Flat Hopper

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The Shore Residences and Converted Freeholds (Part 2)

with 6 comments

Continuing from Part 1, I will discuss about the 2nd point on whether the price gap between freehold and leasehold properties which may disappear during good times, but will appear as property ages is indeed true.

The statement makes sense. Buyers would naturally value a freehold property over a leasehold one, specifically a 99-year leasehold (999-year leasehold properties are as good as freehold in my book), since you get to keep it forever. However empirical evidence is needed to show how price gaps change over time. Due to insufficient data and time (Singapore is only 45), we can only really test the 1st part.

Firstly, The Shore Residences is not the first freehold conversion. Is there another freehold project that was converted to a 99-year leasehold? What other freehold-leasehold pairs are there with enough data to compare with? And lastly the sales data must go through 2006 – 2007 which is the period of Singapore’s recent property bubble or the good times.

1. District 10 – Jervois Jade (Converted freehold to 99-year leasehold vs Valley Park (999-year leasehold)
2. District 21 – Pine Grove (99-year leasehold) vs Pandan Valley (Freehold)

Round 1: Jervois Jade vs Valley Park

Jervois Jade and Valley Park are located in River Valley at the point where Jervois Rd, Delta Rd and River Valley Rd meet. Jervois Jade is on a freehold site but the property was converted to a 99-year leasehold. It is the apartment awkwardly shaped like a thin slice of cheese. I’m not 100% certain about the freehold conversion so do leave your comments. Valley Park on the other hand can be prominently seen from the main road by looking for the only Starbucks in the area.

Valley Park was constructed in 1997 while Jervois Jade was only completed in 2000, so our comparison goes back just 9 years. Clearly we are not comparing like for like here. Jervois Jade is a smallish 45 unit apartment while Valley Park is a 728 unit condo with full facilities and even a shopping centre, but the sales data over the years shows a remarkable similarity.

Jervois Jade vs Valley Park

The sales data have been smoothened for clarity and the price gap is the $ psf difference between Valley Park and Jervois Jade. As you can see from the stability of the price gap, there is a baseline level at $200 psf where I drew in a trendline so it can be seen better.

According to the article, The price gap between freehold and leasehold properties which may disappear during good times.

As such, one would expect the price gap to dip below the trend line and approach $0. The results show this is to be untrue! In fact the gap had widened during the property boom from $200 to as much as $500 psf during the property boom. As that bubble burst, the price gap then reverted back to the baseline level before widening again with the new rising trend. It seems that property buyers still prefer freehold over leasehold properties during the good times.

Round 2: Pine Grove vs Pandan Valley

Pine Grove and Pandan Valley are located along Ulu Pandan Rd. Pine Grove, once a HUDC now a privatised condominium and waiting for en-bloc. Pandan Valley, built in 1979 and older than me, is a full facilities freehold condominium. Both have over 600 units and over 25 years of history, so we have a nice set of data to work with.

Pine Grove vs Pandan Valley

Firstly, we can draw in a trend line at $140 psf where prices had found support. What is different from the Jervois Jade chart is that there were 2 significant dips in ’06 and ’08 where the price gap broke the trend line and came as low as $40 psf. The dips also corresponded first with the property boom and then with price decline in ’08. Unlike Jervois Jade, the price gap did return back to the trend line level.

This is significant as even in declining property prices, the price gap had also decreased. Being leasehold we expect Pine Grove to fall in line with Pandan Valley, perhaps falling even more as its demand is less inelastic. Another factor is at work here to keep prices supported at $600 psf – En-bloc speculation. Pine Grove much like Gillman Heights is sitting on a huge and lucrative morsel of land, which can be profitably redeveloped.

En-blocs are directly correlated to economy strength, i.e. the good times. The link is that en-blocs require a lot of capital, in the hundreds of millions. For a project like Pine Grove  if say every owner gets paid $2 million, the developer would have to pay out $1.32 billion. Such credit can be loaned from the banks more easily at low rates during economic expansion than in crisis. As we recently seen in ’09, tightening of bank lending meant there was only 2 en-blocs the whole year.

So en-bloc speculation might explain the difference between the 2 charts, but there are similarities as well. You can see that after the dip in ’06, the price gap again spiked to $400 psf and then declined, much like Jervois Jade above it still follows the economic cycle. So buyers still seem to prefer freehold over leasehold properties during good times, unless there is en-bloc potential.

