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Unpopular opinion: Lease decay doesn't really matter. Here's why.

Making a case for freehold is easy: You have property and land to your name, and get to own both indefinitely. Because why would anyone want to watch the biggest purchase of their lives “depreciate” through the years?

For some agents, lease decay is a convenient “selling story”. Fork out the premium for a freehold condo, and never worry about it. The value of your home is dwindling, so sell it while it’s worth something.

But lease decay isn’t so straightforward. It doesn’t occur in silos, and instead interacts with factors like land prices and inflation rates. In our view, it should not matter to the extent of being a deal breaker altogether. Here are some reasons why.

1. Price and value are different concepts

In my work with developers as a real estate consultant, we used the Bala’s Table to “value” leasehold properties in Singapore. On the table, percentages are pegged to the number of remaining years, telling us what a property is worth at any given time.

Source: Centre for Liveable Cities

While the Bala’s Table offers an overview, it does not account for inflation - the talk of the town in 2022. In the HDB and 99-year leasehold segments, both price and value are climbing. So, does your lease really decay? Scientifically, and according to the table, yes. But if we’re looking at true value, properties purchased at much lower price have been sold profitably. The result? Million-dollar HDB flats. Some have only 50 years left, but that doesn’t make them any less popular.

2. Property for utility vs investment

Historically, 99-year leaseholds were designed to house three generations of a family. If you live in your home for 49 years, it’ll outlive you and your children could use it as an investment vehicle to collect rent. This means that for half its life, you’ve used it personally and repaid your loan.

In this scenario, the 99-year value will outstrip the book value and your home would’ve served both utility and investment purposes. It is key to do the maths and compare how much you’ll be paying, how much use you’ll get out of it, and how much you can potentially recoup in rental income.

3. Leasehold first, freehold later

In the property market today, buyers are limited by both budget and cooling measures. Amid the economic winds, one thing that doesn’t change in Singapore is land scarcity. Land prices will continue to rise, and are priced at the market whether they’re freehold or leasehold plots.

This decade will see high inflation rates, and the days of cheap money are over. Because time translates to opportunity cost, what’s most important is entering the market early. Practically speaking, it shouldn’t matter if a leasehold property only has 60 years left as long as you can get to work and send your kids to school conveniently. .

If you’re young, and budget is a constraint, consider getting a house first and gunning for a freehold position later. A hyper fixation on lease decay, on the other hand, could stop you from securing a position at all and leave you behind.

4. Freehold value doesn’t always surge

This may come as a surprise, but leaseholds are sometimes more expensive than freeholds in the same vicinity - a phenomenon already unfolding in multiple neighborhoods.

Think of it this way: Selling price is the sum of land price, which is underwritten to the current market value, construction costs, and profit margin. Freehold properties purchased in the past have to be sold at lower prices to achieve the same profit. The data doesn’t lie. Besides, leasehold value also depends on market sentiments. If the latter is high, there remains a price growth story.

Freeholds are valuable for the land, not the unit, and you’d likely need an en-bloc to truly extract its value and make the premium worthwhile. While you can sell it, potential buyers may be put off by the work needed to overhaul an old unit. Lifts could be failing and tiles could be popping up. Water tanks may not work as well as before and the pools may need an upgrade. Until homeowners cash out through an en-bloc or sale, they may have to endure an ageing development while holding on to their freehold’s value.

Lease decay doesn’t mean actual value loss

While lease decay is a valid consideration, it is influenced by land scarcity, inflation, and cost of raw materials. Everyone wants to have their cake and eat it too, but the thinking cap you’re wearing when deciding between freehold and leasehold matters. In a market where things are constantly more expensive than they were yesterday, setting your priorities straight has never been more pertinent. Looking for data to back your purchase up? Reach out to me (Harvey Chia) at 9199 9141.


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