By now, many Singaporeans are aware of lease decay. This is when the 99-year lease on a condo or HDB flat runs out, and the land is returned to the Singapore Land Authority (SLA).

Earlier generations of Singaporeans were less concerned about this. When the first HDB flats were built in the 1960s, 99-years seemed to be a long time away; likewise for the first condos, which arrived from 1974 onward.

Today however, the leases are creeping closer to their expiry. In fact this year, we will see the first batch of homes where the land is taken back by the government, without compensation – this involves 191 homes in Geylang.

geylang lorong 3 houses to be returned to state

Stretch of houses along Geylang Lorong 3 (Source from Straits Times)

But while many people are aware of this issue, many are unclear on when lease decay starts to take effect. There’s also a lot of uncertainty over how the prices start to slide for a 99-year leasehold property, as the property ages. These are the factors we’ll examine in this article, so you can gauge how long you really want to hold on to your flat or condo:

In general, how do we value leasehold land in Singapore?

There is an actual formula for this; it is found in the SLA Leasehold Table. Using this table, the value of leasehold land is pegged to a percentage of its freehold counterpart. I have reproduced a part of the table here:

No. of years passed
Within the first year
10 years
20 years
30 years
40 years
50 years
60 years
70 years
80 years
90 years
Percentage of freehold value
96%
94.3%
90.5%
85.4%
79.5%
74.1%
67.7%
59%
46.6%
27.7%

For example, say you have a condo development, sitting on a plot with a 99-year lease. The lease is 30 years old. If this plot were freehold, it would be worth $400 million.

But because it is leasehold and 30-years in, the value is just 85.4 per cent of its freehold value, or around $341.6 million.

This table is actually based on an older method of valuing leasehold land, called Bala’s Table, which dates back to the colonial era. We don’t need to go into that here, but I would like to draw your attention to an important detail:

The decline in leasehold value is not linear. In other words, the effect of lease decay accelerates more and more sharply as we near the tail end of the lease. I will explain more on how this is a factor below.

The SLA leasehold table is also an important factor in en-bloc prospects.

This is because, when the developer buys over your condo, they need to top-up the lease back to 99-years. The amount that they have to pay will be based on the SLA Leasehold Table, as well as some other costs such as Development Charges.

Without making things to complex, we can draw this simple conclusion:

Freehold or newer properties have a very significant advantage during an en-bloc, as the developer pays much less to top up the lease. This can lead to better sales proceeds, and more developer interest.

As such, aging 99-year leasehold condos face ever greater risks of not seeing an en-bloc with each passing year.

bala's table

Bala’s Table. Image Credit: Juan Velasco, Centre for Liveable Cities

Having understood the above, what’s the “right” amount of time to hold on to a flat or leasehold condo?

In general, it’s best to move on before you cross into the second half of the lease; and particularly before the last 30 to 40 years.

Here’s why:

Note that between the 20th and 30th year of the 99-year leasehold property, the leasehold value (as pegged to freehold) only falls from 90.5 per cent to 85.4 per cent; a drop of around 5.1 percentage points.

But now look at the value around the midpoint of the lease – between the 50th and 60th year. At this stage, the value drops from 74.1 per cent to 67.7 per cent, or around 6.4 percentage points. We can see the fall in value is starting to accelerate.

Once we cross between the 60th and 70th year, the drop becomes a steep 8.7 per cent (from 67.7 per cent to 59 per cent).

Remember that this isn’t even taking into account other forces of depreciation, such as ageing facilities, wear and tear within the unit, or simple changing tastes (visit a condo built in the 90’s and 80’s, and you’ll see their visibly dated; or have facilities that may have fallen out of popularity, such as big squash courts).

How does this impact HDB flats?

The leasehold value table is important if you’re considering the Lease Buyback Scheme (LBS). As we’ve established above, the tail end of your lease is worth much less than the earlier portion.

As such, selling the last 30 years of your lease may net you far less than you expect; it won’t be valued the same as the middle or first 30 years.

Also, bear in mind that althought HDB flats are 99-years leasehold, they can’t be bought by private sector players in an en-bloc.

old HDB flats

Older HDB flats cannot be bought by private developer in an en-bloc.

Another factor, which can drop your property value to even lower than the leasehold table suggests, is financing.

Bank loans are unavailable for 99-year leasehold properties with 30 years or less on the lease. Some banks may also lower the loan to 55 per cent of the property price or value, if the lease only has 40 years or less remaining.

Most buyers aren’t able to purchase your property with low or no financing; this often forces you to drop the price even lower (or sit and wait for an en-bloc that may not come).

10 or 20 years can pass in the blink of an eye, when it comes to property ownership

How long have you been staying in your property right now? For many people, it comes as a surprise to think back and realise how many years have passed; even if it seems like just a few years ago when they first move in.

Don’t be lulled into assuming you have a lot of time – a property that’s nearing its 40-year mark can be difficult to offload later; and you may have to do so at a much lower value than you can get right now.

Older properties may be cheaper at the outset, but you need to consider the long-term consequences. Likewise, you may have to move with some urgency, if your property is ageing but you still have plans like further upgrading.

Drop me a message if you’re uncertain, and I can help you work out a best course of action.