(SINGAPORE) The government's recent decisions to either not top up leases of some leasehold sites to the original 99-year term or to approve shorter lease extensions could affect sentiment towards investment sales of such properties.

The decisions may have implications for the likes of other leasehold properties such as DBS Building, UIC Building and Shenton House, market watchers say. 'We can't take it for granted that the Government will agree to extend leases for sites it had sold in the past to 99 years,' an investment sales veteran said.

While some may be tempted to hold back investment sales deals, a property consultant points out that in reality, the economic life of an office building is probably about just 40 years. 'It's just the emotional thought of being stuck with say just 60 years lease, that may make some potential investors reluctant to redevelop a property,' he added.

Knight Frank executive director Foo Suan Peng added: 'If an investor is planning to develop a new office block and hold it for rental income, he may not necessarily be deterred if he receives a shorter lease top-up or even no lease top-up on the site, since the rental income from the new office block would not vary according to the site's leasehold tenure.

'However, for residential collective sale sites, a potential developer may find it tough selling a new condo built on a plot with a remaining lease of say, 70 years or 80 years, in the Singapore context. If he develops the plot into serviced apartments or apartments for lease, though, it may still be a viable proposition.'

DTZ executive director Ong Choon Fah did not think the government's decisions would scare away investors. 'The shorter lease-term will be priced into the property. The return has to be recouped within the allowed lease period. What would be good is if investors had clarity on lease top-ups; if you know the risk, you can manage the risk.'

There were calls to take some precautionary steps before inking deals, especially for collective sales of residential sites.

'Buyers and sellers should check with the authorities about lease extensions before they agree to anything. The authorities for their part should also come up with clearer guidelines on lease top-ups,' says Credo Real Estate managing director Karamjit Singh.

Agreeing, Knight Frank's Mr Foo said: 'If there's an element of risk that the lease may not be topped up, the buyer will factor this into his pricing. One way to eliminate this risk, would be for the buyer to make the deal subject to the lease being topped up to 99 years.'While that would be one option, Credo's Mr Singh argues: 'It does not cover a situation where the authorities may agree to extend the lease, but not to 99 years. 'Practically, it would be difficult to impute a formula to recalibrate the sale price depending on the number of years that SLA approves for lease extension.'

Instead, Mr Singh suggests 'that where the redevelopment proposal is in line with the Master Plan, Singapore Land Authority consider processing an in-principle application for a lease upgrade without a need for the applicants to first obtain an outline planning permission (OPP) from Urban Redevelopment Authority'. An OPP may cost anywhere from $5,000 to $100,000, or even more, depending on the size of the proposed redevelopment project - and owners, especially in a residential collective sale, may find this a costly upfront payment.

In early 2005, history was made when Eng Cheong Tower in the Beach Road area became the first collective sale of a 99-year leasehold property. Paving the way for the deal was an unprecedented decision by SLA to grant in-principle approval to top up the site's lease to 99 years before the site's sale.

This article was first published in The Business Times on Jun 4, 2008

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