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The 191 private terraced houses in Geylang Lorong 3, with land leases expiring in 2020, have been in the news. It is the first case in Singapore where residential land is taken back by the government due to expiry of the land lease. This has thrust the issue of residual tenure and property value in the spotlight.
In July 2000, the Singapore Land Authority (SLA) made public a table that expresses the value of a leasehold land as a percentage of a freehold land. Assuming that a freehold land is worth $100 million, the same piece of land will be worth only $96 million (96%) if the tenure changes to 99-years.
This table, commonly known as Bala’s Table (below) is often used by industry players as a guide in valuation and a way to calculate differential premium. This indicates that the government and many real estate players recognise that the remaining tenure of a land does have an impact on property values.
Source: SLA
Despite the official stance, there have been cases where aging properties have fetched top dollar. Older HDB flats in more mature estates have often transacted at higher prices than their newer counterparts. According to Q2 2017 resale statistics from HDB, median price of 4-room HDB flats in Bukit Merah was $688,000 while 4-room flats in Tampines fetched a median price of $435,000.
This indicates that flats in the older and more mature Bukit Merah estate can fetch over $250,000 more than flat in the popular and newer Tampines estate.
Does this mean that residual tenure is unimportant to homebuyers?
The numerous amenities available within an established estate as well as the extensive public transport network could be reasons for the higher prices. Many older estates are also nearer to the city centre compared to the newer estates. Homebuyers do prefer a newer house but it is obvious that they value convenience and connectivity more than the residual tenure.
The family structure of Singapore is changing. There are more single-person households which could comprise of an elderly person or a working professional living alone. For the single elderly person, the shorter residual tenure does not matter as long as it is sufficient to cover his natural lifespan. This is especially so if the apartment is in a familiar area or the elderly has family or friends nearby. For the single working person who plans to live in the house for the long run, location and price is likely to take precedence over residual tenure as the single does not have any descendants to inherit the place.
In Singapore, it is rare for the land of a private residential development to be returned to the government because of lease expiry. Most aging developments would have been put up for en-bloc sale way before the land lease runs out. Knowing this, savvy investors look for developments with en-bloc potential and purchase a unit there. They then sit back and wait for agents to come knocking on their door. Some have even been known to start a committee to get the ball rolling for an en-bloc sale. Many have made windfalls from successful en-bloc sales but not all are so lucky. There is always the risk that an en-bloc sale does not go through, leaving the owner with a property that gets harder to sell as it gets older.
Even if the en-bloc sale goes through, there is still the possibility of making a loss. The owner will have to pay Sellers’ Stamp Duty (SSD) if he bought the property for three years or less before the en-bloc sale. SSD is applicable even if the owner is among the minority who objects to the sale. SSD can significantly lower the amount that the owner pockets. SSD is 12% of the sales price if the property is sold within the first year of its purchase. The rate decreases to 8% and 4% for the second and third years. In addition, a new owner could be hit with a double whammy if he spent a large amount on renovations.
Your property can either make you money or be a black hole for your finances
It is important to note that a short residual tenure will put a cap on the duration of a mortgage loan. Banks require the property to have at least 30-years of tenure remaining after the loan duration. This means that the owner of a property with 52-years of residual tenure will be able to get a mortgage for 22-years only. A shorter loan duration means that the buyer will have to fork out more cash upfront or make higher monthly mortgage payments. This could prove difficult for some buyers because higher mortgage payments means that the buyer must have enough income or low debts in order to pass the internal credit assessment of the bank (if owner-occupied) or the TDSR requirements (if investment property).
As always, there are exceptions to the rule. In general, banks do not give mortgage loans to homebuyers over the age of 65. In the case of a 70-year old buyer, his age will be the factor stopping him from getting a mortgage and not the residual tenure of the property. A younger person, who is not barred from getting a mortgage due to his age, will be more concerned about residual tenure of the property because that could be the factor preventing him from getting a mortgage loan.
For buyers taking mortgage loans at the maximum Loan-to-Value (LTV) of 80%, loan duration for private properties and HDB flats are capped at 30 and 25-years respectively. So the buyer of a brand new 99-year leasehold HDB and the buyer of one with 65-years of tenure will have their loan duration capped at 30-years.
To conclude, the residual tenure of a property definitely has an impact on the value of the property. However, the impact is often mitigated by other factors such as the location of the property, amenities surrounding it, en-bloc potential and financing.