Value of the Tail of the Lease

The Prime Minister has announced that HDB will be willing to allows certain categories of owners to keep the next 30 years lease on their HDB flat and sell the tail of the lease back to HDB for its present value. Part of this value can be taken in cash, while the remainder has to be kept in the CPF account.

Several people have asked me for the formula to calculate the value of this tail of the lease.

It depends on two factors:
* The current remaining lease (which can be from 50 to 80 years)
* The interest rate used to compute the value of the tail

I do not know what interest rate will be used by HDB for the calculation. It could be from 1% to 3%. In my view, an interest rate of 2% or 3% would be appropriate (but this is just a personal view).

The following table shows how much you can get by selling off the tail of the lease:

Value of tail of lease, assuming the owner retains the next 30 years:

Remaining  Value of Tail using
lease        2% p.a.   3% p.a.
60 years     35.6%     29.2%   
70 years     40.3%     32.7%
80 years     43.6%     35.1%

For example, if the remaining lease is 70 years and the interest rate used for the calcuation is 2% p.a., the value of the 40 year tail (i.e. 70 years less 30 years) is 40.3% of the current value of the property.

If the HDB flat is worth $160,000, the value of the tail is $64,480.

If a higher interest rate of 3% p.a. is used in the calculation, the value of the tail is 32.7% of $160,000 or $52,320.

Let us wait for the announcement by the HDB.