LEASE DECAY AND THE PRICES OF PRIVATE RESIDENTIAL PROPERTIES IN SINGAPORE

Abstract

Singapore’s residential properties largely consist of 99-year leasehold, making it essential to understand how the value of these properties change as the years elapse. The objective of this paper is to analyse the effect of lease decay on transaction prices for non-landed, private residential 99-year leasehold properties using hedonic modelling and estimation. Previous research such as the Bid Rent Theory (Alonso, 1964) and the Hedonic Price Model (Rosen, 1974) have shown that the value of a property is dependent on more than the physical value. Thus, unit area and infrastructure variables were included and found to significantly improve the hedonic model, simultaneously causing an increase in the negative effect of lease decay on transaction price. In order to compare the effects of decay between freehold and leasehold properties, age is used in lieu of remaining lease. Freehold properties were found to be more resistant to the negative effects of age decay as compared to leasehold properties when analysing transactions across the whole country. However, when broken down into Planning Regions, it was found that age decay had less effect on leasehold properties in the North East Region and were shown to be more resilient than freehold properties in the long run for the East Region. Given the importance of predicting real estate prices, lease decay remains a prominent factor of consideration for investors, developers and homeowners in Singapore. The findings in this study will be particularly relevant for investors with limited capital in deciding which type of tenure to purchase in these regions.