This article is contributed by Steve Chen
Owning a leasehold condo can be a rewarding investment. These properties often increase in value over time, offering owners the opportunity to earn capital gains.
However, the unique nature of leasehold tenure means that the property’s value can decline as the lease term shortens. As a buyer, you must understand the dynamics of leasehold depreciation to decide how long to hold your condo before it starts losing value.
To make informed decisions about when to sell your leasehold condo, understanding the concept of lease decay and the factors that influence it is crucial.
What is lease decay?
Lease decay is a gradual reduction in a property’s value as its lease period comes to an end. In general, the closer a property is to the end of its lease, the less it is worth. Conversely, shorter lease periods can result in higher values due to the scarcity of lease years.
To address the issue of lease decay, the Singapore government has implemented initiatives, such as:
- Lease Buyback Scheme (LBS): This programme allows elderly homeowners to sell the remaining lease years back to the government, enabling them to continue living in their properties.
- Lease Top-Up via SLA: The Singapore Land Authority (SLA) offers lease top-up options to restart the lease period back to 99 years. For example, If your leasehold property has 55 years remaining, you can extend the lease to 99 years by paying a premium. This fee is determined by the Singapore Land Authority’s Chief Valuer on a case-by-case basis and is influenced by the number of years left on the existing lease.
What is Bala’s Curve and how does it explain leasehold property depreciation?
The Bala Curve is an estimate used in Singapore to illustrate the price decay of leasehold property. It serves as the basis for determining Development Charges (DCs), differential premiums, and lease top-up costs in en bloc transactions for developers.
Bala’s Curve suggests that the value of a leasehold property does not depreciate linearly over time. Instead, it follows a curved pattern, with the depreciation rate accelerating as the lease nears its end.
Phases of the curve
- Initial stability (99 to 95 years remaining): During this period, property value remains relatively stable, and minimal depreciation is observed.
- Slow depreciation (95 to 85 years remaining): The value starts to decrease at a slow rate, typically seeing a 2-3% depreciation per year.
- Moderate depreciation (85 to 65 years remaining): The rate of depreciation increases, with annual depreciation reaching 5-8%.
- Rapid depreciation (65 to 30 years remaining): This is the steepest part of the curve, where annual depreciation can exceed 10%.
- Terminal phase (less than 30 years remaining): The value drops dramatically, with the property being worth only 20-30% of a comparable freehold property.
Now, let’s break it down with an example – consider for a moment that you own a property with an initial value of S$1,000,000 and a fresh 99 years leasehold. At 95 years, the property might be valued at approximately S$980,000, reflecting a 2% depreciation.
At 85 years, it could be worth around S$900,000, experiencing a 10% depreciation. By 65 years, the value might drop to about S$700,000, showing a 30% depreciation. As the lease approaches 30 years, the property might be valued at S$400,000, reflecting a 60% depreciation, and at 10 years, the value might further decrease to S$200,000, showing an 80% depreciation.
So, how long should you hold a leasehold condo to maximise its value?
Based on this data, owners might consider holding their leasehold condo for about 30 to 40 years to maximise value. At this point, the property has gained most of its potential value (60 – 68.5% of freehold value), the rate of appreciation has slowed significantly, and there is still a substantial lease period remaining, making it attractive to buyers.
After 40 years, while the value continues to increase, the rate of increase slows considerably. Waiting longer provides diminishing returns and increases the risk of facing difficulties selling due to the shorter remaining lease.
Adding on to that, a comparative analysis of property prices in the Queenstown/Tiong Bahru area (District 03) reveals a potential plateau in price growth for older developments compared to newer ones. This suggests that the value appreciation of established properties may not keep pace with that of newly completed ones.
Selegie House, built in 1974, serves as an example of lease decay. Between 2014 and 2024, average unit prices decreased by 5.3%, indicating a decline in property value over time. Due to this depreciation and the property’s age, it could potentially be considered for the Selective En Bloc Redevelopment Scheme (SERS), although it currently falls below the 70-year age threshold.
Factors influencing the Bala Curve
Credit: Juan Velasco, Centre for Liveable Cities
While the Bala Curve provides a helpful framework for understanding leasehold property depreciation, it’s essential to remember that it’s a theoretical model. Real-world factors can significantly influence property values, often deviating from the curve’s predictions. These factors include:
Location
Prime locations generally experience slower depreciation due to their desirability and scarcity. These areas include:
- Central Core Region (CCR): Districts 9, 10, 11 (Orchard, River Valley, Tanglin)
- Rest of Central Region (RCR): Districts 3, 4, 5, 7, 8, 12, 13, 14, 15, 20, 21
- Proximity to MRT stations (especially interchanges): Properties near transportation hubs tend to maintain their value better.
