How the Remaining Years of a Property Can Affect Its Property Valuation

The related issues of property valuation and residential tenure have recently been thrust into the international spotlight by the upcoming land lease expiry of the terraced houses in Geylang Lorong 3. This case is the first example of residential land being reclaimed by the government as a result of land lease expiry in Singapore, so it has led to a lot of people talking.

Leaseholds and Property Value

The Singapore Land Authority, or SLA, created and made public in 2000 a table that expressed the value of leasehold lands in a straightforward way as a direct percentage of freehold land. So, for example, if a piece of freehold land is valued at $100 million, that same property will be worth only 96% of its original value, or $96 million in this case, upon changing the tenure over to a 99-year leasehold.

This table has been used since its creation by major players in the industry to determine the value of leasehold property and can be seen as direct evidence that a piece of land’s tenure directly impacts its property value. The table is known as Bala’s Table.

Inconsistencies and Counterexamples

Despite the evidence offered by this table, there are still plenty of examples of aging properties fetching top dollar on the Singapore real estate market. Often HDB flats in mature estates fetch a better price on the market than newer flats. For example, the median price of a mature four-room HDB flat in Bukit Merah was $688,000 in 2017, while a newer four-room flat in Tampines had a property valuation of only $435,000.

Of course, the maturity of these flats’ land lease in Singapore was not the only factor influencing property value. The fact that there are numerous amenities and easy access to extensive public transportation available nearby in Bukit Merah likely had a dramatic impact on the flats’ property values. Many well-established estates are also built closer to city centers than their newer counterparts as well, so while many buyers prefer to purchase newer homes, it’s clear that these buyers place a higher value on convenience than they do on residential tenure.

Changing Family Structure

It is undeniable that the traditional family structure in Singapore has begun to change. There are far more single-person households now than there were in centuries, or even decades, past. These households might comprise one elderly person living alone or a single working professional who has not yet purchased a family home.

Of course, the needs of an elderly tenant are far different from those of a single working-class man or woman. For the elderly tenant, a short residential tenure is not really relevant provided the tenure is long enough to cover the resident’s anticipated natural lifespan. Elderly tenants often place a higher value on the ability to live close to family or friends and the areas of the city they are familiar with.

For a single working person, the situation is a little bit different. Provided he or she does not have any descendants to inherit the home, location and price are typically valued over the length of residual tenure, but those who intend on starting a family might find that tenure is a higher priority.

The Takeaway

Most investors considering purchasing property in Singapore must consider residual tenure when estimating property values. However, other factors like location, financing, and nearby amenities often take priority in the minds of investors.

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