What’s the Value of my Leasehold Condominium (2)? Is freehold better or leasehold?
A favourite past-time in Singapore is talking about property. And we are unique, because Singapore has freehold and leasehold residential properties available side-by-side. So the invariable questions arise: What is the value of a leasehold condominium relative to a freehold one? Will the value of my leasehold condominium drop towards zero over time? Is freehold better or leasehold? How would this affect the value we can get should our condominium go for an enbloc sale? In short: What’s the value of my leasehold condominium?
Value of a leasehold compared to a freehold condominium
In practice, the prices for leasehold or freehold condominiums depend on both market factors, such as demand and supply, and property-specific factors, such as location, facing, floor, layout etc. In theory, however, we can estimate out how much a leasehold condominium should be worth relative to a freehold one.
The Singapore Land Authority (SLA), which owns around 90% of the land in Singapore, uses “Bala’s Table” for determining the value of leasehold land. “Bala’s Table” has been in use since 1947, and has been publicly available since 2000.
Bala’s Table From SLA
From Bala’s Table, let’s suppose the SLA has a piece of freehold land which they value at $100. The SLA would in theory sell a 99-year lease on this land at a price of $96.
But does Bala’s Table fit the data? In 2015, Giglio, Maggiori and Stroebel (GMS) analysed 380,000 private residential property transactions in Singapore between 1995 to 2013. They control for the effect of location (using 5-digit postal codes!), age of property, size of property for the transactions. Leasehold properties with between 95 to 99 years of the lease remaining transact at a discount of 11.8% to the freehold price, a much larger figure than the 4% of Bala’s Table. This leads them to conclude that the leasehold curve is somewhat different from Bala’s Table.
Bala’s Table compared to GMS Leasehold Curve using actual transacted prices
Answers to how exactly to compute these curves are in our previous post. In the following, we will use the Bala and GMS leasehold curves to answer questions about 99-year leasehold condominiums.
1. Will my leasehold condo drop to zero over time?
The short answer to this question is yes, but that is not very helpful. The value of a leasehold property using Bala’s Table is set relative to the value of a freehold property. So if the value of the freehold property remains unchanged, the value of the leasehold property will start falling immediately. Over time, it will reach zero in 99 years.
But if demand for property and rentals grow over time, the value of freehold property will increase as well. Suppose rentals increase by 2% per year on average. This would mean that freehold property will rise by 2% a year as well. This indeed has been the average yearly increase in private property prices in Singapore over the past 25 years.
Since leasehold property is a significant fraction of the freehold price, its value will rise as well. The chart below plots how leasehold prices will rise and thenfall over time, depending on whether Bala’s Table, or the GMS leasehold curve is correct.
In the early years, the value of a leasehold property will rise with the freehold one, although not as quickly. As time passes, their values will diverge, as the leasehold property slowly falls to zero value. But if freehold prices rise quickly enough, leasehold prices will still continue to rise before peaking. This peak occurs between 65 to 72 years into the lease. After that, leasehold begins a sharp descent to hit zero in the 99th year. In practice, because of the restrictions on loans mortgaged against an ageing leasehold property, and the usage of CPF, the fall in leasehold prices towards the end of the lease can be much faster.
Price of Leasehold Condominium if Freehold rises by 2% every year
What if freehold prices don’t rise as fast as before? After all, Singapore had a large number of immigrants in the 2000s, driving up demand for property. This is something which may not happen again on the same scale in the future. So let us suppose rentals and freehold prices rise by only 1% a year going forward. How does leasehold behave in such a case?
Price of Leasehold Condominium if Freehold rises by 1% every year
Here, the price of the leasehold property peaks between the 45th and 62nd year. While these results are all theoretical, they help to answer the question of why leasehold properties continue to increase in price even as the lease starts running down from day 1.
We can conclude that the price of a leasehold property will peak between the 45th and 65th year of the lease. So homeowners holding on to a leasehold property past that date, or purchasing one with a remaining lease of less than 30 years will face significant leasehold decay.
