in two different terms of government.

Indranee also addressed this, saying there is no triple payment by Singaporeans for the land used to develop HDB flats.

From time to time, the government may need to acquire land for public housing, which is compulsory.

First, the government acquires the land and compensates the land owner for its value, based on fair market value. This may be funded through cash reserves or government revenues.

Second, HDB will purchase the land from the government at fair market value, just like any other buyer of state land.

"Now, 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?" Indranee asked rhetorically.

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

Past reserves would be depleted if HDB does not pay for state land

If fair market value is not paid in exchange for the land, the past reserves will be depleted, there would be no corresponding financial assets to replace the physical assets, and no land sales proceeds to invest and generate returns for use in the form of the NIRC, (thus) requiring HDB to pay fair market value for the land cost.

By preserving the value of our past reserves, this is, Indranee added, for the benefit of all Singaporeans, both present and future.

The third transaction is when HDB sells flats to Singaporeans at a discount from fair market value to keep flat prices affordable.

This difference is known as the market subsidy. In addition, the government provides "generous" grants to eligible applicants.

Due to 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, covered by a government grant.

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

Indranee said that in answer to Leong's questions:

• The government does not profit from the sale of state land developed into public housing;
• There is no "triple payment" by Singaporeans for state land used for public housing; and
• Singaporeans buy BTO flats at a discount from their fair market value. In addition, eligible first-time buyers can enjoy the enhanced CPF housing grant of up to $80,000. This is demonstrated by the fact that a private property of similar size in a similar location costs significantly more, and after a minimum occupation period, HDB owners can sell their flats at comparable or higher prices than what they paid HDB.

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Top image from MCI YouTube and HDB Facebook.