Conclusion

As the results show, during the good times of property boom, the price gap actually widened significantly instead of disappearing. For the gap to decrease, as the price of the freehold property increases, the price of the leasehold must increase even more. The charts showed that both leasehold properties increased less than their freehold counterparts, apart from dips which might be explained by the en-bloc potential of the leasehold property.

I feel that owners of Pine Grove should note when these dips occur where Pine Grove and Pandan Valley prices are almost par. Sell your property then and buy a freehold unit. Returning to The Shore Residences, there is uncertain en-bloc potential for the site, so that is a loss of capital appreciation potential by purchasing a converted freehold, on top of the high valuation Far East has attached to the project.

Do your own research. If you own a leasehold property with similar freehold properties in the area, you might find that they have sales data with the same characteristics as the properties above. That might give you an edge in timing the sale of your property and getting a freehold unit that lets you fully participate in a property market boom.

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Written by L

January 11, 2010 at 6:17 pm

6 Responses

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  1. Thanks L for your write up on the Shore. It shows lots of hard work from you end. One more note to add to investor on the leasehold and freehold units: Many investors are attracted to leasehold than freehold based on the yield return. 2 similar pieces of properties holding different tenure will be likely to fetch the same rental, since the tenants will be indifferent to the status of tenure. As leasehold is of a supposedly lower purchase price, as a result it is able to give a higher return for yield. I discuss this @ http://keithyip.com/2010/01/03/buying-property-intent-on-property-buying/. Feel free to comment too:)

    keithyip

    January 12, 2010 at 5:18 pm

    • Thanks for your comments Keith, you certainly put in alot of effort into your blog as well!

      L

      January 12, 2010 at 6:58 pm

  2. Keith raises some interesting points.

    In your opinion, would you feel that these investors are being short sighted (penny wise and pound foolish) by chasing rental yields over capital growth? Would capital growth suffer for leasehold properties as compared to freehold?

    After all, L has in a recent post demonstrated the depreciation curve for leasehold properties.

    A second point; would either of you know how acceptable leasehold units are as security for refinancing/leverage purposes?

    I’m guessing, though, that these investors probably won’t wait 60 years to sell their condos and make them someone else’s problem…

    Melbourne

    January 20, 2010 at 9:54 pm

  3. Actually yes. From the charts I think that the capital growth of leasehold units are always going to be stunted compared to freehold. The difference cannot be more clear than during a property bubble, where freehold prices can jump far more than the typical premium of 15%.

    I’m not too sure about the 2nd part, but its a question of bank valuation. Leasehold and freehold properties in regards to liquidity (converting to cash) should be similar but the value of it as collateral will depend on the banks case by case valuation.

    L

    January 22, 2010 at 3:26 am

  4. Currenlty, it is rather the affordability of the leasehold in comparison to the freehold matters most to buyers now.

    I guess too. As a real estate agent, i do feel the anxiety of the buyers over the ever-escalating pricing that they are not able to secure a house in time if they act fast. Singapore has been enjoying tremendous economic progress that property has been all the while riding higher & higher after each hiccup. Just take a look at the HDB pricing (which is also 99 years lease), it has outprformed many private developments.

    I do not have an affirmative answer to Melbourne. Let’s see if we could afford to wait for the oldest HDB in Toa Payoh & Queenstown to survive us til the last year of lease, which at least another 55 years time. (of course, it is in the event that there is no en bloc:)

    keithyip

    February 1, 2010 at 4:21 pm

  5. why would anyone want to convert from freehold to 99 year leasehold? its mind boggling. as far as i know, the whole stretch of jervois road is freehold. and jervois also encompasses the tanglin/bishopsgate/chatsworth/grange road/orchard road vicinity. it is in the city and yet it is so green and quiet. expats and locals love it for the surroundings – its probably the best place in the orchard road area to live in and yet enjoy a quiet, safe outdoor lifestyle. you can see families with their kids cycle, walk, and jog free of the orchard road traffic. and i think there is tremendous potential for the prime district 10 jervois area with enhancements made to the park connector nearby. (qualification – i live in the area).

    ace

    February 10, 2010 at 4:09 pm


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