Singaporeans as a whole have become more aware of lease decay – that is, the impact of an expiring 99-year lease on property values. This came to the forefront of the property market’s attention in 2017, when 191 homes in Geylang were taken back by the government, at no compensation after their leases ran out.
In spite of this, there are some Singaporeans who are happy to purchase older properties (whether HDB or private). One example would be walk-up apartments, such as Still Mansion, United Mansion, and so forth. Besides these, there are still buyers interested in condos dating back to the 1970’s, such as the famous Pandan Valley, or Peace Mansions.
In this article, I want to explore the reasons why some buyers are still interested in such old properties, and why do they still retain value:
What are the main attractions of older leasehold properties?
The key factors to note are:
- Probability of higher rental yield
- Freehold property
- Potential en-bloc prospects
- Mature location
- Scarcity or heritage value
1. Probability of higher rental yield
Older properties tend to have higher rental yields than new ones. To understand this, you should know that a property’s gross rental yield is the annual rental income, divided by the total cost.
Say your new condo unit generates $42,000 in annual rental income. The total cost of the property is $1.5 million. The gross rental yield would be ($42,000 / $1.5 million) x 100 = 2.8 per cent.
However, let’s say you were to buy a much older condo unit of the same size, in the same general area (perhaps just a few streets away).
This property is already 25 years old, so the cost is much lower – it is priced at just $1.15 million.
When you rent it out however, the rental income is about the same (perhaps just a bit lower as its older). This is because a tenant does not care about your remaining lease – they care mainly about the location, which in this case is broadly the same.
So say the rental income is just a bit less, at $39,600 per annum. your gross rental yield would thus become $39,600 / $1.15 million x 100 = 3.4 per cent; significantly higher than that of the newer property.
(Note that this assumes the older condo is still in reasonable condition i.e. the facilities are still decent, the unit is not too run down, etc.)
As such, it’s possible even for older properties to generate interest among buyers; and some older properties may still make good investments. Their lower quantum means a lower cash outlay when buying, and the higher rental yield can make up for the shorter remaining lease.
This is especially true for older properties in highly desirable locations, such as in the Core Central Region (CCR), or close to transport hubs and schools.
It helps to get an experienced eye to look over an older property, however; you want to make sure factors such as needed renovations don’t end up negating the savings. I’m in a great position to help you with this, as I have a background in construction and interior design work, as well as being a realtor. You can contact me on Facebook for help.
2. Freehold property
Some buyers don’t care if a property is older, so long as it’s a freehold property. Their reasoning is quite straightforward:
The property will be more affordable if it’s older, and might fetch higher rental yield (see point 1). At the same time, there is no threat of lease decay, so age will have even less of an impact on its resale value.
As with point 1 though, this is conditional on factors such as a good management committee (i.e. the condo stays well maintained, and facilities stay intact or are upgraded), and on other developments in the area. If there are now multiple developments in the area whereas it used to be the sole condo, for example, that could put downward pressure on prices and yields – even if it’s freehold.
3. Potential en-bloc prospects
I don’t think it’s ever a good idea to bet on an en-bloc sale; I include this only for you to understand that – to some buyers – it is a motive.
To date, apart from the 191 homes in Geylang, we have yet to see a property actually run out of its entire 99-year lease. In practice, almost all properties – whether they are freehold or leasehold – typically go en-bloc before they get past 40 years.
Once the land value eclipses the value of the property on it, developers are quick to move in with good offers. Some buyers feel that, by getting an older property, they can buy at a discount and “hit the jackpot” when a developer swoops up the property.
I can’t say it doesn’t happen, as there are many property investors who have done this and profited from it. However, I will state that no en-bloc sale is ever guaranteed.
4. Mature location
This reason is a familiar one among resale flat buyers, but it is also relevant for private properties.
Older properties tend to be in more built up areas. Examples include Marine Parade, Queenstown, Tanjong Pagar, and Clementi. These areas have seen the emergence of many shopping malls, park spaces, schools, etc. Most also have multiple MRT stations servicing the area, unlike newer estates such as Tengah or Sengkang.
Genuine home buyers may be more focused on the benefits of a mature location, over issues like getting an extra percentage point on their property returns.
This doesn’t mean that investors don’t aim for mature locations too – some investors will only consider condos in mature areas despite their age. This is because rentability is as much an issue as rental yield.
(Rental yield is how much you make from renting out the property, whereas rentability is how quickly and easily you can find a tenant; the two are not the same).
In addition, many investors feel that condos in mature locations are easier to sell at a good price, due to near constant demand. There isn’t much space to build new condos or flats in Tanjong Pagar, for example, so any unit for sale there tends to be snapped up quickly despite its age.
4. Scarcity or heritage value
These refer to properties that are unusual or cannot be found anymore. In public housing, the most famous example would be HDB Maisonettes, which are two-storey units that HDB no longer builds (million-dollar flats are often Maisonettes; or they are from the famous Pinnacle@Duxton, which is a one-of-a-kind HDB development).
For private properties, the most famous examples would be conservation shophouses. These are favourites among the most affluent property buyers, as they get to own a piece of history – and as there are only around 7,000 such units in Singapore, they tend to hold their value regardless of the ups and downs of the real estate market.
Am I saying older properties are better? No, but I am saying you shouldn’t be too quick to discount them
There’s a strong psychological inclination toward new properties. Most of us want something that’s “fresh”, especially if it’s to be our first home. That’s perfectly understandable.
However, if we want to be practical, we should consider all dimensions of the property we’re buying. Sometimes, our lifestyle and budget could mean an older property is the right fit for us. And in terms of investment prospects, newer isn’t always better.
You can check out RonChong.net to stay tuned to the latest updates on property investment or home ownership opportunities; and do contact me directly if you have any questions.
Ron Chong is a leading property agent with Orange Tee & Tie, and had a previous background in construction and Interior Design. His background gives him a wider breadth of experience in dealing with Singapore properties, and he aims to provide practical, actionable advice to buyers and sellers today. Like him on Facebook for the latest news and updates.