A keynote report by the Centre for Liveable Cities (CLC) Singapore in 2017 outlined the intricacies of Bala’s Table. Bala was a colonial-era official who devised a method to standardise leasehold valuations in relation to freehold valuations.
The orthodoxy is that the land tenure of leasehold properties diminishes over time. If leasehold land expires without renewal, the residual value at the end of the lease is arithmetically zero. Consequently, some fund managers argue that investing in a bond is preferable to investing in Singapore leasehold property, particularly industrial property with short land leases. At a bond’s maturity, bondholders receive the face value, whereas a property reaches zero value at the end of its land lease.
CLC explains that when a person purchases a piece of land, they are actually paying for the right to use it, including the right to receive a stream of future rental income. However, the rent today is likely to differ from the rent 99 years hence due to the time value of money or inflation and deflation.
“For this reason, the total land rent received in the first 10 years would have a much higher present value than the total land rent in the last 10 years of this lease. To get the present value of the land rent in one lump sum, the future annual rental payments must be discounted at a rate close to the opportunity cost of the money,” said the CLC authors.
See also: Freehold versus leasehold
This discounting mechanism is similar to the discounted cash flow (DCF) method. For the use of Bala’s table, the future stream of rental income is discounted to a single multiplier, generally known as the Present Value Interest Factor (PVIF) or the Years Purchase (YP). The PVIF is then calculated for different lease durations and compared with the PVIF for freehold land. When plotted on a chart, the shape is a curve.
The CLC report estimates that the discount rate used for the PVIF is around 3.5% and this appears to be constant from 99 years down to one year. Bala’s table is a reference point for investors in residential property.
The SLA and JTC are very transparent, with land rents for various plots posted on their websites.
See also: CLAR: Property proxy to the digital megatrend
In Bala’s table, year 99 accounts for 96% of the freehold value; 60 years of land tenure is equivalent to 80% of the freehold value; 30 years of land tenure still holds 60% of the freehold value; while three years’ residual land tenure accounts for 10.9% of the freehold value.
Back to the bond argument. The decline in land tenure is reflected in the portfolio’s yield. If a bond were to forfeit all its face value, the yield would be considerably higher. Indeed, high-yield bonds are so named because of their greater risk and the likelihood of receiving the same amount at maturity as a leasehold property at year zero.
