Singapore Property Developers buy Free Hold land and release it for sale as 99 lease hold land
In view of the recent few launches such as that of “The Shore residence” and the “Greenwood terraces”, both of which are bought as Free hold land, redeveloped and sold as 103 years lease hold strata title.
These are 2 Far East developments which have been launched recently.
Singapore government can release land in various forms, but more likely than not, most land parcels being released are 99 years lease hold land, while very few are freehold or 999 lease hold land. This means that the supply of perpetual land (FH, 999 lease hold) are diminishing all the time.
In land scarce Singapore, this means that in the coming years, Freehold land may run out if it is not being regulated.
The recent developments where developers who bought the Free Hold land and sell it as 99 years lease hold could further accelerate the running down of such land, to the public at lease.
We look at the implications of such developments
IMPLICATIONS for Singapore Property buyers and Investors
Developers may now bid for many Freehold land parcels or take over existing free hold property through en-bloc sales.
The Singapore economy is still weak, if you look at the salary census, Singapore’s salary growth has been slower than that of properties. In other words, people can only afford so much. Say for instance a couple earning a combined income of $10,000 a month with no financial commitment on a 30 years loan repayment tenure, can only afford a $987,000 Singapore property buyer loans with a threshold interest rate of 4.5%.
At 20% down-payment, and a loan of $987,000, the property price that such a property buyer can afford is $1,233,750.
Say for instance, the Singapore property developer who wants to market his property at $1300 psf for a 1,100 sq feet property, that would be a price of $1,430,000. In order to fit the target segment of say the $10,000 household income group, the Singapore property developer would have to reduce the price from $1,430,000 to $1,233,750. Even if this means that the Singapore property developer would have to sell it’s property for $1,121 per sq feet for the Free Hold land.
So rather than sell at $1,121 per sq feet for a Free Hold strata title land, the Singapore property developer retains the rights to the Free Hold land and sell you a 103 years lease-hold strata-title land and retains future potential upside for itself.
The Singapore Property developer’s aim
The developer’s goal is always to maximize profit (There is nothing wrong with it). Capitalism is about seeking profits. All profit making enterprises seek profit, with or without regards of whether it is the right thing to do. It’s all about pricing power. If they have the power to price the units at a price of their liking, they will maximize profit.
Smaller Singapore condo units
In this scenario, the property developer can choose to reduce the size of unit, thereby meeting the affordability price quantum and achieve superior price per sq feet per plot ratio (psfppr). This could lead to a trend of smaller size condominium units.
FH land becomes Leasehold 99 years and may be lesser in the future
In another scenario, the property developer opt to maintain the size of the unit, but converts the Free hold land to a 99 years leasehold land. The developer owns the Free Hold land title. This could lead to the gradual disappearance of the Free Hold land titles available to the public.
Overtime, if the law permits, developers could even sell properties on 70 years lease, 50 years and lesser.
Singapore government hands power to large Singapore property developers
If developers are allowed to hold on to the free hold land titles while developing properties and selling it as a 99 years lease, then this will over a period of time dilute the powers of the Singapore Land authority.
Say for instance when the building is 20 years old and run down, the residents opt for selling en-bloc, they can sell en-bloc for the remaining lease of 79 years. Whoever buys this piece of land en-bloc would find it hard to redevelop and sell it again as there is not much lease remaining. Supposedly if this is allowed, the residents are only selling the remainder 79 years lease of the land to another developer.
In order to make this development attractive, a top up of the lease by 20 to 30 years would be required. In the case of topping up of this lease, the property developer that owns the land has the final say on setting the rates. (Not SLA’s Development charge).
So whether you can en-bloc or not depends solely on the goodwill of the property developer. If the property developer sets a high price for the top-up, then that would mean that no other developer would want to buy it or they may force the potential gains of en-bloc lower.
In this case, Far east would retain the rights and option to develop the land should the residents want to en-bloc. Far East having a right to set development charges, far east will have the first right of refusal in any land parcel development.
As more and more developers have such status, the authority of Singapore land authority could become eroded. There is always a worry that such developers will eventually wield too much power.
DEPRECIATION OF THE BUILDING
Let’s say the building is poorly maintained, the condition becomes worse, over time the value of the building drops. So in such a scenario, even if Far East makes an offer for the land that is giving only a slight premium, the residents will have no option but to accept the offer and sell back the remaining lease to the developer and lose any potential upside.
WHAT IS PROPERTYBUYER.com.sg Mortgage Consultant’s STAND ON THIS?
PropertyBuyer.com.sg mortgage consultants are research focused, so what we do is to merely to inform the public of these matters.
We have already got in touch with Singapore land authority to enquire about under what circumstances these deals are allowed to happen.
If you want us to inform you when we have an answer, please email us at loans@propertyBUYER.com.sg or sms us at +65 – 9782 – 8606.
We are not against Singapore property developers maximizing profit and giving property buyers a bad deal. Ultimately it is a matter of buyer power versus seller power. If the seller has the pricing power, it is very obvious that buyers will have buy at the seller’s terms. Ultimately all profit seeking enterprises are there to make money, and rightly so.
What does this mean for you if you own a FREE HOLD property?
We are checking with SLA under what statute or circumstances are such arrangements allowed. If this is allowed, wouldn’t you then be able to offer your Free Hold landed property for sale at a slight discount as a 99 years lease hold property? Or maybe even at a 70 years old lease or lesser.
Imagine, this is really a unique way of passing money and assets to the next generation while retaining a vested option in the perpetual land value of the property.
I would say, it has all the UPSIDE and none of the downside.
Stay tuned while we wait for an answer from Singapore land Authority.
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