ANALYSIS: The impact of lease decay on HDB flats
By Elizabeth Choong
/ EdgeProp Singapore |
The transformation of the Jurong Lake District seem to have given a boost to the resale prices of HDB flats in Jurong West. (Photo: Samuel Isaac Chua/EdgeProp Singapore)
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SINGAPORE (EDGEPROP) – It is well-known that age affects the price of leasehold property. In general, older properties tend to have lower prices than their newer counterparts due to wear and tear and a shorter remaining tenure.
However, the extent of the impact of lease decay is less certain. To better understand this, we examined the prices of HDB flats and compared the average resale prices of those 10 years or younger with their older counterparts.
Price data for new HDB flats is available only for selected towns each year, as Build-To-Order (BTO) projects are launched in different towns annually. Therefore, we used price data for resale HDB flats aged 10 years or less as the basis for comparison. We compiled a table of price differences between newer and older flats, allowing us to assess the impact of lease decay as HDB flats age.
The five towns
A comparison was made of the towns with the most HDB flats in each region. Bukit Merah, with 44,958 flats, has the most in the Central region, while Tampines, with 76,637 flats, leads the East region. Jurong West (72,230 flats) and Woodlands (68,019 flats) have the most flats in the West and North regions, respectively. The North-East region is represented by Sengkang with 70,430 flats.
Residential properties in the Central region have always been highly sought after by buyers, so it is not surprising that HDB flats in Bukit Merah have a higher average price across all ages compared to the other four towns (see Chart 1).
Source: EdgeProp Market Trends (as at 4 October 2024)
Flats in Woodlands have the lowest average price for those aged 30 years or less, but they are overtaken by flats in Jurong West once they are at least 31 years old. It is also noteworthy that there are no transactions in Sengkang for flats over 30 years old, likely because Sengkang is a relatively new town without flats of that age.
Despite having the highest average resale price, Bukit Merah seems to experience the greatest impact from lease decay, especially after flats reach 31 years of age. The price difference for Bukit Merah flats aged 31 to 40 years compared to those 10 years or less is -33.8%, significantly larger than the price differences for flats in Tampines (-26.5%), Jurong West (-25.4%), and Woodlands (-15.7%) (see Table 1).
Bukit Merah: Numerous million-dollar transactions
A closer examination of the flats in Bukit Merah shows that five-room flats experience the most rapid lease decay compared to their three-room and four-room counterparts (see Table 2). This could be due to the high prices paid for five-room flats in Bukit Merah that are 10 years old or younger. The average resale price for such flats in Bukit Merah is $1,172 psf, compared to $647 psf for five-room flats of the same age islandwide.
Assuming a five-room flat measures 1,200 sq ft, a five-room flat in Bukit Merah that is 10 years old or younger would cost approximately $1.4 million. At the time of writing, only nine five-room flats in Bukit Merah aged 10 years or less have been sold this year, and all fetched at least $1 million. Across Singapore, 49 five-room flats aged 10 years or younger have been sold for at least $1 million this year (see Chart 2). Last year, 54 five-room flats were sold for at least $1 million, with 12 of them located in Bukit Merah.
Source: EdgeProp Shortlist (as at 30 September 2024)
The high prices for newer flats in Bukit Merah could be attributed to the introduction of Prime Location Public Housing, which has a Minimum Occupation Period (MOP) of 10 years. Due to Bukit Merah’s proximity to the city centre and numerous amenities, many recent BTO projects in the town have been launched under the Prime category.
However, resale flats in Bukit Merah are not classified as Prime and therefore still have a shorter MOP of five years. As a result, resale flats in Bukit Merah with a long remaining lease are highly sought after by savvy buyers who want to live in Bukit Merah without the longer MOP. This demand likely contributes to the high resale prices for Bukit Merah flats that are 20 years old or younger.
Tampines: Delayed lease decay
Lease decay seems to have a limited impact on Tampines HDB flats aged 11 to 20 years (see Table 3). Flats in Tampines within this age range have a higher average resale price than their younger counterparts, aged 10 years or less. The difference is most significant for four-room flats, where flats aged 11 to 20 years have an average resale price that is 10.4% higher than their younger counterparts.
Tampines Greenridges, located along Tampines Street 61, reached its MOP last year. Many of this year’s transactions for HDB flats in Tampines that are 10 years old or less involve flats from this project. There are limited amenities and no MRT stations within walking distance of Tampines Greenridges, which may have affected the overall average resale price for flats in Tampines that are 10 years old or younger. Additionally, only Angsana Primary School and Poi Ching School are within a 1km radius of Tampines Greenridges (see Map 1).
