Are 60-year leasehold residences here to stay?

We are reminded regularly that one in five Singaporeans will be over the age of 65 come 2030. Immigration policies and the mix of new Singaporeans can alter our demographics, but the total number of senior citizens will certainly increase.

In public housing, the Housing and Development Board (HDB) already has several schemes catering for the elderly. But a pilot project was introduced in 2012 on the private housing front: Sixty-year leasehold residences targeted at retirees.

To test the interest of developers, the Urban Redevelopment Authority (URA) was generous in its incentives for this project provided conditions around Retirement Housing were met: An additional 10 per cent gross floor area and no limits on the maximum number of Dwelling Units (which means it can be filled with shoebox or pigeonhole units).

Developers took the bait: There were 23 bids submitted on Nov 15, 2012.

Fast forward to now. The Hillford in Bukit Timah is set to launch this weekend with 281 units, 186 of which are one-bedroom units with average sizes of around 410 sq ft. Buyer interest seems high, fuelled by the relatively low outlay with prices from around S$400,000. Thousands of visitors have visited the showflat.

But how attractive is the development from an investor’s perspective? And will this be a one-off experiment or the first of such properties?

ATTRACTIVE RETURNS?

Investors are probably attracted by the potential rental income. One possible buyer offered the following scenario: Rentals for the one-bedroom units may fetch S$2,200 per month. This means that over the 57-year lease period that would remain post-construction, the total rental income could potentially be S$1.5 million. Subtracting the purchase price of about S$400,000, that implies a profit of about S$1.1 million.

Ignoring stamp duties and other costs, as well as the vacancy period between tenants, one flaw in this proposition lies in the monthly rental expectation of S$2,200 for a 398 sq ft apartment that includes a bomb shelter and an air-con ledge.

In comparison, monthly rentals for two-bedroom units in Signature Park (1,055 sq ft) across the road are currently around S$2,500. A little further off, Springdale (970 sq ft) rents are approximately S$2,750. Both are condominium projects with much bigger grounds and facilities including tennis courts. A four-room HDB flat (about 1,000 sq ft) in nearby Bukit Batok may be rented at S$2,200 per month. The record high supply of private residences (about 19,000 units this year and next, and 23,000 units in 2016) will also put a cap on rentals.

Investors might also overlook the fact that if they wanted to sell this property, say 10 years from now in 2024 when the lease is left with 48 years, the next buyer may only get a maximum loan term of 18 years, which would limit the pool of potential buyers.

VALUATIONS

The estimated launch prices range from S$1,000 to S$1,100 per sq ft for this 60-year leasehold property. Using a straight line depreciation to zero value over 60 years, the equivalent price based on a 99-year lease is as high as S$1,815 psf.

If we adopt industry valuation methods and reference the Leasehold-Freehold tables from the Singapore Land Authority (SLA), a price of S$1,100 psf for a 60-year lease translates to an equivalent of S$1,320 psf for a 99-year lease.

However, at the other extreme, considering that banks do not lend for residential properties with a remaining lease of 30 years or less (and Central Provident Fund monies cannot be used to service the instalments), the depreciation is even steeper and, therefore, the equivalent price in 99-year terms might well be in excess of S$2,500 psf depending on the residual value of the final 30 years of lease.

Optimistic and eager investors often look beyond these issues and hope for a brighter future.

SCORECARD FOR SUCCESS

Apart from the development’s investment potential, a few milestones will need to be cleared before we can determine the final scorecard of this pilot project in assessing whether it is delivering on its aims.

Firstly, after the project is fully sold, we need to understand the profile of all the buyers. If the buyers are owner-occupiers, how many are senior citizens and retirees?

Secondly, after the construction is completed in two years, we need to tote up the profile of the tenants in this “retirement resort” — what proportion are senior citizens or retirees?

And most importantly — say three years after completion — we should take another look at the profile of the tenants in the apartments and the services provided in the commercial units below. Are the tenants elderly citizens and are the commercial outlets providing services relevant for retirees and eldercare?

The scorecard should be objectively assessed against the list of incentives given to developers for building retirement housing. And if these three final checks returned satisfactory results, i.e. the completed property is largely serving the needs of retirees, then the authorities might consider selling more residential land parcels on 60-year leases with similar incentives.

By Ku Swee Yong – property agent and CEO of real estate sales organisation Century 21 Singapore. He is the author of two bestsellers: Building Your Real Estate Riches and Real Estate Riches.

Source : Today – 17 Jan 2014

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