2. Are prices of leasehold properties fair relative to freehold properties in Singapore?
There are far fewer private freehold condominiums in Singapore than leasehold ones. Hence, to fulfil the desire to upgrade to private property, most private homeowners will purchase a leasehold property. In most residential areas, there may not be freehold and leasehold properties existing side-by-side. So the question is: Is it better value to buy freehold or leasehold, if our finances allow?
To answer this, we refer exclusively to the GMS leasehold curve and not Bala’s Table. The GMS curve uses actual property transactions in Singapore between 1995 and 2013, and so reflects how property buyers act. In contrast, Bala’s Table serves only as a guide to how the SLA approaches the valuation of leasehold land.
Looking at the GMS leasehold curve, the price of a 10 year-old leasehold condominium should be 86% of the price of a freehold one. The price of a 20 year-old leasehold condominium, in comparison, should be 82% of the freehold one. So let’s look at some transacted prices from 2019 and see if this is the case.
Southhaven I and II
The first table below shows some transacted prices of units at the Southhaven I and Southhaven II condominiums. Southhaven I is a 99-year leasehold development. Southhaven II has a 999-year leasehold, which is as good as a freehold. Both condominiums are roughly 20 years old.
| Southhaven I (99 Year) | Southhaven II (Freehold) | |
|---|---|---|
| 1 | $914 | $1,126 |
| 2 | $990 | $784 |
| 3 | $919 | $1,167 |
| 4 | $1,108 | |
| 5 | $1,161 | |
| Average PSF | $941 | $1,069 |
The average PSF transacted at the 99-year leasehold Southhaven I is 12% less than those at the 999-year Southhaven II. This discount is less than the 20% discount seen in the historical data for Singapore between 1995 to 2013. However, removing the pesky lowball datapoint from the Southhaven II data, the average PSF in Southhaven II rises to $1,141. The discount of the Southhaven I transactions now rises to 17.5%, close to the predicted 18%! Success!
For the two Southhaven condominiums, the transactions do reflect rational pricing, with the 99-year leasehold one having a discount of 18% from the 999-year leasehold one, as predicted by the GMS leasehold curve.
Tanjong Rhu
The Tanjong Rhu area has a mix of upper-tier and mid-tier condominiums, both with freehold and 99-year leaseholds. For example, amongst the freehold condominiums, The Waterside is upper-tier while The Parkshore is mid-tier. Amongst the 99-year leasehold condominiums, Camelot and Pebble Bay are upper-tier, while Tanjong Ria and Casaurina Cove are mid-tier. Let’s take a look at how the prices of transactions have been in 2019 in the two tables below.
Upper tier condominiums
| Waterside (FH) | Pebble Bay (99 Year) | Camelot (99 Year) | |
|---|---|---|---|
| 1 | $1,559 | $1,425 | $1,555 |
| 2 | $1,657 | $1,485 | $1,517 |
| 3 | $1,690 | $1,498 | $1,647 |
| 4 | $1,681 | $1,413 | |
| 5 | $1,711 | $1,573 | |
| 6 | $1,458 | $1,599 | |
| 7 | $1,576 | $1,815 | |
| 8 | $1,634 | $1,688 | |
| 9 | $1,721 | $1,607 | |
| Average PSF | $1,632 | $1,567 | $1,573 |
Mid tier condominiums
| Parkshore (FH) | Casuarina Cove (99 Year) | Tanjong Ria (99 Year) | |
|---|---|---|---|
| 1 | $1,534 | $1,237 | $1,090 |
| 2 | $1,426 | $1,217 | $1,050 |
| Average PSF transacted | $1,480 | $1,227 | $1,070 |
Tanjong Rhu presents a very different picture compared to the two Southhavens. For the upper-tier condominiums, the price difference between freehold and 20 year-old 99-year leasehold condominiums ranges between 3.6% to 4.0%. This is far lower than the expected 18% from the GMS leasehold curve.
However, for the mid-tier condominiums in Tanjong Rhu, the price differential between the freehold and 20 year old leasehold condominiums is much wider, ranging between 17% to 28%. This corresponds well with the predictions of the GMS leasehold curve.
