Lease Decay and Its Impact on Private Condominiums

In our previous blog post, we explored the concept of lease decay and its impact on the value of HDB properties.

Now, let's find out whether similar observations can be made for private condominiums

Leasehold Vs. Freehold Condominiums

In Singapore, private properties can be categorized as either 1, Freehold or 2, Leasehold. This is based on the duration of ownership of the property itself.

Freehold properties grant the owner complete and indefinite ownership rights over both the property and the land it occupies. On the other hand, leasehold properties have a specific period of ownership.

Lease options for private properties in Singapore include durations of 30, 60, 99, 103, 999 or 999,999 years, and freehold. Given that a significant number of residential properties in Singapore offer a 99-year tenure, the potential impact of lease decay on property values is frequently discussed.

A notable example is the case of the 191 terrace houses at Geylang Lor 3. Their 60-year lease expired on December 31, 2020, resulting in their return to the state. This marked the first occurrence of such a situation in Singapore.

Housing units along Geylang Lorong 3 before demolition.

It offers a foresight into the possible future scenario of land returning to the state should leases of private homes reach their expiration. There are more differences between freehold and leasehold besides the tenure, as shown in the table below.

Calculating the Remaining Lease of Condominiums

First, let's clear up the misconception: The age of a condominium isn't calculated from the date of the Temporary Occupation Period (TOP), but rather from the date the developer was initially awarded the land for the construction of the condo.

In general, developers usually begin the sales launch of a property not later than a year after being awarded the land. Taking into account the construction period of 3-5 years, it is common for a development to be approximately 3-6 years old when it obtains its TOP. At this point, the property typically has a remaining lease of 93-94 years.

But this is not always the case.

An Example: Coco Palms Condominium

Coco Palm Condominium, located along Pasir Ris Grove

The developer, City Development Limited (CDL), purchased the land in 2008 and delayed the sales launch until 2014. Subsequently, it took another 5 years before obtaining the TOP in 2018. By the time Coco Palms received its TOP, it was already 10 years old, leaving a remaining lease of 88 years (99 years lease - 10 years old = 89 years remaining).

Table 1. Condos in Pasir Ris

Is it accurate to believe that leasehold properties experience a more pronounced impact on their value as the lease approaches its expiration? Let's examine and verify this assumption.

Impact of Lease Decay on Private Condominiums Vs. HDBs

In order to isolate any other potential influences on property prices, let's analyze the performance of various condos of different ages during a period of slow or stagnant market conditions. By doing so, we can ascertain the significance of micro factors such as age in determining the value of the property.

Specifically, we will focus on the years between 2015 and 2019.

Table 2: Avg. PSF of 99-year Leashold Private Condo and HDBs

Side note:

Following an upward trend in property prices since 2020, there was a 2.6% decline in private property prices during the second quarter of 2023. This decrease was mainly driven by the Rest of Core Region (RCR). However, it is important to highlight that this adjustment is relatively small in magnitude.

From 2015 to 2019, HDB flats experienced a slight drop in price while private condominiums demonstrated a gradual and consistent growth of 12.29% over the course of four years.

For our analysis, we will assess the performance of various condominiums with different age ranges within the same vicinity.

First stop, the East.

Case Study #1: Condominiums in the East

The table below shows the trendline for condos near Tanah Merah MRT Station. Condos are picked based on the age gap.

Table 3. Avg. PSF of 99-year leasehold Private Condos near Tanah Merah MRT Station

The observation:

Surprisingly, Bedok Court, the oldest development with a remaining lease of 54 years (99 years lease - 41 years old), outperformed three other condominiums in the vicinity between 2015 and 2019 when the market was considered slow. Bedok Court experienced the highest increase of 18.16% in value, while the others showed minimal growth, with the next best performer being The Glades at 3.71%.

The Glades is the youngest development among the four, being only 10 years old.

This case provides a counterargument to the common belief that older developments with diminishing leases will inevitably experience a decline in value. Bedok Court appreciated in value, even though it is older and has a shorter remaining lease.

Now, let's shift our focus to another cluster in Jurong and explore whether it further challenges this notion.

Case Study #2: Condominiums in Jurong

Table 4. Avg. PSF of 99-year leasehold Private Condos along Jurong Lake District

The observation:

During the period between 2015 and 2019, the price movements of the four condos we observed were relatively stagnant. The oldest condominium, Lakepoint Condo, experienced the highest increment of 8.01%, followed by the second oldest, Parc Oasis at 6.78%.

Once again, the oldest condominium actually had the highest appreciation during the same period.

The real question is, why? This is interesting and contrary to the findings for HDBs.

Buyers of older private properties also face the same restrictions as covered in our previous blog post - so why do older private condos (~40 years old) still continue to appreciate in value even more than the younger ones?

The answer is simple as that: They are still sought-after despite all the restrictions.

And with that, it leads us to the next question: "What makes these older private homes so attractive to buyers?"

What Makes an Older Private Home Attractive to Buyers?

The following list concludes the possible reasons:

1. Size and Rarity - Unlike HDBs, condo sizes can vary drastically even between the same bedroom types. Example: A typical 3-bedroom in Bedok Court (41 years old ) comes with a size of 2271 sqft while a 3 bedder in Grandeur Park (10 years old) is at 883 sqft. Unlike HDB flats, the size of 4-room flats has remained around 1000 sqft for decades. Therefore, there is no need to exclusively consider older units for their size. Large units in private homes have become increasingly scarce, leading buyers to be attracted to older developments that offer more spacious floor areas. Due to the limited availability and higher demand for larger houses, buyers are willing to pay a premium for these expansive units.
   

2. Matured Estates - Older developments are typically situated in well-established neighbourhoods with abundant amenities and established infrastructure. Buyers, particularly families with children, are drawn to these areas and willing to pay for the convenience of their younger ones.
   

3. En Bloc Potential - This can be an attractive attribute that motivates buyers to invest in such developments as there may be significant capital gains on their property being collectively sold to developers for redevelopment.
   

4. Pricing Strategies for New Homes - New private houses are consistently priced higher than older houses. As a result, older developments become even more appealing to buyers who desire ample space and need to stay within their budget. Conversely, newly constructed HDB homes, also known as subsidised flats, are typically priced lower than older flats. As a result, older flats are less attractive, especially when their sizes are comparable.

Conclusion

The analysis of lease decay's impact on private condominiums in Singapore has defied conventional expectations. Contrary to the assumption that older developments with shorter remaining leases would experience a decline in value, the examination of various condos during a slow market period (2015 to 2019) challenges this notion. Surprisingly, certain older developments showcased strong value appreciation, surpassing their younger counterparts.

The allure of larger and rarer living spaces, coupled with matured estate locations, en bloc potential, and competitive pricing compared to new homes, contributes to the enduring appeal of older private properties to buyers.

If you currently own or are contemplating purchasing a property with a shorter remaining lease, we encourage you to send us a DM @HomeGen.SG on Instagram, Facebook or TikTok and we can evaluate further. Alternatively, feel free to leave a comment below and we'll get in touch with you.

Disclaimer: When considering the purchase of a property, it is crucial to take into account individual needs and purposes. This report includes comparisons of several condominiums belonging to different age groups. While concerns about properties reverting back to the state upon lease expiration are valid, it is important to carefully assess such possibilities. The intention is not to suggest that only older condos serve as superior investment instruments. Regardless of the property's age, attractive opportunities can arise if one effectively times and executes their market entry and exit strategies. Additionally, it is essential to consider macro factors such as buyer behaviours and profiles. It is worth noting that the peak performance of these properties may not necessarily align with the timeframe of our study.