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In Singapore, land is classified either as leasehold or freehold. The difference to the 2 lies in the tenure of the land ownership. For freehold land, the owner will have a non-expiring, perpetual right of ownership to the land/property while leasehold provide owners with a temporary right over the land, depending on the terms, like 999 years, 99 years, 60 years or even 30 years. Most residential development starts with a 99 years leasehold, while industrial often start at 60 years or 30 years tenure.
For leasehold property, the ownership of the land will be returned to the state upon the expiry of the lease term.
On the secondary market, there often will be transaction exchanging hand between properties. A lease can also be bought or extended and therefore it is important for the property developer or buyers to know the value of the land-based on the remaining lease.
What is Bala Table?
Bala Table, named after a Land Office employee during the British colony, provides a guide on the property valuation for the leasehold property versus its value over time as the government starts releasing 99 years leasehold. This table becomes known as “Bala Table” thereafter in real estate industry.
Singapore Land Authority (SLA) has adopted this Bala Table to determine the value of a land parcel based on the remaining lease.
As seen from Bala Table, the value of the 99 years leasehold property has 3 milestones. For example a 1 million property
- 99 years | 96% of the freehold value. So the $1m million property will worth $960,000 at start
- 60 years | 80% of the freehold value. When balance 60 years left of the lease, it will worth 80% of the freehold value, so it will now worth $800,000
- 30 years | 60% of the freehold value. When balance 30 years left of the lease, it will worth 60% of its freehold value or $600,000.
The Bala curve doesn’t depreciate in a linear manner, but rather, it curves down and depreciate more as the property becomes older and nearing its end of lease. The curve flows gently down initially, reflecting a gentle depreciating at first, but after the 30 years mark, the depreciating effect accelerated, with an effect like a reversal of compound interest on bank saving. The value of the property will be depreciated at a faster rate as the property aged until it hit zero at the expiry of the lease.
That how the Bala table works, reflecting on 99 years leasehold property depreciating over the years. However, in reality, a leasehold property does not depreciate immediately on day 1. In fact, it tends to appreciate in value as new homes are generally highly sought after as its brand new with limited renovation required. Transactions for new home sales and those newly TOP projects generally have healthy transaction figures that push up the property prices, in line with the inflation rate.
But when the property reaches that 30 to 40 years mark, the figures will catch up and depreciate much faster, regardless of location, design, and condo facilities. This effect can be seen in more mature estates like in Clementi, Circuit Road, and Toa Payoh older flats where the price downward trend goes in line with Bala’s curve. That is also the reason why banks are more reluctant to loan homebuyers property with less than 60 years of remaining lease.
Application of Bala’s Curve in HDB Lease BuyBack Scheme
HDB has a “Lease BuyBack Scheme” (LBS) that allows the elderly to sell part of their HDB remaining lease back to HDB in exchange for cash proceeds for the elderly to tide over their remaining days. HDB valuers will use the Bala’s Table to determine the value of the HDB flat to compensate the elderly.
However, HDB will normally offer higher sales proceed to compensate the elderly for those who choose to take up the HDB Lease BuyBack Scheme that comes with certain terms and conditions. That is, those who take up the scheme will not be able to rent out the entire unit nor sell on the open market. In case they wish to sell the property, it has to sell back to HDB where HDB will apply the same thing, determine the value of the HDB flat based on Bala’s Table to compensate back the homeowners.
Exceptions to Bala’s Curve
Bala’s Curve applies generally to the property market as a rule of thumb. It is easy to use and transparent and provide a guide to the value of the land across different land lease. However, it does not apply to all units. At the end of the day, its about open market, willing buyers, willing sellers. One of the obvious exceptions to this Bala’s Curve is in the form of en-bloc, where developers are seen paying a premium to buy back the units from homeowners to rebuild. Developers will then top up the lease back to 99 years and sell as 99 years leasehold new condo.
Developers will often enbloc when they believe that site is under value and also when the project turns older where wear and tear get common with leakages etc, homeowners will, in turn, be more motivated to enbloc too.
There are also individual cases where HDB is seen to cross a million mark. But hey, isn’t 99 years leasehold supposed to depreciate accordingly to Bala’s Curve? As mentioned, the open market is about willing sellers and willing buyers. Often, these individual cases likely do have its unique positive attributes like brand new, nice view, nice renovation, and emotions of individual homebuyers that over the fundamentals of Bala’s Curve.