We often hear people say freehold condominium is better than leasehold. Is it true? This becomes an important decision to make when we are committing to purchase a private property.
Definition of Freehold and Leasehold
Firstly, what do freehold and leasehold property mean?
Freehold estate refer to estate in fee simple. A property owner enjoys absolute freehold ownership where there is no need to pay ground rent or quit rent except statutory charges like property tax.
Freehold estate refer to estate in perpetuity where the freehold estate is held for perpetuity but subjected to implied terms and conditions under State Land Act.
In both instances, there is no encumbrance to the absolute title of the property and it can be passed down to generations.
Leasehold property refers to a property where the tenure has a definite duration. It can be a 99 years, a 103 years or even a 999 years lease.
For the purpose of this article, we shall treat leasehold to be a lease of 99 years and 103 years. The 999 years lease is a very long lease and can be considered to be similar to that of a freehold.
Preference for Freehold Property
Generally, buyers prefer freehold property because
1. They can hold the property for perpetuity (Forever and Ever)
2. The freehold limited supply should command a higher price over time as the leasehold has limited life span. In Singapore, land is scare and the Government has stopped selling freehold land.
This cold reality of a lease decay is brought closer to home as it was reported in the Strait Times on 20th June 2017 that the 191 private terraced houses at Geylang Lorong 3 with a lease of 60 years will be returned to the State.
The owners are to return the vacated units to Singapore Land Authority (SLA) at the end of 2020. There will be no extensions allowed and no compensation.
Instances like these highlight the lack of stability when it comes to leasehold, and this drives property owners to pursue freehold properties. As such, freehold properties will appreciate over time.
Hold Freehold Property for Perpetuity ( Forever and Ever)?
In reality, the holding of the freehold property for perpetuity may be challenged.
The property can be acquired by the government under the Singapore Land Acquisition Act in order to pursue public interest or other purposes.
Alternatively, the freehold property can be acquired in an en-bloc exercise. The minority will have to give in to the consent of the majority of more than 80 percent.
Freehold limited supply should command higher price over time?
Is it true that a Freehold property appreciates more than a Leasehold property given the scarcity of land in Singapore ?
Let us take a look at a 15 years comparison at the price psf and volume between freehold and leasehold condominiums. The increase for leasehold was 137.81% outperforming the increase of freehold of 116.75%.
The belief that freehold limited supply to command higher price than leasehold over time is debunked.
It is also noted that the volume of leasehold overtook the freehold on and after 2010. It showed that in the recent years buyers also prefer leasehold to freehold.
Reasons for the Preference for Leasehold Condominiums
But why is there a changing mindset amongst the buyers in the recent years?
Prices of property have increased. As a rule of thumb, freehold commands a price premium of about 15% to 20% over leasehold property.
Due to the constraints of budget as capped by Total Debt Servicing Ratio instituted by government in 2013, leasehold property becomes a more affordable option than freehold.
Buyers favour leasehold because of :
1. Better Rental Yield
2. Better selling characteristics of Leasehold Property
Better Rental Yield
It does not matter to the tenant whether he is living in a freehold or leasehold condominium, what matters is the rental amount.
So, for an investor, his objective is to improve his rental yield. The lower the property price, the better the yield, so his preference will be for leasehold to freehold.
Gross Rental Yield is (Rental Amount x 12months)/Property Price x 100 percent
Both Clementi Woods (completed in 2010) and Botannia (completed in 2009) are along West Coast Road and in District 5.
Clementi Wood is a 99 years leasehold property and has 240 units. Botannia ,on the other hand, has 493 units and is a 956years leasehold property.
Although Botannia (equivalent to a freehold) is more expensive than Clementi Wood (leasehold), the capital appreciation of 60.68% is lower than Clementi Woods of 89.71%.
Correspondingly, the gross rental yield of Botannia of 2.52% is lower than Clementi Woods of 3.15%.
Better selling characteristics of Leasehold Property
Kovan Residences and D’ Pavilion were both completed in 2011 and in District 19 .
Kovan Residences is a 99 leasehold property that has 521 units. It is just opposite Kovan MRT station.
D’ Pavilion is a freehold property that has 50 units, about 10% of the units found in Kovan Residences. It is situated 2 bus stops away from Serangoon MRT.
Though started at about the same price in 2008, Kovan Residences performed better than D' Pavilion.
Kovan Residences has a better location as it is closer to amenities. As a bigger project, it has more condo facilities. Yet maintenance is more affordable due to the greater number of units to share the overall condo facilities cost.
In contrast, boutique projects like D’ Pavilion has fewer indoor facilities. Maintenance will be relatively higher as there are fewer units to share the cost.
Even though it is a freehold, it is less favoured by buyers because it is further away from MRT and amenities.
