Freehold vs Leasehold Property

Freehold vs Leasehold Property

The constant debate when buying property has been – is freehold better than leasehold property? There doesn’t seem to be a clear-cut answer as to which one is better. In the search for an answer regarding the two kinds of property ownership, there is one question that comes up often, what premium should a buyer pay for a freehold property over its leasehold counterpart which has a legal lifespan that is limited. Experts like valuers would use an approximate percentage in their reply, usually 10%.

What is the difference between freehold and leasehold property?

What does it mean when a property is freehold?

A Freehold property, by definition, can be indefinitely held by the owner. A 999-year lease is a remnant of the Colonial period. For all practical purposes, this is the same as a freehold.

What does it mean when a property is leasehold?

99-year leasehold property, the revisionary rights of the 99-year leasehold property goes back to the developer or the state when the lease expires.

Either way, there are exemptions where the Singapore government can reclaim land for important infrastructure or security needs. If your freehold property is in the path of a major highway, it will not save the property. En-bloc redevelopment is also a possibility. When a developer requests an en-bloc for your freehold condo where the majority of the residents are in favor, you will still lose your freehold.

Is Freehold a Better Investment than Leasehold Property?

There is no easy answer to this question because isolating individual cases of the value of a property is difficult to do. Tenure isn’t the only factor that goes into determining the property price in Singapore. Those other typical determinants include

  • District and location
  • Proximity to amenities such as reputable schools and MRT stations
  • Singapore Zoning law that regulates land use
  • Plot ratios which represent the density of a development and has an impact on building heights

For comparison purposes, we will omit the variables above. Our assumption will be based on two newly launched condos located next to one another, with tenure being the only difference between the two property developments.

Freehold Property Sells for More During En-Bloc

Owners of freehold properties are parting with more; therefore the en-bloc value is usually higher for a freehold development. A leasehold unit that is close to the end of its lease tends to have a lower price in theory because in a couple of decades the owners have nothing to gain from it. A differential premium has to be paid by the developer when the lease is topped up and this indirectly reduces the en-bloc leasehold property value.

Limited Supplies for Freehold Land Parcel

The Singapore government has stopped offering freehold land parcel in Government Land Sales Programme. For home buyers, the freehold properties have increased in value due to the scarcity factor. Today in Singapore, freehold properties make up around 49% of the entire condominium and apartment stock with leasehold properties making up the rest. Freehold properties are expected to drop proportionally since future launches will be made up mostly of leasehold projects. Even more restricted are the freehold condos and apartments located close to MRT stations.

Property Value Depreciates as Lease Shortens

The 40-year interval is the most important difference. Most banks will not finance leasehold units that are 40 years of age. Buyers are unable to use their CPF if they are looking to buy a property with less than 30 years left on the lease. When the tenure gets closer to zero, it is usually an accelerated depreciation rate in the leasehold property value.

Better Rental Yields for Leasehold Property

This is the case because rental yields are usually cheaper. There is no difference between a freehold and leasehold from the view of the rental market and there shouldn’t be any difference in the rental rates between the two kinds of properties. As a result, the rental yield is higher for a leasehold compared to a freehold.

Investors should focus on the important principles. How much do the surrounding properties go for? Does the URA master plan have any upcoming projects in the area? What will the rental yield be? These matters are more important than if the unit is leasehold or freehold.

If you are a homeowner, don’t place too much emphasis on where you or the future generations will be living. There are always changes in places and family structures. Family members move away, kids move out and 40 years from now, you might want to live elsewhere too. Therefore, before paying top dollar for a freehold unit, keep in mind that 99 years isn’t an eternity, however, you don’t need an eternity. All you need is just long enough.

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