When it comes to property, the most asked question would be “buy freehold or leasehold”?
Most people would say buy the freehold, because freehold is forever and can be handed down for generations and that it is more valuable than leasehold.
But is that really the case?
In today’s article, we will go into the differences between the two and if freehold is better.
Before we go into the differences, you should know that is another type of tenure – 999 years. Triple nine leasehold is as good as freehold as that is almost a thousand years.
Freehold is FOREVER (or not)
The common understanding is that freehold is forever and a 99-year lease will revert back to the government when the lease period is up.
But that is not exactly the case.
In Singapore, the government can take back the property at any time, if for example, it is sitting on a site identified for future development i.e. a line MRT line.
Take the Thomson-East Coast Line (TEL) as an example.
While they tried to minimise the land acquisition, the government will still need to acquire six landed properties along Amber Road and one three-storey walk-up apartment along Tanjong Katong Road.
Even the Laguna National Golf and Country Club are not spared as it stands to lose more than 190,000 sq ft of land.
In total, 15 residential properties, nine strata units, and six landed properties were acquired. The government has also said that the owners will be compensated at the existing market price.
Government land acquisition can happen to any property, be it freehold, 999 or 99-year leasehold properties.
Does Freehold have a HIGHER value?
Everyone knows that property is all about location, location and location.
It is too simple to generalise and say that freehold has a higher value. The value of a property is tied to the location of the property.
Take a unit in Marina One Residences in Shenton Way.
A 657 sqft, 2 bedroom unit is selling at $1.6m as compared to an 1152 sqft, 3 bedroom unit in Balestier, which is listed at $1.3m.
This shows that location plays the most important role in determining the value of a condominium and not the tenure.
Rental yields
Rental yield is calculated as (annual rental income ÷ total price of the property) x 100%. That will give you the rental yield in percentage points.
Renters do not care if the property they are renting is freehold, 999 or 99-year leasehold. They care about location, amenities, condition and rental price.
99-year lease properties are generally cost about 20% less than freehold or 999-year properties.
If you apply the above rental yield formula, you will see that 99-year leasehold properties give a better yield. You pay less for the 99-year leasehold property but you are getting the same amount in rental as compared to freehold properties.
Leasehold expiry
Many people are worried that when the lease period is shortening, the property will start to lose its value.
Banks usually restrict financing for the purchase of units that are within 40 years of expiry.
If the unit is within 30 years of expiry, you will not be able to use CPF funds for the purchase.
However, as seen in the last 4 to 5 years, many property developers are on the lookout for ageing condominiums for collective sale.
Once a collective sale is successful, developers will top up with a fresh 99-year lease and sell it as a new launch project. Developers need to replenish their land bank to keep their business going.
Summary
Ultimately, whether to buy freehold or leasehold depends on your situation and objectives.
Bear in mind the most important factor in buying property is location, location and location.
If you are buying your dream home, it makes more sense to buy in a good location, near transport links and with good nearby amenities. That is also true if you are buying to rent out.
As said earlier, renters do not care if the property is freehold or leasehold. They want to rent a place that is convenient, with lots of nearby amenities, easy access to transport to and back from the workplace and a comfortable and clean interior.
If you are thinking of buying a property and passing it on to your future generations, a freehold property will be a better choice but just beware that it can be acquired if it is in the way of the government’s future developments.
Are you looking for a new home? Head to MOGUL.sg to browse your preference of properties for sale or rent in Singapore.
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