After buying my house, I started reading up on property information and how the market works.
Some
of the objections I heard from my friends are:
- These days no one cares about Freehold(FH) any more.
- There’s no need to care about lease decay, you won’t stay that long
anyway.
So
it got me thinking, is that really the case?
Better Location
If
we look at HDBs, there is constant renewal by the GRCs to enhance their value, with
better amenities, social support centres, connectivity and covered walkway.
In
terms of planning, it also makes sense to plan the train stations in a way that
has the minimum impact on existing buildings. Next, creates land value through further development around the vicinity.
That
could mean that future development of the land parcels near the Station is likely
going to be new HDBs or GLS > Condos
In addition, selling the GLS at these locations would help attract developer interest and strengthen the reserves. It is essentially a partnership between the authorities and developers to make this a success.
This
is why you normally see more GLS sites having relative connectivity for new train stations, interchanges, community centre, hospital etc.
Other
opportunities could be putting the Leasehold (LH) beside HDB estates so that
they can easily access the amenities / commence that are supported by the HDB.
While
FH locations are scarce, they were land that had sold and can no longer
monetize.
There’s also not much legroom/incentive to put improvements directly beside the FH.
This
endows the new LH developments with a new advantage that closes the premium
gap.
Valuation Opacity.
Most
FH developments are small and buyers also want to keep their units for legacy.
Hence,
the lack of transactions makes it difficult for the valuer to give a proper
estimate as the valuer can’t deviate far from the last transaction even
if it was 3 years ago.
This
makes the valuation lower than a LH with a healthier transaction history.
As
the valuation is impacted, the loan size is reduced and the buyer has to fork
out a higher amount of cash to offset the lower loan.
This
means that FH units are generally trying to catch up with the surrounding LH’s
growth valuation and are very unlikely to outpace LH.
I’m
not sure if large FH developments like Continuum will suffer such a fate but I sincerely
hope not.
Lease Decay
Looking
at the Bala curve, the LH value doesn’t decline in a straight-line depreciation.
Source: Centre for Liveable Cities
This essentially means that there are certain premiums that are retained during the unit’s lifecycle as it is sticky. The value will only steadily decline at the very end of that remaining lease.
This
is also normally when banks will no longer allow buyers to take a loan for the LH’s
purchase.
This
makes sense as the LH tends to have better attributes compared to a typical FH.
So essentially when people say FH will outperform LH in the long term.
I
don’t think it’s because FH price appreciated further, instead it is because LH price has started to
suffer from lease decay.
That very “long term” that people are referring to will only be reflected gradually and is more evident at very late stages
of the remaining lease. It will definitely not be within our lifetime.
Summary
In
summary, better planning allows LH units to sell at a closer premium to FH
units. The healthy stream of transactions for LH units allows better valuation
transparency and loan approvals as opposed to small FH developments
Owning a FH that holds value better than LH units, but it's effects are gradual and will only be evident at the very late stage of the lease.
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