As in, just thinking, about them as an investment class, not thinking about buying them.
Now, I'm just talking about leasehold properties, not freehold. Cos most SG properties are 99 year leases.
I wrote about 99 year lease here previously.
On first glance, the 99 year lease issue seems typically problematic only for HDB owners, cos there's low probability of SERS.
Whereas condo owners can self initiate en-bloc proceedings.
For me, there's no doubt that 99 year lease purchases is just prepaid rent.
You can tell yourself anything you want. The fact that after 99 years it doesn't belong to you means you don't own it.
The ability to sell the unused portion of the rent doesn't mean the property belongs to you.
Every year, the lease drops by one year, so on the first year, the lease loses 1% of it's value.
And as the lease gets shorter, the lease loses more of it's value every year. A 50 year lease loses 2% of it's value after 1 year.
And yet... for most properties, the sell price increases every year. EXCEPT for those leases which are really short. Like a 10 year remaining lease would be losing 10% utility every year.
The thing is, Singapore rental market probably increases by more than 1% per year due to inflation.
So... during the early years, the 98 year lease would have an increasing market value. Cos the rental inflation is more than the annual depreciation of the lease.
UNTIL the point where the annual depreciation of the lease starts to exceed the rate of increase of market value rents. Then prices of the property will start to flatten then eventually fall as the annual depreciation starts to outpace the rental inflation.
As I've written in the previous article.
You ALWAYS lose value when investing in property. You MAY gain in PRICE, but you ALWAYS lose value.
Singapore property is a function of lease remaining, size and location.
If you sell your property, and want to keep some cash, you must lose one of the above.
I stay in Queenstown. If I sell the place, and want to keep some cash, I MUST move to a less centralized area, OR if I want to stay in the same area, I need to find a smaller size apartment.
There's no way to sell the place, stay in the same area, with the same size, with the same lease remaining.
I think only lucky/smart folks like SMOL beat this situation.
Even for en-bloc, this holds true.
Developers aren't stupid. How many people do you know sold their condos en-bloc and managed to stay in the same area with the same size with the same remaining lease?
Most condos around the area are usually much smaller.
You can't even just stay in the same property forever, cos the lease will eventually expire.
Let's say, we live forever, or we want to pass off our wealth to our kids.
We will not be able to just stay in a 99 year lease property cos it will eventually expire.
So there will always be a need to sell it and move to retain some value. Once it expires, it's worth ZERO. The worst case situation.
But, when selling and moving, we'll need to downgrade in terms of location, or size or length of lease.
The thing is... you're always losing something when investing in a leasehold property.
In the long run, it's always depreciating. You may earn in price, but you will always lose in value.
As compared to other investments...
Like freehold properties. You can forever pass this on to your kids. OR if you live forever, you can continue to stay in that property, or until the government re-zones the area.
Also, for freehold properties, the problem comes when you want to move. Well, there isn't many other freehold properties to choose from. So it's not like there is much choice.
But I would think a freehold property would be a good store of value. Cos it doesn't depreciate as the lease expires.
Alternatively, investments into a significantly large portfolio of companies would theoretically last forever. Or until societies change and ownership of companies and assets change.
Gold and maybe Bitcoin could also be perpetual storage of value, until people don't value them.
The thing is... as I keep thinking about it, a 99 year leasehold property doesn't retain value in the long run. Especially if you plan to stay in it or want to pass it on to future generations.
Think about it.
You buy a property for $1 million. It is for 99 years, 1000 sqft, at Paya Lebar.
30 years later you sell it for $3 million. It has 69 years of lease left.
To continue to stay in Paya Lebar with extended lease, you will need to downgrade to a smaller unit.
So you may spend $3 million to buy a place nearby with 80 year lease, but now it's 800 sqft.
Fast forward 20 years. This place now has 60 years lease left. Better sell it so that the price is still ok.
You get $5 million.
800 sqft is already kinda small, that's the minimum you'd be willing to accept. So now you need to move further out. So you buy a place at Simei with 80 years lease, 800 sqft.
And it keeps continuing...
I'm assuming no new capital injection... The initial $1 million which was invested has risen in price. You haven't "lost" money.
BUT... you aren't staying in the same place anymore.
You HAVE LOST value. You haven't managed to maintain the same standard of living.
You have not managed to hand off the same standard of living over to your kids or future generation.
Wealth is lost.
However... this is only if we're talking about the property that you are living in.
If we look at a property as an investment and we will take out a loan and rent out the place.
Depending on the rate of return, there is a higher chance that wealth is preserved for future generations.
Cos as the property depreciates, the rental could cover the depreciation. And even without additional capital injection, just by using the rental cashflow, it probably is possible to continue to maintain the ownership of a similar property within the same location as you sell and buy a new place to renew the lease period.
So it appears that... Accommodation needs to be viewed like any other goods and services.
To preserve wealth, for SG, I should buy a freehold property to stay in. This ensures that I can keep the same standard of living and hold the property for future generations.
Alternatively, invest in a large basket of stocks and use the investments to pay rent.
As the stocks rise along with inflation, the returns should follow rental rates.
If I want to buy a 99 year leasehold property, then I need to rent it out, cos that property is depreciating in value.
Alternatively, since a 99 year leasehold property is prepaid rent, then I could combine the solutions by taking a loan for the leasehold property and keeping as much as possible in other investments which can be used to pay for the mortgage, which could be viewed as "rent".
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