There has been much discussion about what will happen to the value of HDB flats when their leases run out (Lawrence Wong: There is still value in older HDB flats; May 18).
It is difficult to place a value on HDB flats when the remaining lease shortens. This is especially when the restrictions on the use of Central Provident Fund monies for older flats and the lack of loans during the last 30 years of the lease make such older HDB flats basically illiquid.
For commercial properties with short leases left, a common valuation method is to use estimated rental proceeds over the remaining lease life to determine its value.
For HDB flats, assuming monthly rental of $2,000 over the entire remaining lease period, total gross rental proceeds for leases with 20 years and 30 years left are $480,000 and $720,000 respectively.
As rental proceeds received later are worth less than those received earlier, we need to discount the income streams over time by an appropriate discount rate to arrive at its present value at the beginning of the 20 year and 30 year period.
A 6 per cent per annum discount rate will give a present value of $279,000 and $333,000 for a HDB flat with remaining 20 years and 30 years of lease respectively.
These figures give an idea of what could be used to determine the value of a short-leased HDB flat.
Ultimately, what we need is to remove restrictions in the purchase and rental of HDB flats with short leases.
Banks should be permitted to finance the purchase of such flats through appropriate loan products.
If restrictions are lifted, there could be an active secondary market for the purchase and rental of such flats. This will support the value of short-lease HDB flats and give owners the option of either selling or renting out their flats.
Rental demand should be good, as older HDB flats are in mature estates with well established services.
Owners will ensure that the flats will continue to be maintained properly, and this should prevent the deterioration of HDB estates as their leases run out.
Kuo How Nam