As it is more expensive to purchase freehold sites, there are generally more boutique sized than big scale freehold condominiums that were developed.
Preference of Leasehold over Freehold for en bloc sites
Interestingly, this preference for leasehold property is not only among the retailer buyers but also with the developers.
It is reported in the Business Times dated 30th October 2017, that land-hungry developers prefer larger leasehold sites for en-bloc in 2016 and 2017 to achieve greater economies of scale and generate substantial revenue.
There is a shift of interest in collective sales from freehold to leasehold , which is a big change from 2008 to 2013, where collective sales were predominantly freehold.
Then, freehold collective sales dominated over 70 percent to 100 percent of units and value sold.
Industry players perceived that the swing came mainly from the insufficient supply from government land sales (GLS) and a strong demand for mass-market private properties from HDB upgraders.
Former HUDC (Housing and Urban Development Company) estates have bigger sites and so the land rate on a per square foot per plot ratio (psf ppr) basis is cheaper compared to freehold residential sites.
Moreover, most HUDC owners are more realistic in pricing with the developers so as to cash out from their properties in view of the depleting land lease.
Freehold property owners, on the other hand, prefer to drive a hard bargain and take time to look for the best price.
Based on BT’s estimates, of the total residential collective sales in 2016 about 70 per cent were former HUDC estates.
What about the decaying lease for Leasehold property?
21 and 40 year Mark
Before 21 years mark, a leasehold and a freehold do not seem to differ much, hence price acceleration is more for leasehold such as the case for Clementi Woods and Botannia.
Once it hits 21 years or more, the difference is apparent.
Oleander Tower and Trellis Tower are both situated in Lorong 1 Toa Payoh (District 12).
Oleander Tower is a leasehold property that was completed in 1998. It has 318 units.
Trellis Tower is a freehold property that TOP in 2000. It has 384 units.
Oleander Tower outperformed Trellis Tower over the years as we compare the price increase of 233.35% to 178.23%.
However when Oleander hit the 20 years in 2018, the price began to fall as the property experienced lease decay.
Another turning point for falling prices is when the leasehold property is close to 40 years old. This is because there are restrictions in the bank borrowing and the use of CPF for the buyer.
If the remaining lease is 30 years or less, it is even more disturbing , as banks will not lend under such circumstance.
Bala's Table
Bala’s Table was developed by Bala, a Land Office employee in around 1947. It is a guideline to be used to value leasehold land or property.
This table is used by the government, developers and HDB.
The table shows that the leasehold depreciation is not a linear one. It declines faster as the remaining lease became shorter.
The table form is extracted from finance website Investment Moats.
On the curve, the value of leasehold land is expressed as a percentage of the land value as it was a freehold.
From the table, for an example, at the start for the fresh lease, the value of the leasehold property is 96% of the freehold property. Where there are 60 years remaining on the lease, it is 80percent of the value.
So, leasehold does have its drawback in the form of decaying prices. However, in the modern days of living, people have changed their lifestyle. For the first 15 years, they may want to stay near their parents and primary schools of their children.
Beyond that, they will move to another place. In that case, a leasehold property can meet this purpose.
Does that mean that Freehold property has no relevance?
All that is said ,freehold property is still preferred for legacy planning. This is especially so if the property can be preserved , because it is near to the home of relatives or is within 1km radius to famous primary schools. It is also often viewed as a preservation of wealth for their future generations.
Conclusion
The statement that "Freehold is better than leasehold" has been an advice passed down from the older generation. It has always been for legacy planning.
However, the price of freehold property has increased significantly over the past years. With the various cooling measures in borrowing restrictions, the additional cost premium of 15% to 20% of freehold over leasehold is significant.
Now, both retail buyers and even developers are moving towards leasehold properties.
Nevertheless, leasehold property does have its setback of its depleting lease life.
Candidly, the preference of freehold or leasehold is more than a general statement that freehold or leasehold is better.
Many a times, we need to go into the details for specific projects.
Location, project size, amenities, proximity to good schools, development of the URA plan are important factors to consider.
Besides, personal preference such as need for privacy, proximity to family support, budget, layout etc are also as important.
As the purchase of property requires more in-depth understanding as to match the buyer’s needs, I would be glad to have a discussion you over a coffee/tea on your concerns. Please call or whatapp me, and I look forward to hear from you soon.
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I am Ruth Chia, a Senior Sales Director with Orangetee and Tie Pte Ltd.
Prior to joining the real estate industry, I was in the finance and accounting department of a corporation which engaged in the consultancy works for real estate owners.
I switched my career to assist others to achieve financial freedom through real estate.
Being financially trained has enabled me to value add to my clients to give them a balanced perspective in making their real estate decisions.
My greatest reward is to have meaning relationship established through servicing my clients.
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