99 Years Leasehold vs Freehold in Singapore

99 Years Leasehold vs Freehold in Singapore
First Time Home Buyers' Essential Guide

Think you know the difference between leasehold and freehold? Read on to find out more.
Table of Contents

Leasehold VS Freehold

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.

Leasehold good, freehold better?

Freehold has better capital appreciation potential?

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.

Leasehold properties vs freehold properties (TOP 1990 – 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?

  • We will gather property transactional data for properties that TOP between 1990 to 2000. This is to account for potential inflation influencing prices.
  • We will use properties within 1KM of Orchard MRT. This is because properties along Orchard MRT within 1KM typically share the same amenities.
Leasehold vs free properties with 1KM of Orchard MRT (TOP 1990 - 2000)

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.

1st Reason: Affordability

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. 

To a home buyer, remaining lease is important but so is the entry price!

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. 

Case studies: Leonie Hill Residences and Leonie Suites

To better illustrate this point. We will look at 2 projects which are

Leonie Hill Residences

  • Tenure: Freehold
  • TOP 2005
  • Total Units: 80

Leonie Suites 

  • Tenure: Leasehold from 2006
  • TOP 2006
  • Total Units: 97
Walking distance between Leonie Suites and 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.

Average psf per year from 2004 to 2019

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.

2nd Reason: Rental yields

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.

A case for freehold developments

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.

No CPF usage restrictions

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. 

Freehold is more resilient against the advanced effects of lease decay

As the lease runs down, the property value will eventually fall to zero. This is for the simple reason that, very soon, the property will be passed back to the government and will hence cease to be an asset.

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. 

Freehold has better en-bloc opportunities

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. 

Historical enbloc sales for the year 2018

Buyers should be mindful of both the pros and cons

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.

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