Thursday, June 5, 2008

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99 yr-leasehold Properties Uncertain Top-up: Are 99-year leasehold worth really worth the price ?

Yesterday came yet another headline that got property buyers pondering:

Uncertainty over lease top-ups may affect sentiment
"The government’s recent decisions to either not top up leases of some leasehold sites to the original 99-year term or to approve shorter lease extensions could affect sentiment towards investment sales of such properties. "
- Business Times - 4 Jun 2008

The following responses (extracted from this discussion thread of the Singapore Property Forum) are representative of Singapore property buyers:

"Oh Oh this means 99 year leasehold condo will face the most severe price decline shortly judging from the news that came out. Foreigners will become more wary now of investing their hard earn $$ in 99 years project from today onwards. It seems like condo prices are destined for a major correction end of this year. History is repeating itself. 10 years ago people all shun away from buying 99 year projects even at a major discounts. Now it seems that the 99 year saga will come back to front page again. Feel sorry for those stupid buyers who bought 99 year leasehold projects and pay more than S$1,000 psf for such units. Only to realise that the land where their condo stands have to return back to the government after a certain time."

"I smell bad egg now ! Seems like the owners of 99-year leasehold condos are going to suffer soon when buyers start to take note of 99 year issue when purchasing."

"A major correction is inevitable to bring skyhigh prices down to earth. Prices has grown to be unrealistic and out of proportion in relation to income level and economic growth. A major correction is on the way assisted by increase in supply and the news above. "

"As a corollary to this news on 99 yr property, freehold and 999 year properties will see increased demand over 99yr leasehold. "

"New 99 LH above 1996 ('s price) but old ones still below .. go to show 99 LH really depreciate in value quickly over time .. 99 LH bad investment option. "

Here is Sean's analysis on the impact of the uncertain lease top-up for 99-leasehold properties:

(a) Major cut down in investments in 99 year leasehold projects -including condos and on office sites. As investors dont see long term value in such investments. Why pay millions on a condo or billions of dollars over a building when after a certain period, the land will have to return to government. Bearing in mind, annual rental return is at a pathetic 3-4% of existing asking prices. After taking into account loan quantum, maintenance and other costs (including property taxes)..nett return can be as low as only 1% per year meaning to say that in 100 years, then one will be able to get back his capital investment. This is idiotic cause by then government will take back the leasehold land and the owner left with nothing !

(b) All those 99 year leasehold condos like The Bayshore, Mandarin Gardens etc which are hoping to go for enbloc can now wrap their plans up and forget about it altogether cause nobody of a sane mind will be buying that land unless of course its cheap sale.

(c) Those developers whom have bought enbloc lands which are 99 year leasehold will not be able to hold that land undeveloped for long. Time is now very precious cause if they waited 10 years to redevelop the land, the leasehold title will drop to 88 years or lesser and it takes another 3-4 years to redevelop the enbloc land. As such, it seems that time is no longer on their favor. Initially the developers' plan were to hold the land till market sentiments turn positive.

99-yr leasehold properties have never been quite favoured by property investors in the past, and especially during the gloomy property cycles such as 2003-2006. Prices of these properties only started to rise in 2007 due to the supply crunch. Also 20+ yr old 99-yr leasehold properties like HUDCs became hot suddenly in 2007 only for their enbloc potential. In retrospection, their enbloc potential may have been over-hyped.

The following is an excerpt from Mr Brown's blog: The 99-year lease timebomb?

"The financial erosion built into 99 year leases hasn't yet been appreciated. Why? Many of the 99 year leases started about 10 years ago, a minority were earlier (e.g. Mandarin Gardens), but those were pre-property price escalation period. If you look at they property bought in 1996 peak, we see a depreciation of 30-40% just on price. Not to mention the cut-throat amounts paid to banks as interest, opportunity costs(if you leave your money in CPF, over 8 years it would have gone up by 30+%). The lease as it get used up faces downward pressure every year. After 10 years, potential buyers would ask how much it is worth after 5 more years when it has only 85 years left. By the time you finish paying in 15-25 years time, the total you paid to would be 150%-180% of the property price because of bank interest. After 20 years, the lease only has 80 years left, how much do you think it will be worth?"

Here the experience of a "Regretful Buyer" as related by himself:
I bought a $600,000 condo last year for investment. But I found out I have miscalculated. A condo is not a good form of investment. The total cost is not just the cost of the loan, but many cost components:
1. Lease & building depreciation. In the initial years lease depreciate by 2-3% a year. This means "natural" depreciation cost a lost of about $20K a year.
2. Market depreciation. Condos have a long term declining trend for past 10 years. This is starting to improve but will never have a chance to rise much because once it improves alot of supply - many people who are stuck will dump (including myself), developers will launch and govt is just waiting sell land. Market depreciation should slow to 0.5% should the economy remain strong. Lost is about $3K a year.
3. Maintenance charges - $250 a month. $3K a year.
4. I took about $300K loan. At special offer rate of 3% (will revert to 5% in 2007). $9K a year.
5. I managed to rent out after much difficulty. Remember rental is not continuous, after the tenant lease finish will be some gap. Every month $1.8K.Every year rental income is $21K.
6. Insurance = $300(?) + Income tax $400. cost per year $0.7K
In summary, if you total up all the cost it is $36K (not to mention renovation, furnishing, aircon maintenance, repairs). The rent I collected was $21K. Total absolute loss is $15K a year. If I put my initial $300K in fix deposit instead of buying property I will get $6K (2% per year, the CPF part actually earns 4% per year) my economic total loss is $21K a year!!
By renting a similar apartment, I could have saved $21K more per year. So my tenant (who has a PHD), is smart to rent from me.


Anonymous said...

This may be the government's way of pulling the carpet off from under the feet of developers who are trying to hold the population hostage by restricting supply - supply which the URA has repeatedly promised in their quarterly reports.

Together with repeated rebuffs to KLB's tantrums about DPS removal, it sends a clear message to developers the government's decree that prices have 'peaked'.

Anonymous said...

Agree with your view.

While HDB continues to see over-subsciption in its BTO applications, 60% private property units have been left to languish. This is not good in terms of utilization of resources. I believe the government will want to continue to apply such subtle pressure on private property developers.

Anonymous said...

I'd rather go for HDB than 99 condos.

oscar said...


would just like your pfrofessional opinion on the price of DBSS site in AMK. Is it too overly priced?

Smart Buyer said...

Dear Oscar,

I'm not well-versed with the Ang Mo Kio HDB market. Neither have I visited the showflat of AMK's DBSS. It'd not be fair for me to comment if the project has been over-priced, except that I doubt it's a bargain. My position has been to caution buyers against over-stretching financially. That's all I can say to you.

Best wishes.

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