Valuing Leasehold Property: An In-Depth Look at Bala’s Table

How is the value of a leasehold’s remaining tenure determined? The Singapore Land Authority’s (SLA) Leasehold Table, also known as “Bala’s Table,” provides a value comparison for different lease tenures and land valuations. Bala’s Table can also be used to calculate the differential premium for changes in land use or increases in building density, as well as the land premium for lease renewals. In this article, Leo Kwek, a senior real estate agent from AnjiaSG, delves into the logic and structure of Bala’s Table, suggesting that its creator may have used a 3.5% discount rate to link the value of remaining leasehold tenures to a percentage of freehold value, thereby calculating the value change of a leasehold property from 1 to 99 years.

Value is Crucial

In Singapore, land is an extremely scarce and vital resource, making its proper pricing and valuation crucial for the government, private sector, and households alike. Land tenure is divided into freehold and leasehold. Freehold land owners have perpetual ownership that does not expire, while a leasehold title grants temporary ownership to the purchaser. Except in certain special cases, residential leasehold tenures are typically 99 years, while most industrial land has lease terms of 60 or 30 years (and in some cases, 20 years). Upon lease expiry, ownership of the land reverts to the state. There is an active secondary market for the sale and resale of both leasehold and freehold land and properties. Because leases can be bought, sold, extended, or topped-up, the government, as well as property developers, buyers, and sellers, often need to understand the value of the remaining lease on a piece of leasehold land. The government can use this to calculate the land premium (or payable fee) for alienating state land, changing land use or plot ratio, or extending a land lease.

What is “Bala’s Table”?

To this end, the Singapore Land Authority (SLA) refers to a discounted value table (Appendix 1) that shows the value of a piece of land at different remaining lease tenures, with the value of the remaining lease expressed as a percentage of its freehold value.

During Singapore’s British colonial era, the Land Office first adopted this leasehold value table. It is widely believed that a Land Office employee named Bala devised this table, and since then, it has been known in the real estate industry as “Bala’s Table”.

The exact timing and basis for the adoption of Bala’s Table are unclear. However, in their book “Singapore Real Property Guide” (1999, 4th ed.), Philip Motha and Belinda Yuen noted that after 1948, the alienation price of leasehold land was calculated based on the following:
(i) 99-year lease: 96% of freehold value
(ii) 60-year lease: 80% of freehold value
(iii) 30-year lease: 60% of freehold value

Let’s Take a Quick Look at How Bala’s Curve is Applied:

On Bala’s Curve, the value of leasehold land is expressed as a percentage of the freehold land value. Taking a freehold property worth S$1 million as an example:
At the start of a new 99-year lease, the property’s value is 96% of its freehold value. Therefore, if we assume the freehold property is worth S$1 million, the actual value of the leasehold (99-year) property would be S$960,000.
When the lease has 60 years remaining, its value is 80% of its freehold value, or S$800,000.
When the lease has 30 years remaining, its value is 60% of its freehold value, or S$600,000.

In this chart, based on Bala’s Table, the value of leasehold land is expressed as a percentage of the freehold land value.

Since these three percentages of freehold value correspond with the entries in Bala’s Table, we can infer that the table was adopted around 1948. At that time, under the Crown Land Rules (1947), it was officially declared that only 99-year leases, and not freehold titles, would be granted under any circumstances.

Increasing Transparency to Encourage Better Land Use

Bala’s Table was initially an internal document used by the Land Office for the alienation of state land. At some point, it was leaked to the private sector and subsequently used by real estate firms as an unofficial guide for valuation. However, it was unclear how the government determined the land premium payable for lifting state ownership restrictions on leasehold land.

From July 31, 2000, the Singapore Land Authority published the Leasehold Table online, increasing the transparency of the valuation system. This move by the SLA encouraged the optimization of land use and facilitated the overall pace of redevelopment in Singapore. With public access to the table used by the SLA, landowners and industry players gained greater certainty, as they could now calculate the premium payable in advance. They can refer to the Development Charge (DC) table rates to calculate the price for changing land use or increasing plot ratio, and this DC can be adjusted based on the percentage of freehold value for the remaining lease tenure as listed in the Leasehold Table.

Understanding the Leasehold Value Table

Generally, the value of a piece of land changes with its lease tenure. A longer remaining lease term corresponds to a higher land value. However, the value of the land does not decline at a constant annual rate as its remaining lease decreases, for example, from 99 years to zero. When a person buys a piece of land, they are essentially paying for the right to use the land or the right to receive future rental income. For example, assume a 99-year leasehold project generates a rental income of S$1 per square foot per year. The landowner will receive S$1 per square foot annually for 99 years. However, due to the “time value of money,” S$1 today will not be worth the same in 99 years. Therefore, the Present Value of the total rent received in the first 10 years will be much higher than the total rent of the last 10 years of the lease.

To receive the present value of the land rent in a lump sum, the future rental of S$1 per square foot per year must be discounted at a rate close to the opportunity cost of money. This future stream of rental income is discounted into a single multiplier, commonly known in finance as the “Present Value Interest Factor” (PVIF), in the US as the “Gross Income Multiplier,” and in the UK as “Years’ Purchase.” The PVIF is then calculated for different lease tenures and compared to the PVIF of freehold land. This provides us with the percentage of leasehold value to freehold value, as shown in Appendix 2.

