What’s the Value of my Leasehold Condominium (1)? Revisiting Mr Bala’s Table
Apart from shopping, another favourite past-time of our fellow Singaporeans must be talking about property. And we do have more to talk about property than people elsewhere, because we are one of the very few countries in the world where freehold and leasehold residential properties are available side-by-side. So the invariable questions arise: Is freehold better than leasehold? What is the value of a leasehold condominium compared to a freehold one? 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?
Introducing Bala’s Table
The Singapore Land Authority (SLA), which owns around 90% of the land in Singapore, has a method for determining the value of leasehold land. This is encapsulated in what is commonly known as “Bala’s Table”, which has been in use since 1947. It was also made publicly available in 2000.
Bala’s Table From SLA
Understanding Bala’s Table
From Bala’s Table, suppose the SLA has a piece of freehold land which is valued at $100. The SLA would in theory sell a 99-year lease on this land, perhaps to a developer for residential purposes, at a price of $96. I know, this sounds a little implausible, but let’s just assume that it is true. Alternatively, the SLA could in theory sell a 60 years lease on this land for industrial purposes for $80. Finally, for a condominium plot with 60 years of lease left, a developer will need to top up from the valuation of $80 to $96 to get a fresh 99-year lease.
But what is the basis of Bala’s Table? How do we compute it? It appears to be based on the net present value (NPV) of the future rents which the land can earn. In the 99-year leasehold case, this will be for 99 years, in the freehold case, it will be forever. Suppose D is the annual rent for the property, and it grows at a rate of g every year. Discounting this at the rate r will give us the freehold value on the left.
Similarly, the expression on the right side is the value of the same property under a T-year leasehold. This looks similar to the freehold case, except that we subtract off the value of the rents after T years. Since we re only interested in the ratio of leasehold to freehold prices, we can use any value for D as long as the same value is used for both freehold and leasehold. For the interest rate r, we can try using the long term yield on government bonds, which is around 2%. For the growth rate, we can assume 0% for a start.
Before we go on to analyse Bala’s Table, let’s take a moment to appreciate the genius of Mr Bala. The table uses the net present value of future rents. This is similar to the Dividend Discount Model, or the Gordon Growth Model. But Myron Gordon only published his work in 1956, a full 9 years after Mr Bala’s calculations! Seriously, Mr Bala is a financial genius!
Are the values in Bala’s Table accurate?
When Mr Bala made his calculations in 1947, there were no calculators, much less computers. Hence many of the points on the table are probably approximations and interpolations. With computers and calculators, we can now reconstruct Bala’s Table more accurately now. With some trial and error, we find that a discount of rate of 2.94% matches Bala’s table best.
Bala’s Table compared to Leasehold Curve (2.94%)
Notice how Bala’s Table flattens the curve for a leasehold property with 39 to 79 years left? This is an example of the approximations in the Table.
One implicit assumption of Bala’s Table is that there is no increase in rent forever. Since the value of property is the NPV of future rents, growth in rents will lead to growth in value. However, the values in Bala’s Table is do adjust for increases in rent. As long as the discount rate is 2.94% higher than the rental growth, the values in Bala’s Table are useable. That is, if we forecast property rent to grow by 1% per year, using a discount rate of 3.94% to construct the Leasehold Curve gives us exactly the same values.
A 1% increase in rent per year and hence property values may seem very small in light of how property prices have increased over time in Singapore. However, much of the property price increases have come from one-off events in the past – CPF liberalisation, building too few HDB flats, building too many private apartments, increasing the immigration rate, decreasing the immigration rate. In the long term, if population growth stabilises at 1% a year, this is also the growth of rents. In any case, it is not appropriate to assume a high rate of growth in property rents and prices, such as 3% per year, since this implies a discount rate of 5.94%, which is far above the yield of long term Singapore Government Bonds.
Other proposed versions of Bala’s Table
In recent years, with more enbloc sales of 99-year leasehold condominiums, and ageing of leasehold HDB flats, there is more interest in how the SLA will use Bala’s Table in order to compute values of the condominiums and flats for topping up the lease, and for lease buy-back. As the values affect busienss decisions and costs significantly, there have been other proposals made for updating Bala’s Table.
These proposals are usually in the form of changing the discount rate for used for Bala’s Table. For example, the Centre for Liveable Cities proposes using a discount rate of 3.5% instead. Cushman and Wakefield have a more aggressive proposal to use a discount rate of 6.0% instead. These proposals increases the value of 99-year leasehold property relative to freehold property at the start of the lease. Which also leads to a much steeper fall in values as the lease nears expiry towards the end of the 99 years. We show this below:
Bala’s Table compared to other proposals
Look at the leasehold curve corresponding to the 6.0% discount rate. The value of leasehold property is virtually identical to freehold for the first 40 years! This means that a developer doing an enbloc purchase of a leasehold condominium which is less than 40 years old does not need to pay anything to top up the lease at all! This does not sound realistic. Therefore, we do not think these proposals to revise Bala’s Table can be taken seriously.
A more accurate version of Bala’s Table?
In a very thoughtful academic paper published in the Quarterly Journal of Economics in 2015, Giglio, Maggiori and Stroebel use private residential property transactions in England, Wales and Singapore to work out what long term discount rates look like. For Singapore, they control for the effect of location (using 5-digit postal codes!), age of property, size of property for the 380,000 transactions between 1995 to 2013, and find that 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 discount rate to use in the leasehold curve is 2.0%. This is equivalent to a discount rate of 2.6% with a rental growth rate of 0.6%.
Bala’s Table compared to Leasehold Curve using actual transacted prices (2.0%)
Astonishingly, this research has been missed completely by the local real estate fraternity! Possibly because it is economics research rather than real estate research. But it does match up to reality better. After all, just ask yourself. Given the choice of freehold property at $100 and 99-year leasehold at $96, as implied by Bala’s Table, which would you choose? The answer is obvious! In fact, the 11.8% discount of 99-year leasehold prices to freehold prices matches our experience and expectations better. It has only been in the last decade that new leasehold condominium prices have surged to match prices of older freehold condominiums.
What about CPF and loan restrictions?
Note also that Bala’s Table is a theoretical construct which does not acount for CPF usage and bank loan restrictions when a leasehold property ages. Local property consultant Ku Swee Yong posits a Leasehold Curve which incorporates these real world constraints leads to an even sharper decline in leasehold values as the property ages. For example, CPF is not useable for a leasehold property with less than 35 years of its lease left. Banks will also not lend against a leasehold property with less than 20 years left of its lease. We can construct a leasehold curve which incorporates both the observed prices of leasehold and freehold properties, and the effects of real world restrictions.
Bala’s Table compared to a Leasehold Curve incorporating CPF and loan restrictions
In this post, we answer what’s the value of my leasehold condominium by unravelling the mysteries of Bala’s Table which the SLA uses for valuing leasehold property. We also show there are inconsistencies in Bala’s Table as it has not undergone revision for more than 70 years! However, since the SLA is the largest land owner in Singapore, what it chooses to use is the law.
In our next two posts, we shall look at how to use Bala’s Table and the other Leasehold Curves to work out the prices for leasehold condominiums relative to freehold ones, and also the lease buy-back and other schemes for retirement. This is important for retirement since more than 50% of the net assets of Singapore households are in their flats. For the low income households, this figure is as high as 90% or more. Which is why ensuring retirement adequacy in Singapore has to work on capitalising property assets.