Thursday, September 25, 2008

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99 Leasehold Property: Calculation of Depreciation Rate based on Singapore Land Authority Data

The table below published by SLA (Singapore Land Authority) shows the value of a 99-leasehold property as a percentage of a freehold property as the number of years left in the lease (Labelled as "Term of Years" in the table) of the 99-leasehold property. This is based on the Development Charge (DC) that SLA will impose for extension of 99-leasehold land. For example, we can see from the table that a 99-leasehold is valued at 96% of a freehold property when it is brand new, i.e., the "Term of Years" is 99. By the time the "Term of Years" is 20 years, the percentage value of a 99-leasehold property is reduced to 48% of that of a freehold property.

99-Leasehold Property Depreciation based on Singapore Land Authority Development Charge

The table below shows a simple example of a freehold property valued at $1M throughout the 99 years in consideration for which a 99-LH property will be valued against based on SLA's table given above. In this example therefore a 99-LH property will be valued at $960K at the beginning of its 99 year lease (ie. 96% of $1M) and $946K after 9 years when it is left with 90 years lease (i.e. 94.6% of $1M). The rate of depreciation is then calculated by taking the difference between the current value of the 99-leasehold property and that of the preceding year as a percentage. For example, the rate of depreciation for the first 9 years is ($946K-$960K)/$946 = -1.5%

99-Leasehold Property Depreciation Rate based on Singapore Land Authority Development Charge

(The example above looks at the depreciation of a 99-LH property solely from its lease reduction. It does not take into account other factors such as the "age depreciation" of the property which all types of properties will suffer.)

The above analysis shows that the rate of depreciation of a 99-LH property would have accelerated from an average of 1.5% for every 10 years in the first 19 years to more than 20% towards the last twenty years of the lease.

In reality, the rate of depreciation will likely be worse than that projected here as a result of advanced market discount for the uncertainty in 99-year leasehold property in terms of lease-renewal cost or if at all renewable, availability of mortgage and limits in CPF usage. A study of URA transaction records will reveal that capital gains are likely only for relatively new leasehold properties purchased during the property bust cycle or in a rapdily rising market as in 2006-2007 and held for short period. Because timing the market is difficult, as all seasoned investors know, such capital gains are in reality hard to come by within the short market life-span of a 99-year leasehold property.

Market perception makes market reality. For those buyers who think that 99 years is a long way to go, substantial depreciation is likely to set in even in the near term because of market perception. So buyers should seriously consider the odds against 99-LH properties especially at a time like now when they are still priced at sky-high level.

May also want to read:
Singapore Government said 99-year Lease Top Up cannot be taken for granted
History of Singapore Property 1960 to 2008
Property Price Index Graph Plotter & Online Property Valuation
Your Property Investment Determines Your Financial Success in Your Life

3 comments:

Phantasia said...

Interesting study! Thanks for sharing!

But with a whole list of factors that may come into play in pricing a property, i'm actually inclined to think that the lease tenure (FH vs LH) is only part of the whole equation. Hence some LH may actually be worth investing in? Might be too sweeping to underwrite all LH properties cos of the depreciation from lease tenure. Just some personal thoughts on the issue.

Cheers

Smart Buyer said...

Dear Phantasia,
Agree with you that lease tenure is only part of the equation but undeniably, such intrinsic depreciation of 99LH property will always contribute to its uncertainty as a property investment and hence, investors will inevitably have to weigh the associating risk when making their investment choice.

Best wishes again.

Anonymous said...

Hi,

I have been trying to look for this 99LH depreciation table. Thanks for posting it online.

During property boom in 2007, I think the table of calculation 99LH depreciation is not even a guide for reality value of a property.

There are flaws in the table as a guide, I remember a property at East area like Costa Del Sol where the lease left around 90yrs before the property peak the valuation range $600-$700++psf. But during the peak the price of 99LH which left 90yrs when up close to $1200psf. Even FH like Fernwood Towers worth less than a LH.

I'm trying to make sense of this matter. The best part is, when I ask a property valuer, they told me they don't refer to the above table. Then my next question is, why SLA came out with the depreciation table for 99LH property.

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