Freehold vs. Leasehold - Is It Really Necessary Paying The Premium For a Freehold?
There is one mindset that remains prevalent amongst home buyers today – that a freehold property is always the more treasured option.
“Because it will always be mine and I can hand it down to my children when I pass away”
Yes, there is no dispute that if we were to throw our life savings into buying a million dollar home, we want it to be ours forever and ever, even passing it on to our children…or pets (yes, there are people who do that!).
Buying into that mantra, property investors have also pursued freehold properties, believing it will bring them greater returns.
However, freehold properties come at a premium – estimated to be on average between 15-30% more than their leasehold counterparts.
Is forking out the extra money to buy that freehold really necessary?
Freehold vs. Leasehold – What’s the Difference?
An analysis of property transaction records from the past 20 years threw out an interesting trend which challenges the prestige of freehold properties.
New leasehold property buyers have seen greater price appreciation
Yep, it’s true.
I compiled data on gains and losses for every single new launch property purchased and resold since January 2009*. Averaging out the returns, this is what I got:
Leasehold property transactions have appreciated more in price, compared to their freehold counterparts.
In fact, when I trimmed off the new launches from 2009-2011 to keep the average of all new launches from 2012 onward – I found that freehold property transactions were, on average, losing money.
As I again trimmed off more transactions from the average to include only those from 2014 onward...and those from 2017 onward, the results gave a conclusive picture: for new launches, the leasehold ones have been consistently outperforming their freehold counterparts.
*This refers to the current market value versus original purchase price, if the unit has never been resold / or / the price transacted versus original purchase price for units which have been resold once or more
Why are buyers paying more and more for leasehold properties that will one day depreciate to $0 value?
If I were to sketch out for you what I’d imagine the value of a freehold versus leasehold property would be over time, it will look something like this:
In theory, the value of a leasehold property should start depreciating at some point of time and eventually reach zero – since the land returns to the state at the end of the lease and you get back $0 (just like the price of your car with a 10-year COE lifespan).
In reality however, we have yet to see the value of any old leasehold property in Singapore begin to plunge. In fact, there are 50-year old leasehold properties, such Lutheran Towers (along Farrer Road) and the apartments at People’s Park Complex that are still transacting at all-time high prices.
Why is this so?
In land scarce Singapore where a strong emphasis is placed on constant urban renewal, there will always be demand for land, especially land in good locations. This probably explains why old properties such as People’s Park Complex (sited right in the heart of Chinatown, above the MRT station) still retain their value, since the possibility of a windfall profit from en-bloc remains a tantalizing prospect for owners.
Singapore has so far had a relatively healthy “en-bloc” scene – where developers come in and buy up all the units in your old condominium in a collective sale, usually paying you above the prevailing market value. This has proven to be a viable exit strategy for leasehold properties as they age.
Aware that there is an exit strategy in the future, property buyers therefore appear to focus on other factors, such as location, facilities, rental yield and the overall profile of the condominium to judge the value of the property – especially so for newer properties where expiry of the 99-year lease is but a distant concern to them.
What’s the point of Freehold then?
Naturally, the first point will be that a freehold property belongs to you forever. So if you're the sentimental sort of person who foresees your great great grand children living in the same home 100 years later, then by all means - freehold's the way to go.
Secondly, a developer looking to buy a site en-bloc may see value in its location and profile. However, the developer will most likely be willing to pay more for one that is freehold since it will not need to pay a development premium (which usually adds up to millions) to top-up the lease of the land to a fresh 99-years before selling it (provided a lease top-up is even granted by Singapore Land Authority in the first place - read more about it here).
This is a cost which reduces the amount the developer will be willing to pay to the property owners to acquire their property.
With a freehold estate, no matter how old it is, they do not incur this cost.
So in theory, freehold property owners should benefit from higher en-bloc payouts or; bigger capital gains.
The Lowdown – So is Freehold really worth buying?
There’s no hard and fast answer to this. While general analysis of available data shows that in the short-term, leasehold properties experience bigger capital gains, there are still many other factors at play.
For example, if you buy a unit in a leasehold condo in an area that has no current appeal and poor transport links, do you think you’ll see it appreciate in value faster than a freehold condo built right next to an MRT station?
Have a thought about these points:
How long do you intend to hold onto the property you are buying?
If you intend to buy your property as an investment and rent it out… does it matter to your tenant whether or not it’s a leasehold or freehold? (i.e. will your tenant pay a higher rental because it’s a freehold??)
In theory, a freehold’s biggest advantage is during enbloc sales – and this usually happens only as the property gets older. If you buy a new launch property today, will you really hold on to it for the next 30-40 years to enjoy this advantage – IF it happens?
If you think a freehold property is great since you can pass it on to your children, think again: do you think they will want to live in it, or will they sell it off?
Has there (to date) been any leasehold property seeing its value fall off a cliff as it grows older?
In summary, what I’m trying to do is to offer you a different perspective about leasehold properties, not to tell you that a leasehold (or a freehold) will be a better investment.
There are many factors that affect the value potential of a property – and its tenure should not be seen as the primary factor. Don’t end up unnecessarily forking out more money just for the sake of buying that desired freehold property!
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