In August, I had the privilege to meet up with a young couple looking to embark on their first homeownership journey. Like most first-time buyers, the number one concern is whether the home they purchase will appreciate in time to come.
Owning a property can be a great method of wealth and capital preservation, but only if you know how to do it right. The aim of this article is not to assert if leasehold or freehold is superior; Rather, I hope to highlight common blind spots that homebuyers should be mindful of.
For the first part, we will dive into the common misconceptions between leasehold and freehold properties.
Let us take a quick comparison of freehold private property types against leasehold properties in Singapore. To account for reasonable inflation affecting prices, we’ll look at leasehold and freehold condominiums that TOP between 1990 to 1995.
Despite freehold development costing almost 52% more than a leasehold, for the last decade, leasehold condominiums have appreciated by 170% in contrast to 148% for freehold/999 years condominiums.
Let us dive deeper as we compare freehold and leasehold properties near Orchard MRT. Does a property being freehold or leasehold contribute to property prices?
The findings that leasehold properties appreciate better than freehold even in a prime central location near Orchard MRT still holds true. Despite freehold properties costing almost 34% more than a leasehold, leasehold properties still appreciates by approximately over 2 times more than a freehold. What are some contributing demand and supply forces in influencing property prices? Here is my take on 2 possible reasons.
It is a well-established fact that freehold properties cost more than a leasehold by 10% to 15%. The premium price will often affect potential buyers’ affordable quantum based on their available loan amount. This impacts the potential buyers’ affordability. Leasehold being more affordable plays a role in driving the potential for better capital appreciation.
In the perspective of a potential home buyer seeking to buy a home for pure residential needs, the remaining lease on a property sometimes does not matter as much. As long as the property they buy can outlive them, the remaining lease sometimes matters less to them. What matters more to buyers of such a profile, is the entry price and the amenities he can get to enjoy matters more.
To better illustrate this point. We will look at 2 projects which are
Leonie Hill Residences
These 2 developments TOP-ed 1 year apart. In terms of the project size, amenities as well as accessibility to transport lines, they are relatively comparable in terms of their walking distance from one another. One key difference being, one is leasehold and the other one at freehold.
The price premium of a freehold development might deter prospective home buyers. For buyers seeking to buy a unit along Leonie Hill road, the affordability of Leonie Suites (leasehold development), which is almost 30% lower in terms of psf has the added advantage of attracting more potential pool of buyers. This combined with the lower initial launch price puts this project at a better trajectory for price appreciation.
Investors looking to capitalize on the real estate hoping to enjoy higher returns on equity prefer leasehold properties. This is because we commonly observe leasehold properties giving a higher rental yield compared to freehold. This reason makes it more attractive to a potential investor.
From an investors’ perspective, tenants rarely care if the land is standing on freehold or leasehold plots. What matters to tenants is accessibility, location, and rent cost. This makes a leasehold property much more attractive to a potential dividend seeking investors.
In addition, dividends seeking landlord, investing in a leasehold property will yield greater returns on equity as they can use fewer funds to gain same or even better rental yields. The dividends seeking investors also contribute to the potential pool of buyers.
As mentioned earlier, the main aim of this post is not to justify whether freehold or leasehold is better. Instead, I hope this post can illuminate some misconceptions of freehold and leasehold properties.
Freehold properties have its fair share of merits. Take, for example, for buyers without a definitive property exit strategy in mind, freehold properties can be worthwhile their consideration. This is because unlike leasehold properties, buyers of freehold properties can maximise their usage of CPF regardless of the age of the properties. Buyers of leasehold properties regardless if it is HDB or private are required to prorate the amount of CPF funds they can use for their property purchase. This can mean more upfront cash by buyers and inability to maximize their loan to value amount.
Lease decay is an ongoing debate that has suddenly been a hot topic among Singaporeans. Given the fact that most Singaporeans live in a HDB, most are concerned with what will happen should these leasehold properties expire in future. You can read more about lease decay issue from 99.co here.
Freehold properties are less likely to suffer from the effects of lease decay as owners of such properties do not need to return the land back to the government since there is no deadline to the lease of the land they are residing on. As such freehold properties tend to be less affected by the effects of lease decay.
In addition, freehold properties also hold better en-bloc potential as Government Land Sales (GLS) no longer releases freehold plots, hence a need for developers to shift their focus into collective sales to cater to freehold home seekers. Looking at the enbloc transactions for the year 2018, freehold developments contributes 37 out of 45 enbloc transactions. The sales figures is a very good example depicting the current developers’ sentiments towards freehold developments.
In my years in real estate industry, I realised that there are always 2 sides of a coin especially in real estate transactions. There will always be pros and cons towards a freehold or leasehold development. However, with the right preparation and knowledge, I seek to value-add to both buyers’ and sellers’ property portfolio enhancement journey. If you are facing challenges about whether to sell or hold regardless if you are holding HDB or private property. I invite you to contact me for a free assessment.