Aging and Decaying Leases of Residential Properties

By Sumit Agarwal and Sing Tien Foo

Amidst land-scarce Singapore, there are residential properties that are freehold or leased for 99 years, among the latter are Housing Development Board (HDB) flats that come with a subsidy from the government. Unlike freehold estate that lasts in perpetuity, leasehold estates are considered depreciating assets because the value after the lease expires returns to the original land owner.

Housing is a unique asset class serving the dual motives of consumption and investment for buyers. It is a very unlikely scenario that HDB flat buyers will outlive the 99-year lease period. Yet to many such buyers, their flat is a valuable asset expected to grow in value over time. They monetize by selling the balance unused leases of their flat or bequest it to their children. The next question then is: Can buildings on leasehold lands outlast the tenure of 99 years?

Leasehold flat values are created in the secondary market. Similar to the concept of “profit rents”, the leasehold value is positive if the market value is higher than its historical cost. Value is created when there are improvements to the surrounding amenities, proper maintenance is kept and the property upgraded.

Fears of Depreciating Value

When the oldest HDB flats reached their half-life of the 99-year lease, there were concerns that the property value would stagnate, or worse, decline. These fears were heightened when various policies were instituted including one in 2013 that restricted the use of Central Provident Fund (CPF) for the purchase of HDB flats with less than 60 years in the remaining lease.

Since then, HDB resale prices have declined for 19 consecutive quarters. While there is no direct evidence linking the resale HDB price declines to such policies, the concern of owning a depreciating asset cannot be dismissed.

In 2017, when National Development Minister Lawrence Wong cautioned home buyers on the risk of buying older HDB flats with short balance leases, he also reiterated the government’s strict criteria for selecting older blocks to be redeveloped under the Selective En Bloc Development Scheme (SERS). The intention of the message was to manage expectations—not to depend on the government to bail owners out when the lease expires. This sparked fears among some potential buyers, triggering resale HDB prices to spiral down.

While recognising the impact of decaying leases effects, Prime Minister Lee Hsien Loong in his 2018 National Day Rally speech assured that the government will step up efforts through various schemes such as Home Improvement Programme 2 (HIP2), Voluntary En Bloc Redevelopment Scheme (VERS) to preserve the value of flats when they reach 60 and 70 years old, and tackle head-on the depreciating effects of HDB leases.

Our Study

Together with our PhD student Zhang Xiaoyu, at the National University of Singapore, we studied the depreciation rates of over 618,000 resale houses from 1997 to 2017 using historical resale transaction prices of private non-landed residential properties and HDB flats, obtained from Urban Renewal Authority and HDB. Some 77 percent of the resale houses were HDB flats, while 11 percent were private leasehold houses.

We disentangled the age-related depreciation rates from the transaction prices of resale properties. We also controlled for other non-age-related factors such as housing size, housing type, number of housing units in the neighborhood and distances to the nearest Mass Rapid Transit station and to Central Business District.

The depreciation rates are plotted against the age of houses in the Figure, where the green line represents private freehold non-landed houses, the blue line private leasehold non-landed houses, and the black line resale HDB flats. It shows resale housing prices to decline for all three housing types as the house ages.

It also shows that the depreciation rates for the three housing types are very similar in the first 10 years—HDB flats depreciate by only 1 percent faster than the two other classes of private residential properties. After 10 years, private freehold residential properties in general depreciate at a slower rate relative to private leasehold residential properties and HDB flats.

The depreciation rates of private leasehold residential properties and HDB flats are similar to each other for up to 20 years. After 20 years, HDB flats depreciate much slower than the two classes of private residential properties.

When houses are 21 years and above, the depreciation rate for HDB flats is only around 3 percent, while freehold private residential property prices depreciate by more than 10 percent, and leasehold private residential property prices depreciate by more than 30 percent.

*Note: For HDB, the age group “<=6” includes only properties aged between 5 and 6 years old.

 

Our findings indicate that the differences in depreciation among freehold and leasehold residential properties and HDB flats appear only after 10 years. After 30 years, the flatter HDB depreciation line demonstrates that aging slows down the resale price decline for HDB flats relative to private residential properties. In comparison, the depreciation lines for the two private properties decline at a steeper rate after 30 years.

 

Economic Obsolescence

One possible reason for the increasing aging effects of private properties above 30 years old is under-maintenance of the building and its surroundings. Owners have to incur higher maintenance expenses and set aside more sinking fund to address building deterioration. This problem is more serious for leasehold private property owners who face the double whammy from both aging and lease decaying effects.

Aging effects of buildings can also be further hastened by economic obsolescence especially when private housing prices increase significantly. There are incentives to redevelop older buildings resulting in en bloc sales of older private properties. Many older but structurally sound residential developments have been sold en bloc to private developers and redeveloped into new and high density residential developments.

Redevelopment Option

For HDB flats, on the other hand, the government offers redevelopment options such as repossessing older HDB flats en bloc via SERS for which owners are compensated for their existing values at market values along with a rehousing option. In addition, various enhancement schemes have been implemented to improve building conditions, resolve major maintenance problems of aging buildings, as well as spruce up surrounding amenities of older housing estates. Therefore, it is not surprising that aging effects are better managed in HDB flats.

Moreover, aside from the subsidy granted when new flats are bought from the government, various housing grants such as Enhanced CPF Housing Grant, Additional Housing Grant (AHG) and Proximity Housing Grant adding up to $120,000 are given to eligible first-time buyers of resale flats to help partially defray price depreciation as the property ages.

It is reassuring that alongside with the subsidy/grant buffer, the various redevelopment schemes have helped to retard the decline in prices of older HDB flats. With the proposed HIP2 and VERS, HDB flat owners can continue to enjoy improved living conditions, while having a peace of mind that prices for their aging property are not declining that quickly.

 

Media Coverage:

“Older Housing and Development Board (HDB) flats depreciate at a much slower rate compared to private residential properties,” Today Newspaper, 14 February 2019

“国大研究：相较于同龄私宅，老组屋”抗贬值”效益较强“， 联合早报，2019年 2月14日

“A question of time: The Great HDB lease dcay debate” Lee Meixian, Business Times, 6 April 2019.