Freehold or leasehold properties: Which are better?

Purchasing a home is a major investment. Therefore, just like any other asset, it is crucial to thoughtfully compare your options before making this significant financial decision.

For property owners in Singapore, it is important to understand the difference between freehold and leasehold properties.

In this article, we examine the differences between these types of homes to help prospective buyers make an educated decision.

WHAT IS THE DIFFERENCE BETWEEN FREEHOLD AND LEASEHOLD PROPERTIES?

Before we get to the nuts and bolts of this subject, let's begin by understanding what 'freehold' and 'leasehold' mean in Singapore.

With a freehold property, the owner can retain ownership over an indefinite period.

It is because of this perpetual ownership that many home buyers and even property investors seek to acquire such properties despite their hefty price tags.

With leasehold, the owner can only claim ownership for a fixed period (typically 99 years or 999 years in Singapore), thereafter, the property will have to be returned to the government. An example of a leasehold property is Singapore HDB flat.

All HDB flats are granted 99-year lease and once they expire, the flats will be repossessed by the government.

• Freehold: Property owner has no limit to his period of ownership
• Leasehold (99 years): Ownership of the property will return to the government after 99 years
• Leasehold (999 years): Ownership of the property will revert to the government after 999 years

999-year leasehold properties are similar to the freehold variety given the extensive tenure. For the ease of discussion, any reference of leasehold in this article will be referred to the 99-year lease only.

WHICH IS BETTER, FREEHOLD OR LEASEHOLD?

Freehold properties do have some clear advantages. These properties typically come with premium price tags and the perpetual ownership ensures that owners can have their peace of mind since they don't have to be too concerned about their lease running out.

Property financing seems to be a lot easier since there are fewer property aging issues.

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However, it is important to note that freehold properties are not entirely protected from external disruption.

Like leasehold properties, the government is still entitled to reclaim freehold properties if they obstruct national infrastructure development.

Also, in the event of an en-bloc attempt by a developer, freehold condo owners will still have to give up their properties if the majority of the residents agree to the sale.

It is also interesting to note that contrary to market perception, studies have shown that leasehold properties have appreciated 86.7 per cent over the past decade, while freehold properties progress at a slower pace of 60.8 per cent.

When comparing freehold and leasehold homes, it is also important to assess the age of the property.

For instance, New freehold properties will usually demand about 10 per cent more than leasehold units; however, the latter usually depreciates much slower than freehold with the exception of the 21-year and 40-year marks.

COMPARING THE SELLING PRICE AND RENTAL YIELD OF FREEHOLD AND LEASEHOLD PROPERTIES

To help us understand if freehold properties are better than leasehold properties, the following examples will provide us with a practical comparison.

The prices indicated are based on the average price of ten condominium units from District 9 to 11 with similar Temporary Occupation Permit (TOP) date and area size listed on PropertyGuru.

ASKING PRICES OF FREEHOLD & LEASEHOLD PROPERTIES

However, as freehold properties age, it seems to share the face the same fate as any property, in terms of diminishing resale value.

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Our research suggests that the asking price of newer freehold property is 40 per cent higher than a newer leasehold.

However, when the freehold ages, the asking price dropped significantly to 18 per cent above the estimated average price of a newer leasehold.

This indicates that freehold properties become relatively less valuable with age.

The older it gets, the more it will depreciate, and the value of even older freehold properties may even approach those of new leasehold homes.

RENTAL PRICES OF FREEHOLD & LEASEHOLD PROPERTIES

When it comes to newer properties, we estimated that freehold homes go for about 12 per cent more than leasehold homes.

However, the average asking rent of slightly older freehold properties is significantly lower than newer leasehold homes.

However, this does not necessarily mean that older freehold properties have lower rental yield.

Bearing in mind that property investment was much cheaper in the 1990s, if a freehold property was purchased during that time, the long-term rental yield likely increased over time.

ALL PROPERTIES HAVE ADVANTAGES & DISADVANTAGES

There are no clear-cut advantages when it comes to buying freehold or leasehold properties.

For example, while leasehold properties tend to be slightly less expensive, freehold properties may offer more long-term value.

The crux of the matter is really about the intention of the purchase.

Before taking up a huge mortgage loan to buy a freehold property because of the theoretical upsides, it will be a much wiser approach to do in depth research to study if the perceived value will last.

Besides tenure, other factors such as location, amenities, and infrastructure are important factors to consider before buying a property too.

Evaluating a variety of housing factors without taking a biased view on the lease type may be a more reasonable route for making informed decisions.

This article was first published in ValueChampion.