DETERMINATION OF LEASEHOLD VALUES AS A PERCENTAGE OF FREEHOLD VALUES

Abstract

Residential properties on expiring leasehold tenure face dilapidation, depreciation, illiquidity and financing problems. To address these issues, the restrictions pertaining to the extension of the lease tenure for older properties without redevelopment potential in Singapore should be modified. Currently, Bala's Table or the Leasehold Table (LT) which expresses a leasehold value as a percentage of freehold value is applied to determine the Differential Premium (DP) for leasehold sites and the premium for upgrading the lease tenure. This study examines if the present LT is fair and comparable in the event of lease extension using the market approach. The basis of the LT is further investigated using the income approach. Using data on leasehold condominiums with unexpired tenure of 70 to 79 years and comparable freehold properties, the values of leasehold condominiums can be close to or even exceed their freehold comparables in some submarkets in a booming market. However, the value differential widened by up to 29 % during market downturns. This is twice the 14% discount pegged to the 70-year tenure in the LT, a conservative estimate considering that the sample leasehold properties are between 70 to 79 years of tenure. Although the present LT provides transparency and certainty, it does not represent a fair discount for different types of properties in localised submarkets over time. The income approach demonstrated that leasehold discounts for every term of the unexpired lease can be determined by the DCF model. In addition, the leasehold discounts can be adjusted by modifying the yields that can be determined from market comparisons. To improve flexibility as well as maintain the transparency of the current system, more Leasehold Tables (computed by the income approach) for different types of properties and submarkets or sectors that can be more comparable with the market value are recommended. Adjustments to these Tables can also be made periodically to reflect changing market conditions similar to the method applied for the DC table of rates.