It’s finally happened: The government has sold land on a 60 year lease, for the development of private housing. The excitement is…not palpable. So far, most Singaporeans are lukewarm. It’s a bit uncomfortable, you know? Like getting discount milk because it’s near the expiry date. It’s cheap and all, but there’s always nagging reservations. In this article, I venture an opinion on the worth of 60 year leasehold homes:
About 60 Year Leaseholds
The URA (Urban Redevelopment Authority) is experimenting with shorter leases. Jalan Jurong Kechil has become the first example, with developers allowed to bid for a 30, 45, or 60 year lease.
The Jalan Jurong Kechil site attracted 23 bids, with World Class Developments (North) Pte. Ltd. winning at $73.8 million (60 year lease). Once they develop a condo there, they’re expected to price units at about $1,100 psf, as compared to the $1,600 psf for some surrounding units.
But even with the steep discount, is a 60 year leasehold a reasonable buy? That depends on a number of factors:
- Are an Owner Occupier or Investor?
- Financing Difficulties
- Do You Have Alternative Investments?
- Are You Renting it Out?
1. Are You an Owner Occupier or Investor?
If you just want a roof over your head, a 60 year leasehold is a viable option.
The site at Jalan Jurong Kechil is close to a food centre, has nearby public transport, and is relatively quiet. It has the same amenities as other residences there, but with a discount of around $500 psf. The 60 year time limit shouldn’t bother you, not unless L’Oreal’s anti-aging products work way better than we imagine.
For investors looking to re-sell, it’s a different story altogether.
Let’s say you buy before completion. By the time development’s complete, you won’t have 60 years left on the property. There will probably be 55 years left by the time you get the TOP (Temporary Occupancy Permit). Assuming you wait five more years for appreciation (and to avoid seller’s stamp duties), you will end up trying to re-sell property with 50 years left on the lease.
It won’t be easy for prospective buyers to get financing, even if you can find them.
As 60 year leaseholds are new on the market, I have to rely on speculation rather than existing data. But my belief is that an investor will have a hard time re-selling, and won’t see much in the way of capital gains.
2. Financing Difficulties
We’ve yet to see how banks will handle this new type of property. But let’s take an example from existing loan situations, where buyers have tried to get financing for aging properties (50 years left on the lease). Usually, banks will:
- Refuse to finance the loan
- Reduce the LTV (Loan to Value) Ratio
- Give short loan tenures (typically 20 years)
At present, not many banks want to finance property with a remaining lease of 50 years or less. You can visit loan sites like MoneySmart if you need to find one.
Some banks will reduce the LTV. The amount will vary based on the bank’s assessment, but it’s often around 60%. So while the total cost of a 60 year leasehold is lower, the buyer may have to make a sizeable down payment.
Most banks will cap the loan tenure at 20 years, as the property starts to rapidly depreciate after that. In case it needs to be pointed out: Shorter loan tenure = higher monthly repayments.
3. Do You Have Alternative Investments?
If you’re going to reside in a 60 year leasehold to the very end, you’d better have alternative investments.
Unlike the sanity-defying gains of resale flats, your 60 year leasehold will not show significant appreciation. Should you run out of money post-retirement, you can’t expect to sell it for profit and downgrade. Any property, once there’s 30 years or less on the lease, is worth about the pile of bricks it’s built with.
So if you want to save money by getting a 60 year leasehold, invest the money that you save. In a funny sort of way, buying this cheaper property may actually require more investment knowledge.
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4. Are You Renting it Out?
Will 60 year leaseholds generate good rental yields?
The answer is “probably”. There’s a clear advantage to landlords: Rental income is no different from a 99 year leasehold, but the overall price is lower. Even with higher loan repayments, rental income should more than cover the mortgage.
The only drawback is the lack of resale value. But if you intend to just sit back and collect rent, this isn’t a serious issue.
Mind you, this is all speculative. We’ll have to see once the property is ready. But if there’s ever a successful plot to mass poison landlords, I’m betting it involves the cocktail sausages at a 60 year leasehold launch.
Image Credits:
taxbrackets.org, ssedro, quinn.anya, Iman Mosaad, umjanedoan
Would you buy 60 Year Leasehold Property? Comment and let us know!