Home News Forum The decaying HDB lease, myth or reality?

The decaying HDB lease, myth or reality?




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By Chow He Shen

What did Lee Kuan Yew really mean when he said that 99-year HDB flats will enjoy generous HDB upgrading and their value “will never go down”.

Did LKY really mean that the value of a HDB flat will never go down eternally?

Or did he mean that with the policy of upgrading, the flat will continue to rise in value in the foreseeable future of 33-39 years?

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Many older Singaporeans who bought their HDB 35 years ago would have seen their flat appreciate from $50,000 to $500,000 (on the average) when they retire.

To the majority of Singaporeans, their home is their largest asset and nest egg. 82 percent of these are HDB homes. HDB values will shrink to zero when they reach 99 years old. So what?

It is profoundly confounding that many Singaporean intellectuals have come to a collective view that an HDB residential asset with a 99 year lease is a poison chalice because, at some stage in the future, its value will shrink to zero.

Yet, professional developers of industrial warehouses, shopping malls and casinos in Singapore bid sky high prices for land leases ranging from 25 to 50 years and spend billions on building these facilities.

It is understandable that HDB owners are anxious. But is this anxiety grounded in truth and fact? 99 years is a very long tenure for the first time HDB owner to feel financially insecure.

Those who purchase 35 year old HDB flat at market prices are a different breed. They have different considerations and financial abilities. It is not the government’s duty to ensure that the flat outlives these secondary market buyers.

The government’s sole duty, when it comes to housing, is in the primary market, ensuring affordable new HDB flats to a fresh generation of young Singaporeans.

What could be the root cause of this bifurcation of thinking between leasehold and freehold?

The answer lies, in my view, on the lack of understanding of basic finance.

In reality, leasehold and freehold are two sides of the same coin.

If markets are reasonably efficient, buying a leasehold property should not be inferior to buying a freehold property. Most of the prime real estate in London sit on leasehold titles.

Critics will argue that London leases are renewable. But ground rent must be paid by the lessees to renew each time.

Say there are two properties side by side and similar in every way except (a) one is a 33 year old leasehold property X (b) the other is a freehold property Y.

If the professionally appraised market value of freehold Y is $5 million, what should leasehold X sell for?

A retired couple aged 65 are weighing the options. How will they decide?

Say they are planning to live in either X or Y till they die. From an actuarial sense, either property will outlive them.

If their long term opportunity cost of capital is 4% per annum, then they should be indifferent toward paying $1.37 million for leasehold X or paying $5.0 million for freehold Y.

$1.37 million is the present value (PV) of the future value (FV) of $5.0 million discounted over 33 years at 4% per annum.

Choosing X will free the couple of $3.630 million. Choosing Y means that all their $5.0 million is tied up in the freehold house.

Freehold Y is expected to appreciate in 33 years.

Leasehold X’s value will drop to zero in 33 years.

But the retired couple, should they choose to buy leasehold X, will instead have the freed up capital of $3.630 million to invest at 4% per annum for 33 years (future value = $13.240 million).

How much will freehold property Y appreciate in 33 years?

Theoretically it should be worth the compounded value of $3.630 million @ 4% for 33 years = $13.240 million.

So whether you decide on X or Y, the outcome should be similar.

Another way of looking at option X (buying leasehold) is to imagine that the buyer is buying the leasehold property to rent to herself for 33 years, being your own landlord.

The implicit rental is this case is $6,290 per month, for 33 years.


In financial calculations, knowledge about the power of compounding and discounting cash flows over long periods of time is non-intuitive.

Hence, many non-financial intellectuals can be forgiven for thinking that assets, when compounded/discounted at a risk adjusted “cost of capital”, appreciate/depreciate linearly instead of exponentially.

As a thought experiment, we use a 5% discount rate to compute the relationship between the PV and FV over a 99 year period.

$1 million 99 years from now is worth only about $8,000 today.

Which means HDB could theoretically promise to buy back every flat after 99 years for $500,000. When HDB sells a new flat each time, it makes a provision of $4,000 in today’s dollars.

The PV of $5,000 of cash inflows per year, over 33, 66 and 99 years, discounted at 5% per annum, are $80,000, 96,000 and 99,000 respectively.

The financial calculations above have shown us that cash received AFTER 33-39 years show an exponential decrease in value.

