Freehold VS Leasehold Properties: An analysis

There have been many discussions out there about whether leasehold or freehold is a better option. However, is the lease of the property enough to determine whether or not it is a good property?

To a certain extent, the lease status does play a part in it, but of course, there are many other factors that might affect your preference for a certain property as well.

Common Misconception

You would have heard of freehold and leasehold properties before, but there are many misconceptions that people have about these 2 terms. So before we move on, let us clarify some of these common misconceptions before we dive right into the topic.

Freehold properties are not lifetime property

First, some of you might think that possessing a freehold property means that you are owning the property for as long as possible and that there is nothing the government (or anyone else) can do to re-acquire the property from you.

The truth is that that’s not the case. If the government requires the land for other purposes, they would most likely reclaim it. Therefore, there is no such thing as a property that lasts “forever”; URA has the final say, and your lease status will eventually succumb to their masterplan.

Freehold properties also have a high tendency to go into collective sales, thus owners of freehold properties are no longer allowed to stay in their property, in other words, you have a high probability of being “homeless” (although not without a payout of course).

999-year leasehold can be considered as a freehold

Next, are 999-year leasehold properties considered as freehold properties? I would say yes, they can almost be considered as a freehold property since their leases would take almost a millennium to expire.

Little difference in depreciation

Moving on, many people believe that leasehold properties depreciate faster than freehold properties. However, this is not exactly true, especially for leasehold properties that are relatively new which means less than 21 years. In fact, the current market trends affect both freehold and leasehold properties the same way.

For example, during the recession period in the early 2000s (i.e. the 2002 – 2005 period), both freehold and leasehold prices were depressed. Therefore, if the market is doing well, both properties will appreciate and when the market is bad, both properties will depreciate. There is actually little difference between the two. However, leasehold properties do start to show a greater depreciation at 21 years of age, and then more so at 40 years of age.

En-bloc does not mean a better price

Lastly, people always believe that freehold properties are able to fetch a better price during en-bloc sales and leasehold unit will be sold at a lower price nearing the end of the lease. Though this is true in theory, but in actual fact it’s not always the case.

As mentioned earlier, there are many other factors such as transportation and amenities near or within the development that also plays a part in determining the price of the property. It too also applies here in the en-bloc sales. They are also affected by a range of factors, such as the state of the market, the zoning laws, and the amenities that have been built up.

Freehold VS Leasehold Condominium

So now that we have cleared the misconceptions, we shall deal further into the details of the different tenure condominiums.

Appreciation rates

In general, leasehold condominiums have appreciated more over the past decade as compared to freehold condominiums. However, this could be due to the fact that freehold condominiums are being sold at a premium of 10 – 15% more than its leasehold counterpart. Therefore, it is not entirely true to say that freehold condominiums are better off than those that are leasehold. Since there is still a lot of room for the surge in price for leasehold condominiums.

Viability of Freehold Condominiums

Family structures change over the years and family sizes tend to shrink, since children tend to move out upon marriage or when they are financially stable to do so. As a home owner, you may also want a change of scenery or environment some 20 to 30 years down the road.

This is especially evident in Singapore nowadays, as married young couples no longer want to stay with their parents and want a home of their own. Therefore, the extra premium of 10-15% that you pay when you purchase a freehold condominium becomes irrelevant and in this case, purchasing a leasehold condominium might have been a better choice.

Leasehold benefit more from rental yields

This is because leasehold properties are cheaper than freehold properties since there is an extra premium of 10-15% on freehold properties. Therefore, lower cost will translate to a higher yield, since the rental yield is the annual rental income divided by the total cost of the property.

Another thing to note is that rental income is not affected by the lease status of a condominium; tenants will not have to pay a higher rent for freehold condominiums. However, when it comes to tenancy, amenities in and around the vicinity of the development do play a very important part in determining the price of the rent.

Location and Amenities are important too

As mentioned earlier, lease status is not the only factor that will determine the price of the property, other factors such as the transportation and amenities in the condominium also come into play.

In fact, if a leasehold property is being acquired or being put on collective sales in a good location, the worthiness of a freehold property is nothing more than a leasehold property. This is evident by the sales transactions of condominiums at prime locations such as Orchard Road. Therefore it isn’t true to say that freehold properties are better than that of leasehold properties.

Conclusion

All in all, though there are many ongoing debates about leasehold and freehold properties, there is not much difference between the two. After doing a detailed analysis between the two types of properties, we would have realised that lease status is not the only price-determining factor and other factors play an important role in affecting the price.

Therefore, when it is your turn to make a decision on what property to purchase, always do your research to make sure you get the best value out of your purchase.

Want to find the best mortgage rate in town? Check out our free comparison service to learn more!

Read more of our posts below!

The post Freehold VS Leasehold Properties: An analysis appeared first on Redbrick Mortgage Advisory.

This post was originally published on Redbrick Blog Section