Source: EdgeProp LandLens (as at 4 October 2024)
Jurong West: Weathering lease decay due to transformative plans
Flats in Jurong West seem to have weathered lease decay better than those in the other four towns. Among flats aged 41 to 50 years, the price difference for those in Jurong West is -21.4%, compared to -38.8% for Bukit Merah, -30.4% for Tampines, and -24.2% for Woodlands (see Table 1). The ongoing transformation of the West region, coupled with the upcoming Jurong Region Line (JRL), may have boosted the demand for and prices of HDB flats in the town, regardless of their age.
Similar to Bukit Merah, five-room flats in Jurong West have borne the brunt of lease decay (see Table 4). Three-room and four-room flats between 11 and 20 years old have a price difference of less than -2%, while five-room flats show a price difference of -14.2%.
The smaller flats could have benefited from stronger demand among seniors aged 55 years or older. Since September 2022, sellers of private residential properties must wait 15 months before they can purchase a resale HDB flat. However, seniors aged 55 and above are exempt from this regulation if they purchase a four-room or smaller HDB resale flat. As a result, seniors seeking a replacement home are likely to gravitate towards three-room and four-room flats.
Woodlands: Three-room flats defying lease decay
According to HDB’s latest annual report, there are 30,388 four-room and 21,125 five-room flats in Woodlands as of the end of March 2023. However, there are only 7,294 three-room flats in the town. The limited number of three-room flats may explain why these flats do not seem to be affected by lease decay until they reach 31 years old (see Table 5).
Three-room flats in Woodlands that are 21 to 30 years old have a higher average resale price, which is 5.6% higher than their counterparts aged 10 years or younger. In contrast, four-room and five-room flats that are 21 to 30 years old have average prices that are lower than their younger counterparts by 15.8% and 19.7%, respectively.
Three-room flats in Woodlands ($614 psf) that are 30 years old or younger have an average resale price lower than their counterparts in the North region ($619 psf) and islandwide ($704 psf) (see Chart 3). This comparative affordability may have boosted demand for three-room flats in Woodlands.
Source: EdgeProp Market Trends (as at 4 October 2024)
Sengkang: New town without flats over 30 years old
The first flats in Sengkang were completed in the late 1990s. Hence, the town does not have any flats that are more than 30 years old. The lease decay for flats in Sengkang follows the expected trend of a small price difference for flats aged 11 to 20 years, followed by a significantly larger difference for flats that are 21 to 30 years old (see Table 6).
Sengkang is sandwiched between Punggol and Hougang. Like Sengkang, Punggol is also a relatively new town without flats that are over 30 years old. However, Hougang is a much older town, with its oldest flats aged between 41 and 50 years.
Thanks to the youth of the flats in Sengkang ($601 psf) and Punggol ($636 psf), the average resale prices for flats in these two towns trend above that of Hougang ($570 psf) (see Chart 4). Among the three towns, Punggol has the highest average price due to government plans for the Punggol Digital District, which is set to be Singapore’s first business district dedicated to the growing digital industry.
Source: EdgeProp Market Trends (as at 4 October 2024)
Key takeaways
In general, older HDB flats will attract lower prices compared to their younger counterparts. Among the five towns examined, Sengkang is the youngest town, with no flats that are over 30 years old. Thus far, the flats in the town are following the expected trend of attracting lower prices as they age.
However, several factors can lessen the impact of lease decay. A desirable central location has helped flats in Bukit Merah delay the onset of lease decay. Furthermore, many BTO projects in that town have been launched under the Prime category. As such, homebuyers who want a flat in Bukit Merah with a long remaining lease and a shorter MOP of five years have to turn to the resale market to meet their requirements, resulting in numerous million-dollar transactions for younger flats.
Lease decay for HDB flats can also be mitigated by transformative plans for a neighbourhood. Jurong West has benefited from the government’s plans for the Jurong Lake District and the West region. Consequently, flats in Jurong West have enjoyed a boost in demand and, hence, resale prices. Thus, the flats in Jurong West seem to be weathering the impact of lease decay well.
Limited supply of a certain flat type in a town can also help to delay the onset of lease decay for that flat type. The three-room flats in Woodlands have benefited from the limited number of such flats. As a result, lease decay seems to have no impact on the three-room flats until they reach 31 years old, unlike their four-room and five-room counterparts.
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