We came across an interesting article on the blog “A Singaporean in Australia” recently, that drew comparisons between Certificate of Entitlement (COE) for vehicles in Singapore, and the 99-year leasehold properties, specifically Housing Development Board (HDB) flats. As mentioned in the article by Singaporean Son, the COE is time-limited (by 10 years) just like leasehold property, except that a property lease is usually 99 years.

Pricey COEs and Leasehold Properties in SingaporeWhen it comes to the price of a car, it generally decreases as the time-limit approaches. Starting from the time you take the keys, the COE portion of the car’s value drops drastically, then more gradually, until it has no more value by the end of the 10th year. Of course, the car body itself has an intrinsic value, but that too diminishes with time. Just like the physical home, it gets old through wear and tear, at the same time getting outdated via design, technology and  amenities / features.

Singapore Son rightly questions why 99-year leasehold properties, with their decreasing value of a finite leasehold period, do not also subscribe to a similar fall in property prices as time goes by. He does bring up some insightful points, which we do agree with to a certain extent, but we’d also like to take his analogy a step further, and delve into greater detail.

This is a comparison that involves limited time, age and limited supply.


As mentioned earlier, both cars and leasehold property in Singapore are on a limited tenure. The difference being that cars only have 10 years before a renewal is required, and properties generally have 99 years before they are taken back (if not allowed to renew). There is no arguing that this limitation is detrimental to the value of said item, whether car or property. No logical reason can be found that having less time would add value to the car or leasehold property. In other words, as the tenure runs out, the time-limited component of value must fall.


This aging process also decreases the value of the physical car or house itself. No matter how well-taken care of, older cars and houses will be worth less in general, due to wear and tear, older technologies and lack of newer features and amenities.


In terms of supply, both a car and a dwelling have limits. On the surface, it seems as if cars are limited by COEs available, and while property is limited by the finite resource that is land. The cars themselves are continuously being manufactured, improved and imported. However, there is a difference. The COE limitation is merely a paper limitation, which can be easily increased by just printing more COEs. Land, on the other hand, cannot easily be created – even reclamation has its limits. As such, the value of the land that the leased property sits on masks the fact that the lease is – slowly but surely – running out of time.

But take a closer look at the underlying reason why COEs are limited, and you will see some similarities emerge. I think we can all agree that the basic purpose of a car is to travel from point A to point B. If a car cannot do so, due to gridlock or lack of parking space at the destination, then it is quite useless. (Let’s ignore for the moment the car as a means to advertise one’s wealth; that’s a topic for another article.) Thus, at the end of the day, a car’s utility is also dependent on available infrastructure such as roads, expressways and parking space. In other words, land.

Is it any wonder then, that cars are even more expensive than leasehold property, on a per-year basis? Just as with leasehold property, hundreds of Singaporeans are throwing money at something they know can only last for a limited amount of time. It seems to us that people are no longer buying based on a rational assessment of the value they are getting. We earlier mentioned that the rising value of the land could be masking the falling value of a lease. But it seems that public perception and sentiment is also a strong contributing reason why 99-year leasehold HDB apartments fetch such startling prices.


Are people placing too much emphasis on land value, to the detriment of their risk-reward balance?

Has the property-buying public (specifically those that buy 99-year leasehold) forgotten that, at the end of an non-renewed lease*, their property price drops to zero, no matter how high the land value has climbed? Yes, there are differences between rental agreement and an agreement of lease, despite many who think that a 99-year lease is merely a rental agreement that lasts 99 years. But these differences should not lead buyers into thinking that they are guaranteed a renewal of their lease. Worse still, buyers now believe they are guaranteed a profit that flies in the face of the dwindling value of the lease.

Our thoughts are that this unhealthy focus on land value, despite the decreasing lease value, is caused by owners that have confused gambling on market fluctuations as a steady form of investment. They are relying on a property boom to produce a return on investment, just as how a rare boom on COE prices allowed car owners to turn a profit once or twice before.

And that is not their only confusion. This situation has caused them to misrepresent the actual value of the property (which factors in the dwindling lease); the actual value has become secondary to its value as a speculation tool.

One should not simply buy a property just because it is expensive and you think it will go up even more in the future. This is something you will be sinking the bulk of your finances into. A proper assessment of a particular home’s merits – without over-emphasis on future speculative gains – is essential to obtaining appropriate value for both yourself as well as the market. It should take into account many things such as lease period, location, amenities, infrastructure, neighbouring property prices, alternative property prices and state of maintenance, just to name a few.

Unfortunately, simple investors who buy for the sake of speculation on land prices only see the upside; they fail to assess the actual value of the property, including the diminishing value of a leasehold property. Thus, they inflate the worth of a particular leasehold property, and are willing to throw whatever amount they can afford to secure a purchase, with no regard for the property’s appropriate value. They are judging based on future market gains, not current utility. This, of course, is the very essence of bubble-like sentiment.

And this is also why even those who buy a public housing lease are under the impression that they are entitled to earn a profit from it. The exorbitant cash-over-valuation (COV) amounts are just one manifestation of such a mentality. In our opinion, such behaviour that encourages market bubbles should not be condoned, especially in the public housing sector. It only takes a small percentage of such people in the Singapore property market to cause prices to escalate to bubble-like proportions.

Just as with any other speculative and gambling endeavour, there are ups and downs. If one takes the chance for a big reward, then one should also be prepared to face the risk. In the face of a market bubble deflation, or even worse, implosion, there should be no state resources allocated to help these people. That would only be further condoning such behaviour going forward.

*Apart from non-renewal of lease, we are also ignoring SERS and other lease buy-back schemes. They are not guaranteed, and relying on these to ensure ROI is tenuous at best.



  3 Responses to “Limited Term Ownership – COEs and Leaseholds”


    I believe most of the properties in Hong Kong are on a 75-year / 99-year lease. Mainland China also has a similar land system based on leasehold properties. I suppose the public expectation is that lease renewal is almost certain (no government wants to lose an election or risk a riot). That may explain the difference between a leasehold property and a car.


    In theory, the manner by which a leasehold property diminishes in value over time is expressed as a percentage to its equivalent freehold property value. The original full 99 year-lease is equated to 96% of an equivalent freehold value. Over the first 30 years, the rate of erosion is slow at about 1/2% point a year. Beyond 30 years, the rate of erosion progresses exponentially, such that 100% of its time-value is reduced to 0% at the expiry of the lease. This “time value vs % to freehold value for remaining term” relationship is given in a chart and tabulation in the Singapore Land Authority’s website.
    For example, let us assume we have two adjacent properties of similar size and site attributes except one is 99 year-leasehold and the other freehold. If at a particular point in time, the remaining term of the leasehold property is 79 years (i.e. a lapse of 20 years), and the value of the neighboring freehold property is valued at $100 mil, then the leasehold property is worth 86 mil. That is: 96% start value less 20years x 1/2% erosion a year = 86% of $100 million. In a bull market, the increase in the freehold value over time could exceed the value erosion in % terms; hence a leasehold property appears to increase in value despite its reducing term of lease. However, in a bear market, the fall in the freehold value actually compounds the further % value loss. So, the speculation in land value is in the freehold value and this affects the valuation for the leasehold property. But, in the 2nd half of the lease, that is, the remaining term is less than 50 years, the rate of value erosion gets rapid speeding toward zero at a faster and faster pace. Then, the increase in value due to bullish market cannot off-set that % value erosion.


    I think many locals paid too much for something that does not last and uncertain in the future. Who can guarantee that the security and prosperity that the locals enjoyed now will be there in 10, 30, 50, 70 years time?

 Leave a Comment