Although it is non intuitive, but the idea of buying a new HDB flat is actually similar to paying a sum of money upfront (PV) in exchange for a fixed annual stream of cash flow over 99 years.

This also explains why an HDB flat reaches its peak market value when it is 33-39 years old.

Be it a 99 year HDB leasehold or 33 private leasehold, the financial valuation principles are similar.

Unlike a pure landlord-tenant contract, the HDB flat “owner” is permitted to sell her flat at market price any time during the lease period.

Why does a new HDB flat appreciate the most during the first 33 – 39 years?

The financial implication of an HDB purchase is most impactful during the first 33 – 39 years.

The 99 year HDB lease is fair and generous.

Refer to the attached Bala’s table below. It shows that the value of any leasehold holds up well against the value of freehold for the first 33-39 years of the lease

This is consistent with discounting a fixed cash flow stream over a 99 year period – the present value of the first 33-39 years of cash flow is 80 percent of the entire 99 year stream.

Although this may not seem intuitive, it basically explains why the market value of an HDB flat rises to its peak level between 33-39 years of age.

This means that during the first 33-39 years of owning an HDB flat, the capital appreciation mirrors that of freehold property.

HDB is not purely a financial transaction between state and citizen. HDB policies impact nationhood, nation building and social-economic-political behaviour.

HDB upgrading, infrastructure boost and economic growth

HDB, like all real estate projects in Singapore, does well when the government improves liveability by building more shopping malls and subway lines, particularly the ones serving the HDB estate.

In addition, individual HDB flats and blocks also receive unique upgrades to enhance their liveability and value.

Poverty, retirement inadequacy and inter-generational legacy

It is true that there are 100,000 poor Singaporeans living in HDB, including 50,000 rental studios for the really poor, with little money to retire on.

Poverty and retirement inadequacy are global problems, in both rich and poor countries today.

Many critics will argue that because CPF is used in HDB flat purchase, hence the two issues are linked. But CPF is used for private home purchases as well.

It is possible that owners of private freehold properties in Singapore who steadfastly hold on to their asset, without any retirement income for years, will run into cash flow problems.

Whether a HDB or private home owner, retirement is about unlocking hard assets in exchange for liquid assets, balancing the two assets smartly.

Hence one should not conflate the poverty and retirement crisis with HDB leasehold policy.

Separate government policies are needed to solve the problem of poverty and retirement adequacy.

The 99 year HDB lease is generous and adequate. If a young Singaporean couple buys an HDB at 30, the lease will expire when they are 129 years old.

Every fresh generation of young Singaporeans are entitled to buy a new and highly subsidised HDB flat, and they should.

No government can guarantee that every generation of Singaporeans can garner surplus wealth to pass down to their heirs.

Every government’s responsibility is look after one fresh generation at a time.

The ability for some Singaporeans to leave a legacy, either freehold property or gold bars, is a privilege and not a political right (freehold property is a tiny fraction of all property in Singapore)

History of the rentier.

Centuries ago, great thinkers like David Ricardo and Henry George have identified that aristocratic land owners had the ability to extract economic rent, carving out a lion’s share of the growth created in an economy, without contributing much.

The modern day rentier is still alive. These are the real estate oligarchs of Hong Kong who collude to horde land, to the detriment of the masses.

In Singapore, the government is the “benevolent” rentier, regenerating residential land in 99-year cycles so that many more generations of young Singaporeans will continue to buy affordable HDB housing.

Smart retirement?

Singaporeans should be smart about making retirement choices.

A sixty five year old couple who bought their HDB flat 35 years ago for $50,000 have options. These include

1. Selling the flat for $500,000 and downgrade to a HDB retirement studio.

2. Sell back part of the remaining lease to HDB and receive upfront cash and continue to live in the flat.

3. Selling the flat for $500,000, and along with other savings, uproot and retire in Penang (if many westerners have already done that, why not Singaporeans?)

4. Renting the flat for $2500 per month and along with a possible “other income” of $1500, move next door to Iskandar and enjoy a good life for 12,000 ringgit per month. For option (4), it is interesting to note that even as the HDB flat value declines sharply, especially during the final 20-30 years, their rental value remains the same as freehold.

This post first appeared on Chow He Shen’s Facebook page. We reproduce here with permission.Follow us on Social Media

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