Sunday 9 April 2017

Your HDB Flat is a Depreciating Asset (eventually)

Recently, the stark reality about the value of our HDB flats was reiterated by our current MND minister, Mr. Lawrence Wong - where upon expiry of its lease, your flat will be returned at zero value to the State via HDB. The Straits Times too has been unforgiving with its relentless churning of articles on the topic of "Lease Expiry" with its latest article on private estates nearing the end of its lease and residents distraught. 

Hard Truth

A few investment bloggers and investing forum had been harping on the fact that many properties in Singapore are leasehold by nature; which means the property value eventually depreciates to zero upon expiry of its lease (be it 20, 30, 99 years etc) and returned to the State,

A feature of Singapore's leasehold is that the value of the property does not depreciate in a straight line but that similar to a concave nature. The Singapore Land Authority (SLA) has a leasehold table which shows how much value of your property is retained as the number of years on its lease runs down. Fellow blogger, Investmentmoats, has depicted this on a table and a graph showing the speed of depreciation which I have reproduced below with his permission.  
Table 1: Leasehold Values to Remaining Lease Years

Graph 2: Speed of Land Depreciation

Applying SLA's leasehold rates to the value of a HDB flat with the number of years on the lease left; from the table and graph, one will notice the speed of depreciation is most pronounced when a flat's remaining lease tenure falls below 30 years. At that stage, your flat retains about 60% of its value as compared to freehold value; moving to 20 years remaining, it only retains 48.0%, and with 10 years remaining - 30.0%. That sets out to a 1-3% annual loss! 

On the contrary, during the first 69 years of a HDB flat's lifespan; you only lose approximately 36-40% of its value. Therefore between these 69 years, about 0.2% to 0.6% of property value is lost annually (before inflation and other demand factors). The slower depreciation at the beginning probably why HDB flat prices are still intact despite using 10 - 30 years of its lease.


Hence fortunately (or unfortunately), because very few HDB flats has reached the stage where there is only 30 years of its lease remaining (only 7% of HDB flats are above 40 years old); valuations of HDB flats have remained sky high. This is because the annual 0.2% to 0.6% depreciation had been offset by factors such as i) Inflation and ii) Property demand due to a growing population. It will take about 40-50 years to see the effects of depreciation on HDB flats.

Critics may argue that the value of HDB flat at the tail end of its 30 years lease can be maintained by ensuring that inflation and property demand remains stubbornly high to offset the approximate 2-3% annual decrease. However, in my opinion, such a scenario will mean either ensuring no houses are built to meet the demands of a rapid population growth (most likely achieved by importing a lot of foreigners) or that Singapore experiences a period of high inflation - not ideal to the citizens' cost of living.

Nevertheless, even if such scenarios do materialize; at the end of the 99th year, a HDB flat is still returned at zero value back to HDB and then to the State.

Wait, there is a Solution!

Others may point out that topping up your lease back to 99 years will do the trick. Some example has been like how Singholdings did an enbloc at Robin Road and paid cash to top up the remaining lease for a fresh 99 year status. 

While this indeed can be done, it is highly unlikely HDB will do so for all of its land.This is because land use intensification or urban renewal has to be done to allow for the justification of a lease top up. In addition, it requires approval from the lessee. Property developers are able to do such lease topping up quickly and efficiently because they are the sole lessee of the land after completion of the enbloc.

Therefore, for the 937,341 flat owners (as of 31st March 2016, HDB Statistics Report), this article serves as a reminder that your HDB flat is in fact a depreciating asset. For those among the group of 937,341 flat owners seeking to flip your HDB flat for a profit, just don't be the last fool holding on and suffer from the effects of leasehold depreciation. 

And the Icing on the Cake

While I have been going on about how a HDB flat's value is affected by depreciation of its lease, another factor deserves a worthy mention - the low fertility rate (1.2 as of 2016). Without enough babies to replace Singapore Citizens and PRs in the future, it will mean a fall in demand for HDB flats; indicating less opportunity for HDB dwellers to upgrade or even monetize their flat's value when they purchase a second home.


  1. Depreciation curve for leasehold property is quite standard around the world.
    E.g. For central London prime leasehold properties:

    Acceleration of depreciation starts to pick up after 60 yrs.

    As for the examples in the ST article, it is obviously very biased towards relatively small plots of landed homes. Condos & private apartments have larger numbers of residents and a larger land plot and benefit from "wisdom of the crowd" in ensuring an enbloc sale well before the danger zone of the lease is reached.

    The other disadvantages for landed homes for enbloc sale is the zoning limitation & limited footprint --- property developers will be limited to building only 4-5 storey condos on small pieces of land. Hence even if willing to buy, developers will not offer very attractive prices to the residents.

  2. At 50 years remaining, free hold value is 75%. If i read correctly, this mean depreciation is slower for the first 50 years.

  3. I suspect that for HDB flats, the price depreciation will be even steeper than for private leasehold. Why?? Becoz private strata-title leasehold is NOT the same as HDB pseudo-leasehold.

    Are there any major condos that have let their lease run down to 50 years or less?? I don't think so. Owners of leasehold condos know the score & price depreciation --- they will try by hook or by crook to enbloc their condo way before 50 years old.

    OTOH, HDB buyers have no say in whether got SERS or not. It's all up to govt to determine whether got "redevelopment potential" i.e. low-density, low-storey blocks, open-air carparks, wide open spaces, etc. 96% won't have SERS. Doesn't take a genius to calculate the odds. By the time a HDB block reaches 50 yrs old, chances are almost zero for SERS if govt hasn't announce by then. Hence if reach 50 yrs old without any SERS announcement, the price for that HDB block will plummet accordingly.

  4. Land use policy is effected by Govt of the day. You need to convince the govt HDB cannot be zero and all citizens have rights to the land.