Freehold, Leasehold which is better
Freehold, of course! So I can pass it on to my next generations after generations. But is that really better?
Why don’t we do a comparison before we jump to the conclusion that freehold is better?
Let’s define 99-leasehold, 999-leasehold and freehold first.
Freehold – This means the owner holds the property ‘forever’, one is able to pass his property to the next generations after generations. ‘Estate fee in simple’ means the same thing as freehold.
999-year leasehold – These are a holdover from the Colonial for all intents and purposes, similar to freehold. Some leasehold holds dated from 1885 which means you still have like 800 over years to go, it is almost like freehold since it is still a long way to go.
*Do take note that there are provisions that allow the government to reclaim the land for vital infrastructure or security purposes, even though it is a freehold or 999-year leasehold, meaning if your house is in the way of a new highway construction, for example, the government still have the right to reclaim it under the Land Acquisition Act.
When the government announced the construction of the north-south corridor in 2011, 26 terrace house owners, (even though it was freehold), had to leave their homes 2 years later for this construction. Condo like Bullion Park was not spared too, but on a smaller scale la, they had to give up 800sq ft of their land to make way for the new north-south corridor.
99-year leasehold – This means land returns back to the state once the lease is up.
It looks like freehold properties would be the ideal choice, isn’t it?
But buying a property isn’t looking at tenure only, there are many other factors to consider and the benefits of these factors could way surpass the freehold tenure.
Let’s take a look at the factors.
Freehold fetches better price in en-bloc?
It should be, right? As owners are giving up more? Leasehold properties depreciates sharply especially as it gets older? The list goes on …
Reality is en-bloc offers are affected by a series of factors, such as the market sentiments, the zoning, plot ratio, and the amenities around it. Freehold or leasehold is not e major factor.
If you remembered Farrer Court, which is 99-year leasehold, en-bloc took off so quickly, it was tore down built up and D’Leedon (the new name) has even got its TOP now. Owners has easily occupied the unit for 3-4 years now.
But look at Spanish Village (which is opposite of Farrer Court), it is still there after at least 2 attempts. Every time when there is a en-bloc exercise, my landlord no longer pin high hopes on it because of the asking price.
Why, because Spanish Village owners want a higher price than Farrer Court since it is freehold but they had forgotten (or choose to ignore) that the plot ratio and gross floor area at Spanish Village give the developer very little room to maximize the no of units.
Farrer Court was the only site in that area that was accorded a high plot ratio of 2.8 and a maximum height of 36 storeys. Though the developer had to pay a differential premium to top up the lease and to maximize the plot ratio, the developer could build more units to make up e costs topped up!
Leasehold units fetches a high rental yield, why?
Freehold units are generally priced about 20% higher than leasehold units. So you if you are buying this unit for investment, you might want to do your Maths and see if this works better for you.
Tenants wants a good location, good facilities, well furnished apartment, he doesn’t bother if the development is freehold or leasehold! And he is not going to pay a higher price because this is a freehold property!
Look at the figures!
If you buy a leasehold unit at $1 million, and the rental is $3000 a month. You get a rental of 3.6 percent.
However, if you buy a freehold unit in the same area, at 20 percent higher, which is $1.2 million. So you still get a $3,000 rental, now your rental yield is 3 percent.
This is why investors tends to look for leasehold properties to achieve higher rental yield.
Leasehold condominiums have appreciated by an impressive 86.7 per cent over the past decade, in general.
However, freehold condominiums are falling behind, at around 60.8 per cent. This could be because freehold condominiums are often sold at a higher price of 10 to 20 per cent, so it can be harder for them to do better than their leasehold counterparts.
The above shows how much leasehold has performed compared to leasehold, but not forgetting factors like amenities, facilities and rental yield contributed to the appreciation and it should be also your consideration factors. Freehold shouldn’t be the deciding factor.
Little difference in depreciation
Many people thought leasehold properties would depreciate faster than freehold properties. But not exactly true leh, leasehold properties which are 21 years and below will not have its value dropped yet.
For example, during the recession period in the early 2000s (i.e. the 2002 – 2005 period), both freehold and leasehold prices were affected. Therefore, if the market is good, both properties will appreciate and when the market is bad, both properties will depreciate. There is very little difference between the two.
However, leasehold properties will start to depreciate when its balance lease is less than 60 years because this is the time when banks will have restrictions in granting the loans and buyers are not able to maximum the CPF usage.
Comparisons Within Locations
So, factors like facilities and amenities matter more than the lease?
Let’s do a comparison at leasehold versus freehold specifically in the outside core region (OCR), East Coast (District 15) area.
We’ve picked this area because it is overwhelmed with condominiums. On top of that, they share the same general amenities across the entire area (beach and foodie havens).
Over the past decade, leasehold units in District 15 appreciated more than freehold counterparts. Leasehold units saw a rise of almost 66 per cent in per square foot price, while freehold counterparts only rose around 50 per cent.
No worries about bank restrictions in freehold properties, as there is no worry about short balance of lease after that many years. However, in 99-year leasehold properties, time will start clicking away when the property has balance lease less than 60 years. Banks will normally has some restrictions granting loans.
Do you realize that most condominiums that are near key amenities like a shopping mall or better still, MRT are usually 99-year leasehold? You can hardly find any freehold condominiums near shopping mall or MRT.
Why? Have you wondered before? Why don’t government release these lands as freehold so they can sell at a higher price?
Because we are in such a land scare country that every inch of land must have proper forward planning. The government has to do a lot of work in urban planning (Otherwise how do we plan for 6.9 million population by year 2030?). Lands are sold as 99-year leasehold so it goes back to the government when the lease expires, for their use or to optimize these lands (recycle!).
This topic is a ever green topic, we will always have buyers thinking, which is better? Leasehold or freehold? End of the day, you have to ask yourself yourself, what is your objectives?
Investment, own stay, location, budget
Always remember that that lease status is not the only price-determining factor, there are other factors that play an crucial role in affecting the price.
I have a client who bought a 999-leasehold apartment in Pasir Ris at $940K way back to 1994 , and we only managed to sell it at $960K in 2018! OK, in paper he still made $20K, but Ouch! you saw how much accrued interest he had lost?
Did it appreciate because it is 999-year leasehold? No, because it is located in a 鸟不生蛋 location!
However, if he had bought any 99-year leasehold property that is near MRT, say Eastpoint, he would have definitely made money.
But he had made fond memories there and his mom has strike 4D a couple of times, so he was happy during his stay. But he had to move on, hence the reason to sell.
Still cannot decide, need someone to talk to?
Call us, we will be more than happy to discuss this over a cup of coffee!
Having been in the industry for 15 years, I have helped many clients to rent, buy or sell their properties, be it residential, commercial or industrial. I take each and every case seriously and this has earned referrals clients to me. Many clients are my friends now, my expat tenants jio me for coffee when they are in town. I want to be your third pair of eyes to point out blind spots which may cost you money to rectify or worse, hard to sell because of that obstacle.
I take pride in what I do, which involve constantly reading up and updating myself with latest news and regulation changes, so to give my clients advices they deserve.