Singapore property investors: Can a 99 year lease-hold condominium go en-bloc?

Singapore property investors: Can a 99 year lease-hold condominium go en-bloc?


Contributed by www.PropertyBUYER.com.sg Mortgage Consultants

What should you buy? A 99 year property or a FH/999 year tenor property?

Are you looking for yield or are you looking for overall capital gains + Yield?

Assumes that a 99 year property gives a yield of 4% while that of a Free Hold property gives 3%.

Is it still worth it? What if the fall in your property value more than offset what you earned in rental?

Say you make 20k a year in rental for 10 years (making 200k) of a $1m property and after 10 years the property value falls from $1m to $800k. Not to mention interest costs, your efforts would have come to nothing.

Let’s look at how Singapore land authority determine the value of a 99 lease hold property.

According to SLA’s leasehold land premium calculation and valuation of 99 years lease hold land.



(Adapted from SLA’s Differential Premium valuation calculation)

As you can see, 99 year lease hold land depreciate less during the first 33 years, still fetching at least 80% of a similar Free Hold land it drops off very quickly after 60 years.


How much is a 99 year old lease property worth?

Under normal circumstances, without any Singapore government policy impetus, a 99 year lease-hold property will continue to lose value until it reaches zero.

If a development (or a condo) wants to top up the lease of a lease-hold property back up to 99 years, it is still subject to SLA’s chief valuer’s valuation of the value of the proposed upgrade.

Can en-bloc happen to a 99 year lease hold condominium?

In case of an en-bloc or simply just a top-up of lease, you would have a difference in values between the existing property and the proposed new one.

So this is how SLA calculates the differential premium.

• Differential Premium = The proposed new property value – existing property value.

Under the new ruling in 2007, Singapore government takes 75% of the additional value created (Differential Premium) from the proposed upgrade or development, while the stake holders take 25% of the additional value.

Due to the depreciation of the 99 lease hold properties, the differential premium becomes higher.

When the Singapore government takes 75% of the differential premium, this means that most of it will end up as tax or fees while the stake holders only stand to gain the 25% of the additional value created from an en-bloc or top-up of lease.

And this top up of lease of a 99 years land is not a given. It is entirely subject to approval.

So are you saying that 99 year lease hold condominiums cannot en-bloc?

En-bloc activity for 99 years lease hold properties can still happen.

Scenario 1 – Top up of lease to 99 years + tear down and build a new condo: -
For example, a 99 years lease hold property was sold at $900 per sq feet per plot ratio (psf ppr). The price differential between this property and the free hold property in the same vicinity is very small when new. Say the Free Hold property was $1000 psf ppr.

30 years later, the Free hold property price is $2500 psf ppr.

• At 30 years old, SLA’s valuation rates the 99 year property at 85.4% of a Free hold equivalent property. Assuming that the market also rates the property similarly.

This means that the equivalent 99 year old free hold property is rated at $2500 x 85.4% = $2,135 psf ppr.

Say you want to top up the lease to 99 years and build a new condominium on it’s existing site, the top up value would be $2500 x 96% = $2400 psf ppr. (But 99 years leases top-up is subject to case-by-case valuation by the SLA)

Considering that you would already fetch $2135 psf ppr. If you were to tear down the building to re-build a new condo, you are likely to get $2400 psf ppr and cost of building psf ppr could be $300 to $600 psf ppr. That would mean that the cost already be $2435 or $2735 psf ppr.

So in this case, there is absolutely no impetus for the developer to build or to make an offer to the residents for en-bloc.

The only ways an en-bloc would happen to the 99 years condo are: -
• The 99 year lease hold building is in a very bad condition. The price being sold on the market is much less than SLA’s valuation of 85.4% of a Free Hold equivalent. This type of anomaly or price distortion makes en-bloc possible.
• 99 years top-up of leases is approved. (There is no guarantee)

Scenario 2 – Top up of lease to 99 years + tear down and build a new condo + Doubling the plot ratio: -

For example, a 99 years lease hold property was sold at $900 per sq feet per plot ratio (psf ppr). The price differential between this property and the free hold property in the same vicinity is very small when new. Say the Free Hold property was $1000 psf ppr.

30 years later, the Free hold property price is $2500 psf ppr. But if you double the plot ratio, that means that you could build double the sq feet of space on the same plot of land. That would mean that the potential price now is $2500 x 2 x 96% = $4,800 psf ppr.

• At 30 years old, SLA’s valuation rates the 99 year property at 85.4% of a Free hold equivalent property. Assuming that the market also rates the property similarly.

Now, with an existing property on the old plot ratio = 85.4% of $2,400 = $2,049.60.

Assuming that building cost would be $400 psf ppr to $800 psf ppr (higher for bigger buildings)

So SLA calculated the differential premium is $4,800 psf ppr (assuming the case-by-case valuation agrees with this value)

So the cost is $2,049.6 and potential value is $4,800 psf ppr.

So the differential premium is around $4,800 psf ppr - $2,049.60 = $2,750.40.

And under the new role in 2007, the Singapore government takes 75% of the $2,750.40. So the cost payable to the Singapore Government is $2,062.80.

So the cost of the renewal of the 99 year condominium is: -

$2,062.80 (payable to the Singapore government) + $2,049.60 (Existing value of condominium) + $800 (Construction cost) = $4,912.40

The cost of building, topping up the lease as well as paying the differential premium of 75% came up to $4,912.40, there is no value to be had from en-bloc in this case.

Given the high development charge of 75% for change of use or for Differential premium, it is unlikely that en-bloc can happen.

Unless there is a change of the Singapore government’s share of the differential premium from 75% to a more reasonable level.

SUMMARY OF 99 YEARS LEASE HOLD EN-BLOC POTENTIAL
So in conclusion, the capital value of a 99 year lease hold property is better obtained from increase in property prices around the property rather than waiting from any en-bloc or top-up of lease.

This would likely hold true until such time that government policies would change making residential property renewal profitable and happen.

What would you do if Singapore property agents tell you again, "En-bloc" potential indiscriminately? As a Singapore property buyer, the choice is yours. Buyers beware.