The Evergreen Legend - Freehold Is Definitely Better Than Leasehold
Updated: Jul 6, 2020
Out of the many questions that linger in the minds of home buyers and property investors, this will definitely be one of the most common one. Is freehold property better than leasehold property? In fact, to some buyers and investors, it is not even a question, it is a must to buy freehold! This debate will never end and it always seems like a no-brainer to go for a freehold property. Let us take a look at the following before we decide a course to steer.
Types of Property/Lease Tenures
Basically, there are 3 main types of tenures existing for private properties. They are the 99-years leasehold, 999-years leasehold and freehold. One of the most common understanding is that buyers of freehold properties will be able to hold on to them forever and they can hand down the properties to their children, grandchildren and even great-grandchildren.
In fact, this is also one big reason why people want to go for freehold properties, because they want to leave a legacy for their offspring. With that being said, we do need to bring to everyone’s attention that under the Land Acquisition Act, the government will have the right to acquire any land if it is deemed suitable for any public purpose, or if any work done on the land is of public benefit or of public interests. And so sorry, the fact that your property is a freehold property does not save you from this Act.
Now back to looking at the freehold private properties and that will be our condominiums and landed properties. If you are an owner of a freehold condominium and you are considering to leave your property down for a few generations, then there is a chance that your bubble could be burst and the property can still be sold against your will. And this comes in the form of an en bloc sale.
For a development which is older than 10 years old, if owners holding at least 80% of the share value and strata area agree to sell their properties, then the remaining 20% will no choice but to go ahead with the sale as well. For properties that are less than 10 years old, then we will need to have at least 90% share value and strata area to proceed with the en bloc sale. One thing we can be sure of, there will always be Developers on the lookout for good properties for en bloc. As for freehold landed properties, owners do not need to worry about the en bloc sale issue and assuming if there is no acquisition from the government, home owners really can have the choice to hand down the house from generations to generations. For that reason, we will usually encourage landed property buyers to go for freehold or 999-years leasehold houses if their budget allows. Of course, if we want to go after the lifestyle of living in a landed property but the budget is a little tight, there are many 99-years leasehold landed properties out there that will make you want to go home earlier every day.
Factors Affecting Property Value
If we want to look closely at the value of a property, although the lease of the property has a significance that is hard to ignore, it is but just one of the many factors that will affect the value. One of the biggest factors that will move buyers’ hands to sign on the cheque, will be Location. Location used to mean that if your property is situated in a more prime district or town, it will draw a bigger crowd of buyers. But fast forward to today, this location factor has expanded to include properties that are near to facilities such as shopping centres and even more importantly, MRT stations.
The reason for this is because the infrastructure of Singapore has greatly improved over the years and MRT stations can be found in so many districts and towns in Singapore. With so many connecting lines within the train infrastructure, convenience to travel from one town to another is no longer is an issue no matter which town you stay in. Looking at past property launches, any project which is near to MRT stations, they will sell well if not sell out. That says a lot about location. This brings us to another trend and that is for lands that are released for government land sales and if they are near to existing or upcoming MRT stations, then chances are, that piece of land will be a 99-years leasehold land. So, do we want to miss out on a property that has a great location but it is not freehold? If now there is a leasehold property which is a short walking distance to the MRT station and another freehold project which is far from MRT and needs a feeder bus to reach home, which one will you choose? These are some things to ponder about. Nevertheless, let’s move on.
Freehold vs Leasehold
It is not a surprise that freehold properties come with premium in price tag. Freehold property prices are usually about 10%-15% higher as compared to its leasehold counterparts and with the ever-growing prices of Singapore real estate, this 10%-15% is not an amount to be neglected. Unfortunately, this premium in price tag for freehold properties does not mean anything to a tenant who is looking for a property to rent.
If you are someone who is looking to buy something for rental returns, think deeper. If 2 properties in the same location with similar amenities, what usually attracts the tenants, will be the monthly rental. Trying to get a higher rental amount basing the fact that our property is freehold, will not make the tenant budge.
So, in order to stay competitive in the rental market, the rental for the freehold property will have to priced similar to its leasehold counterpart in the same location. Without any need for a calculator, we already know that the rental yield will be lower. And of course, the more expensive our property is, the higher the amount of interests we have to pay.
As good a planner we may be, plans change. We have seen many buyers who have bought freehold properties with great plans, regardless whether is it for en bloc potential or leaving a legacy for future generations, these plans were not executed at the end of the day. Many home owners sell off their freehold properties and move out after their children grows up and starts their own family.
These home owners subsequently decides on a smaller property which is more comfortable for them as the maintenance of the place becomes much easier. This move definitely does not need 99 years so the lease of the property actually does not affect them. In fact, with the freehold property that they have bought, they would have paid a premium of 10%-15% more and not forgetting the interests on this 10%-15%.
As we have mentioned right from the start, the debate of freehold properties over leasehold properties will never end and there will never be a clear winner. This article also does not serve to sway your purchasing decision but we hope that we have brought forth the pros and cons of each and you can have a better clarity of this urban legend that freehold properties are definitely better than leasehold. I would say it would ultimately depend on your requirements which will best assist you to make that choice. If you still have any queries with regards to freehold and leasehold properties, feel free to contact us and we can have a chat about it.
<Photo by Neven Krcmarek on Unsplash>
<Background vector created by macrovector - www.freepik.com> <Designed by pressfoto - www.freepik.com>
<Photo by Benjamin Wong on Unsplash>