Rental profits may offset falling prices in older leasehold buildings

Rental profits may offset falling prices in older leasehold buildings

Given the increased rental income, experts believe that investing in an elderly 99-year leasehold property may be worthwhile.

Aug 9, 2024

PROSPECTS for older 99-year leasehold projects are usually bleak, with prices and property values falling as the tenure shortens. However, economists believe that strong rental returns from these aged buildings might occasionally offset possible depreciation losses.

According to Nicholas Mak, chief research officer of Mogul.sg, the rental value of a property is unaffected by its tenure. "A freehold and leasehold property, with the same characteristics and in the same location, will command the same rental rate for the same type of housing unit," he said.

According to Wong Siew Ying, PropNex's head of research and content, some investors may choose an older 99-year leasehold property, which is likely to be less expensive than freehold properties and new 99-year leasehold developments, in order to earn better rental returns.

Data collected by property firm Cushman & Wakefield also shown that rental returns for projects with a shorter term tend to be greater than those for longer tenured buildings.

For example, between 2023 and July 2024, the median rent at the 99-year leasehold Southaven I condominium in Upper Bukit Timah was S$3.35 per square foot (psf). Given that the median sales price was S$1,196 per square foot, the gross rental return was around 3.4 percent.

Meanwhile, the nearby 999-year leasehold Southaven II had a median rent of S$3.65 per square foot and a median sales price of S$1,529 per square foot over the same time. This amounted to a gross rental return of 2.9%.

In Clementi, 99-year leasehold Between 2023 and July 2024, the Trilinq condominium, which was finished in 2017, had a median rent of S$5.49 per square foot. It had a median unit price of S$1,792 per square foot. This increased the gross rental return to around 3.7 percent.

The typical rent at the adjoining 99-year leasehold Parc Clematis, which was finished in 2023, was S$5.55 per square foot, while the median unit price was S$2,011 per square foot. This amounted to a gross rental yield of 3.3%.

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Alan Cheong, executive director of research and consulting at Savills Singapore, said that rents may not always fall in tandem with capital values.

"The former is determined more by the condition of the property, rather than the expiry of an underlying lease term," according to Cheong. "So whether it is a 99-year or freehold property of similar age and condition, their rents should be the same."

According to Christine Sun, OrangeTee Group's principal researcher and strategist, modern condominiums tend to attract greater rentals than older buildings.

Sun investigated the median rentals of eight complexes in Singapore, including three older buildings with 53 to 58 years remaining and five newer ones nearby with 76 to 88 years left. According to her findings, rentals in modern condominiums were 1.5 to two times more than those in older units.

Bedok Court, for example, has a 99-year lease that began in 1982 and had a median rent of S$2.16 per square foot in the second quarter of 2024. The typical rent at the nearby Eco condo was S$4.77 per square foot, more than twice that. It's leasing began in 2012.

In the central area, Lutheran Towers, which is 50 years old, had a median rent of S$3.09 per square foot in Q1 2024. The adjoining 11-year-old The Siena condominium cost S$6 per square foot.

In the western area, the 41-year-old Lakepoint Condominium had a median rent of S$2.42 per square foot. Projects nearby, such as the 23-year-old Lakeholmz, 16-year-old Caspian, and 14-year-old The Lakefront Residences, had median rentals ranging from S$3.54 to S$4.89 per square foot.

Between Q1 2018 and Q2 2024, median rents in newer developments increased even more.

Lutheran Towers was the lone exception, with a median rent rise of over 70% to S$3.09 in Q1 2024, up from S$1.82 psf in Q2 2018. In contrast, the median rent at The Siena increased by 25.5%, from S$4.78 to S$6 per square foot.

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Mak from Mogul.sg said that older houses often have lesser rental demand.

An survey of three older leasehold buildings - Bedok Court in the east, Lakepoint Condominium in the west, and International Plaza in the centre area - revealed that older properties had consistently lower rental transaction volumes than younger ones.

Bedok Court, for example, had an average yearly rental activity of just 8.3 percent, which is the average number of rental contracts every year in relation to the total number of units in the property. It ranged between 29.2 and 42.8 percent in newer developments nearby.

Similarly, Lakepoint Condominium had an average yearly rental activity of 14 percent. This proportion ranged from 23.6% to 39% for other newer leasehold ventures in the region.

"This shows a clear inclination towards newer developments in terms of rental demand and activity," Mak said.

Despite its age, International Plaza was an exception, with a much greater amount of rental activity of 33.4%, according to Mak. It was also much greater than the adjoining Wallich Residences, with an average yearly rental activity of 24.4%. It signed a 99-year lease in 2018.

"This anomaly suggests that while age may generally correlate with diminished rental transaction volumes in 99-year leasehold properties, (other factors) such as prestige and rental pricing dynamics can influence market behaviour significantly," said Mak.

This includes houses in places with strong infrastructure and facilities, as well as those with a scarcity of modern apartments, he said. "Loyang Valley, which is 39 years old, is yet another prominent example... Its unusual position, with no condos or private properties nearby, makes it an appealing living option for individuals who work nearby.

Wong Xian Yang, Cushman & Wakefield's research head, stated that an investor should assess the property's overall return as well as the predicted returns of other investment products.

"Given a lower price for the leasehold property, an investor could invest the savings into other investment products, such as equities or bonds, to offset the weaker capital appreciation potential of the leasehold property, though there would be limits to this strategy," he said.