I was admittedly shocked when I first caught wind of this particular deal – an option inked at $1.75M thereabouts for a 2-storey landed home in Upper Bukit Timah. Making a fuss over nothing? The house was situated upon approximately 3,300 square foot of land, with a balance lease of roughly 38 years. That’s akin to $3,800 per month in rent for 38 years, paid upfront!
Shortly after, Ms Lee Su Shyan, Money Editor of The Straits Times, highlighted in “Weigh the pros and cons of shorter leasehold homes” (16 December 2012) that a 60-year leasehold plot at Jalan Jurong Kechil had attracted 23 bids from interested developers. The 152,848 square foot site was ultimately awarded to World Class Developments (North), the property development arm of Aspial Corp, for $73.8 million. URA’s info on the Jurong Kechil tender exercise.
To my mind it was no longer just a single quirky home-buyer but 23 developers, a trend appeared to be developing! My interest in shorter leaseholds was piqued. Was there something I was missing?
If you’ve been reading our blog from the beginning, you’ll know that while I do favour leasehold properties for cashflow purposes, I generally shy away from anything with less than 60 years balance lease. For one, most banks require at least 30 years remaining lease on the property upon the expiry of the loan tenure – this means that you can take a 30 year loan on a 60-year leasehold, but only a 27-year loan if you wish to re-finance the loan 3 years down the loan, with the maximum loan tenure diminishing with each passing year. Evidently, banks consider such properties risky, unattractive collateral, and I certainly don’t argue with that view.
But with rising property prices, and upward pressure on the underlying costs – both land and construction costs are set to continue their upward ascent in the near and foreseeable future – perhaps shorter leases are the more humane alternative to provide affordability to the masses beyond simply carving out smaller and smaller homes.
The main problem associated with shorter leaseholds – the accelerating depreciation of the property towards the end of the lease – can, I believe, be managed with proper financial planning. So long as you buy a place that is comfortably within budget, and continue to grow your retirement funds and ensure you always have sufficient liquidity to tide you through the unexpected (i.e. protect yourself against the need to ever force-sell your home), you should do fine with a shorter leasehold home. To be safe, I would suggest that you work out your housing budget first, and slash that budget by at least 20% if you’re considering a 60-year leasehold. Then make sure you plow that 20% savings into growing yourself a comfortable retirement/emergency fund!
Ms Lee pointed out that by the time a property owner has lived out his working years in a 60-year leasehold unit, it may not be worth that much, thus depriving him the option of cashing out on his main asset. This is indeed a very real issue for shorter leasehold homes. But I believe one viable retirement plan would be to simply rent the place out. If you are an empty-nester craving the company of youth, you may choose to rent out a room or two to young professionals or students and help off-set your retirement living expenses. Miss cooking for your family? Charge for food and lodging to enhance your income! If you prefer privacy, you might instead choose to rent a smaller, cheaper place while renting out your own property, and pocket the difference.
To put things in perspective, 50-60 year leasehold residences are the norm in similarly land-scarce Hongkong. Or closer to home, our own industrial property market has seen land tenures reduced to as low as 30-years in a bid to keep things affordable for small-medium enterprises. Love them or hate them, shorter leaseholds present an additional option to would-be home buyers. My view is that as long as buyers enter into a purchase fully aware of the risks and limitations of any particular class of property, wider variety in the marketplace is always welcome.