- Near good schools (within a 1-2 km radius): Properties near reputable schools often experience consistent demand.
- Waterfront properties (e.g., Sentosa Cove, Marina Bay): Properties in these areas are highly sought after.
Properties in these locations often maintain their value better due to consistent demand, even as they age.
Looking for a property close to an MRT station of your choice? Check out 99.co’s MRT map here
Maintenance
Well-maintained properties tend to hold their value better. Key aspects include:
- Building structure: Regular checks and repairs of the building’s foundation, walls, and roof, as well as timely repainting of exteriors (typically every 5 – 7 years).
- Facilities: Regular upkeep of swimming pools, gyms, and other amenities, along with landscaping and maintenance of green spaces.
- Individual units: Regular renovation and modernisation of interiors, replacement of outdated fittings and appliances, and prompt addressing of water seepage or mould issues.
Properties with well-funded sinking funds and proactive management committees often maintain better overall conditions, which helps preserve value.
En bloc potential
For condos, en bloc sales could turn a potentially bad investment into a profitable one. These factors can increase the likelihood of a successful en bloc or collective sale:
- Age of the development: Properties aged 20 – 30 years are often prime candidates for en bloc sales.
- Plot ratio: Developments with a lower current plot ratio compared to the maximum allowable under the Urban Redevelopment Authority (URA) Master Plan have higher potential for redevelopment.
- Land size: Larger land parcels (typically above 100,000 sqft) are more attractive to developers.
- Location: Properties in prime areas or near upcoming infrastructure developments have higher en bloc potential.
- Ownership structure: Developments with fewer individual owners are easier to organise for collective sales as disputes are less likely to occur.
- Recent successful en bloc sales in the vicinity: Multiple en bloc sales in an area indicate strong developer interest, potentially increasing the chances for other properties.
To assess your property’s en bloc potential, check the URA Master Plan for the allowed plot ratio in your area. Compare your development’s current built-up area to the maximum allowable, and consult with property agents or valuers specialising in en bloc sales for more insights.
Limitations of Bala’s Curve
Despite its usefulness, Bala’s Curve has limitations. It is a theoretical model and a simplification that does not account for all real-world variables.
Actual property values can deviate from the curve due to various factors, and unique features of a property can cause it to diverge from the typical curve. Therefore, while the curve serves as a valuable guide, individual property characteristics and market conditions must also be considered when making investment decisions.
What else should property owners keep in mind?
Recent changes in the real estate market have made leasehold property values more complex. One key trend is the increasing interest in shorter leasehold properties, driven by rising land costs and limited availability of freehold options. This trend has led to some stabilisation of prices for leasehold properties with shorter remaining leases.
Another observation is the evolving preferences of younger buyers, who prioritise lifestyle and location over tenure. This shift has increased demand for leasehold properties in prime locations, even those with shorter leases. As a result, properties in central areas with desirable amenities have seen slower depreciation rates.
The introduction of new MRT lines and stations, as well as urban redevelopment projects, has also positively impacted property prices in affected areas, regardless of leasehold tenure. Given these complexities, sellers are encouraged to consult with experienced agents who can provide guidance tailored to the current market conditions.
Wrapping up
Determining the optimal holding period for a leasehold condo is a complex decision influenced by various factors. While the Bala Curve provides a general framework for understanding leasehold depreciation, it’s essential to consider individual property characteristics, market conditions, and personal investment goals. By carefully weighing these elements and seeking expert advice, property owners can make informed decisions about when to buy, hold, or sell their leasehold condo to maximise returns and mitigate potential risks associated with lease decay.
Remember, real estate is a dynamic market, and what holds true today might change tomorrow. Regular monitoring and adaptability are key to successful leasehold condo ownership.
Steve Chen
As an Associate District Director at PropNex, Steve Chen brings extensive expertise and a deep understanding of the market to his role.
Known for his tailored strategies and dedicated service, Steve is well-equipped to assist you in navigating the nuances of leasehold property ownership, ensuring you make informed decisions based on the latest market trends.
Steve Chen is available for contact at +65 9438 4277 or via email at stevechenym@gmail.com.
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