Predictions can vary, but it appears that the prices of mid-tier leasehold condominiums in Tanjong Rhu are fair, even if the upper-tier ones are not!
Katong
For our third case study, let’s look at the seafront condominiums in Katong, specifically the freehold Seaview, and the 99-year leasehold Silversea, completed in 2014. The table below shows how the transacted prices in 2019 look like:
| Silversea (99 Year) | Seaview (Freehold) | |
|---|---|---|
| 1 | $1,703 | $1,843 |
| 2 | $1,699 | $1,727 |
| 3 | $1,565 | $1,900 |
| 4 | $1,570 | $1,813 |
| 5 | $1,559 | $1,395 |
| 6 | $1,476 | $1,670 |
| 7 | $1,570 | $1,852 |
| 8 | $1,814 | |
| 9 | $1,495 | |
| Average PSF | $1,606 | $1,743 |
The difference in transacted PSF between the two condominiums is 8%, which is bit less than the predicted 12%-14% for leasehold condominiums less than 10 years into their lease. Perhaps this is due to the better sea view from the Silversea and the poorer view from the Seaview? However, the mispricing is small, and may be indicative of what we see elsewhere for upper tier condominiums.
Leasehold condominiums in Katong are a bit pricey, but the discount to freehold is still within reasonable bounds.
Concluding Thoughts
The similarities and differences between freehold and leasehold condominiums in Singapore is a point for debate for the longest time. Amongst older Singaporeans, freehold reigns head-and-shoulders above leasehold. This is evident from the discounts to the prices of leasehold condominiums transacted in the period 1995 to 2013, as shown by Giglio, Maggiori and Stroebel (2015).
This belief is backed by the view that leasehold property values will eventually fall to zero as the lease expires. However, this seems to go against the experience that property prices in Singapore, whether leasehold or freehold, have almost always risen over time. Here, we show why this has been the case. As long as freehold property prices are rising over time, leasehold properties will also appreciate. This is until 45 to 60 years into the lease, when the pull to zero of leasehold decay finally outweighs the property price gains.
So, for leasehold property owners, the price gains will likely flatten out by the 45th to 60th year of the lease, and decline from then to zero thereafter.
In more recent years, two trends have been seen:
- As investment properties, both freehold and leasehold condominiums of the same quality command the same rental from tenants. This means that the yield on leasehold property is higher than freehold.
- The relentless upward movement in private residential property prices, especially for new launches, is triggering a surge of demand for 99-year leasehold condominiums.
These trends have propelled new 99-year leasehold prices to similar levels to freehold prices, and above the historical norm. Recent transaction prices indicate that upper-tier leasehold condominiums are as expensive as their freehold neighbours. But the prices of mid-tier condominiums tend to be fair, with discounts to their freehold neighbours reflecting historical pricing trends.
For leasehold property buyers, the best value for money is in the mid-tier condominiums, as upper-tier or luxury leasehold condominiums are expensive, very similar to freehold prices
It is quite surprising what insights our research into the leasehold curves starting with Bala’s Table gives us. In the next blog post in this series, we look at the question of HDB leasehold decay.
References:
Giglio, Maggiori and Stroebel (2015) Very Long-Run Discount Rates, Quarterly Journal of Economics Vol 130 Issue 1 February
Singapore Land Authority (2010) The Differential Premium System
Excellent article, thanks for the work!!
Thank you!
Could you kindly do an article to study how LH properties could also be en bloc / have its lease topped up to 99 years – hence further disproving the fear that its value will inevitably trend to zero over time.
Interesting question. I think that from the point of view of the property developers, the ideal point to purchase a property enbloc is when it is not too old, because the slow rate of leasehold decay in Bala’s Table in the early years (up to about year 50) means that they do not have to pay so much to top up the lease. Bala’s Table still gives a value of 75% at year 50. Older properties will be far more costly to top up. So if a private leasehold property fails to go enbloc by year 50, I would think that chances are, it would not make it thereafter. And there is a double whammy from the loan and CPF restrictions kicking in for older properties as well after that, so these homeowners would eventually be faced with the very real prospect of winding up at zero at year 99.