As shown in the comparison chart of leasehold value percentages, assuming a discount rate of 3.5%, the percentage of the leasehold PVIF to the freehold PVIF is very close to the Singapore Land Authority’s Leasehold Value Table. This is particularly true for leases of 30 years and those between 75 to 99 years.

We can also observe that the difference between the two curves is greater for leases between 35 and 70 years. One unconfirmed possibility is that the original author of the table used a discount rate close to 3.5% and adjusted the table for convenience to whole number leases of 10, 15, 20, 30, 60, and 99 years. The values for other lease years could be interpolated in between. Therefore, the most likely discount rate used for Bala’s Table is approximately 3.5%.

The slope and shape of the curve are not trivial, as they affect the rate at which the leasehold valuation declines, which in turn impacts the premium charged by the state to top up a lease to a full 99-year tenure.

Is a 3.5% Discount Rate Appropriate?

Is a discount rate of around 3.5% a reasonable choice for the Singapore Land Authority’s Leasehold Value Table?

Land is a scarce resource that generates a continuous stream of returns, whether in its primary form as land rent or in its secondary form as rent from built projects. The returns are fairly stable and low-risk, so a lower discount rate of 3.5% is reasonable.

In comparison, Singapore’s inflation rate averaged 2.68% from 1962 to 2016, and in June 2013, the Monetary Authority of Singapore (MAS) instructed financial institutions to “stress test” borrowers using a 3.5% interest rate under the Total Debt Servicing Ratio (TDSR) framework when processing home loans. Furthermore, over the past 12 years (2005 to 2016), the government’s cost of capital averaged 3.4%.

All the above rates are broadly consistent with the implicit discount rate in the Leasehold Value Table.

Furthermore, the Leasehold Value Table has been widely accepted since its publication on the SLA website in 2000.

HDB’s Lease Buyback Scheme

Under the Lease Buyback Scheme (LBS), eligible elderly HDB flat owners can choose to retain a portion of their existing flat’s lease and sell the remainder back to the HDB to enhance their financial flexibility in retirement.

During a Parliament session on September 8, 2014, a Member of Parliament asked why the proceeds received by owners for selling a lease term to HDB were lower, even if the sold term was the same length as the retained term. Mr. Khaw Boon Wan, then Minister for National Development, responded that due to the time value of money, the value of a lease is not a straight line, and properties with very short remaining leases tend to depreciate faster.

Minister Khaw explained that “the proceeds from the LBS are the market value of the house for its entire remaining lease, minus the value of the first ‘X’ years of the lease retained by the owner and any outstanding housing loans, but with some adjustments made to reflect the restrictions on LBS flats, namely that the entire flat cannot be sublet or resold.” After these adjustments, the proceeds from LBS are higher than they would otherwise be.

It appears that the principle adopted by HDB—that the value of the earlier years of a house (the years used and occupied by the elderly) is higher than the value of the remaining later years—is similar to the reasonable assumptions of the SLA’s Leasehold Value Table. However, it is noteworthy that HDB further adjusts the values to account for the restrictions imposed on LBS units, resulting in higher LBS proceeds.

Other Uses of the Leasehold Value Table

Temporary Development Levy

Starting in 2003, the Urban Redevelopment Authority (URA) introduced the Temporary Development Levy (TDL) scheme to provide greater flexibility for businesses. The TDL is a time-based levy paid to obtain temporary permission for land use changes or additions and alterations related to commercial uses for a period of up to 10 years.

The TDL lowers start-up costs for businesses as they no longer have to pay the full development charge for the temporary enhancement in land value beyond the development baseline.

The amount of levy payable is calculated based on the rates for the first 10 years of the Leasehold Value Table, ranging from 3.8% (for a temporary written permission of up to 1 year) to 30% (for up to 10 years).

Government Land Sales Programme — Sites with Different Tenure Options

For some government land sales, developers can choose and bid for land tenures of different durations to better control their development costs and project viability.

For example, for a city entertainment center site on Victoria Street sold in 2005 and a commercial site at Collyer Quay sold in 2006, developers could choose to bid for a 30-year or 60-year lease. In 2012, for a retirement housing site at Jalan Jurong Kechil, developers could choose a 30, 45, or 60-year lease. For clarity and transparency, the tender conditions explicitly state the evaluation method for comparing bids with different lease terms.

For the Victoria Street site, for instance, all bids for the 60-year lease were adjusted using the following formula to be compared with bids for the 30-year lease:

60-year lease bid price X 0.6
0.8

These conversion figures of 0.6 (for a 30-year lease) and 0.8 (for a 60-year lease) correspond to the respective years in the SLA’s lease table.

Conclusion

The Singapore Land Authority’s Leasehold Value Table, commonly known as “Bala’s Table,” is clear, transparent, easy to use, and provides certainty for calculating premiums and comparing land values across different lease tenures. The table and its implicit discount rate are not an exact science. However, it has been used by various government agencies and the real estate industry in Singapore for decades. The calculation of lease values in the table is highly consistent and stable, ensuring that Bala’s Table will continue to play a significant role.

Appendix 1: Table of Leasehold Value as a Percentage of Freehold Value

Appendix 2: Deconstruction of Leasehold Value as a Percentage of Freehold Value

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