L.A.M. on Value of HDB flats at end of 99 year Lease

So I read on Gerald Giam's blog that Khaw Boon Wan, Minister for National Development had confirmed in Parliament that the value of flats will be zero at the end of their 99 year lease. He also indicated that the selection of sites and pace of SERS depended on factors including the site’s redevelopment potential. Implicit in what he said was that SERS is not a scheme intended solely to replace old flats reaching the end of their lease.

To me, this is a very disturbing development because so far, the market has been pricing HDB flats as if it had an infinite lease and the resale price index has increased from 33.6 in 1990 to 201.7 in 2013. (An astounding 5 fold increase).

Since this means that a house becomes a depreciating asset towards the end of the lease, then it begs the question of when is the ideal point to sell a flat. In the graph below, we see that there is a high point for a typical leasehold property where everything literally goes downhill after that.

(Modeled graph based on property 40 years into it's lease with 59 years remaining and based on a very modest future asset appreciation rate of 1.6% p.a.)

So there are 2 forces at work with regards to one's property.

1) Asset appreciation. Due to demand and supply forces (more demand than supply), asset prices (property) have been increasing over the years, leading to asset appreciation. This is the force which causes the value of a resale unit to grow. For the model I created, I assumed that the asset appreciation rate is constant.

2) Lease amortization. As lease on your property counts down to zero, the value of the property decreases. In the model, lease amortization increases as the number of years of lease remaining decreases to zero.

So in order to answer the question, I developed a model where a user can input the details of his flat, such as the lease commencement year, and valuation of property and determine the ideal year to sell his flat. (See download link below)

https://drive.google.com/file/d/0B9IgWwXHEwE6b1VBck9DWHNTMm8/edit?usp=sharing

How to use the file:

Enter the input variables into the following cells
C3: Original Lease. Usually 99 years for HDB flats
C4: Lease Commencement Year. Can be found in title deed
C5: This Year. Which ever year this is.
C8: Value of property based on Valuation (excluding COV)

I have taken the following assumptions:

1) Property appreciation rate based on the weighted average growth rate based on the resale price index with more current years having a higher weightage than earlier years

2) Long Term Bond Yield based on information from Singapore Government 10Y bond historical rates taken from http://www.tradingeconomics.com/singapore/government-bond-yield

PS: Although the model is able to determine the ideal year in which to sell your flat, it doesn't mean that you will be able to get a ready buyer on that ideal year. Depending on economic and market conditions, it might be better to plan ahead and time your exit 5-10 years earlier than the ideal year. The model also doesn't fully capture the effects of potential future government policies. This is just an amateur model based on my assumptions, please feel free to comment below if you feel this model can be improved in any way.

For a property valuation tool, see my other blog post: http://johnislam.blogspot.in/2014/02/lams-property-valuation-tool.html

L.A.M's Property Valuation Tool

I have been doing abit of house hunting and along the way there were many variables to consider, so I decided to just create a simple valuation tool to help me to decide whether to consider purchasing the property (Download Link Below).

https://drive.google.com/file/d/0B9IgWwXHEwE6OTh0X3BqTFRUS1U/edit?usp=sharing

Brief Description:

This tool uses the comparable transactions method with adjustments to valuate a property.

How to use:

1) Select the name of the property in cell A1.

2) Click on Download Comparable Transactions button (macros need to be enabled for this, on how to enable macros see link: http://office.microsoft.com/en-sg/excel-help/enable-macros-to-run-HP001119579.aspx)

Note: This process will download a list of comparable properties from the URA website. Please note that it will take about 10 seconds. Once complete, the following message below will be shown:

3) Input the input variables of the property you are looking at in the light green cells (Cells B9-D9, F9, B22 and K4 to K9)

4) Based on your inputs and your comparable properties, cell B23 will return a Y or N value to the question of whether you should consider the property.

5) To find your breakeven transaction price, you can click on the Breakeven Price button and the value will be generated.

How it works:

This tool downloads a list of comparable transactions from the URA website and then does adjustments based on the floor size (in sqft), lease remaining (in years), floor category of the unit and other adjustment factors. After this, a market discount is added which is determined by the preset input in cell K6.

Finally, based on a the asking price, a yield is determined. If the yield is higher than your hurdle rate, then  the property is worth the toolkit considers that the unit is worth considering.

PS: This is just an amateur tool, designed by me to valuate properties based on my own assumptions and consideration sets, if you have any feedback or comments on how to improve this tool, feel free to comment in the comment section below. Another point to note, this tool only applies to resale Private/EC properties in Singapore.

L.A.M.

For a tool on when is the ideal time to sell your leasehold unit, see my other blogpost: http://johnislam.blogspot.in/2014/02/lam-on-value-of-hdb-flats-at-end-of-99.html