Highlights
- Leasehold properties may be more affordable but the value of a leasehold property decreases as the lease term gets closer to expiration.
- Freehold properties may be more expensive upfront but can offer better long-term value.
- Buying a freehold vs. leasehold property should be based on individual circumstances and long-term goals.
About Singapore Property Background
Buying a property can be an emotional rollercoaster, especially regarding the type of tenure – freehold vs. leasehold. While some homebuyers may be unopinionated about it, others feel strongly one way or another. It’s essential to have an objective view of the pros and cons of both options to make an informed decision.
Freehold properties are buildings that the owner indefinitely owns, while leasehold properties have a set period of ownership that reverts to the state once it expires. It’s important to note that even freehold properties can be recalled by the state under the Land Acquisition Act for certain circumstances or bought over by private developers in an en-bloc sale.
Government Land Sales Sites (GLS) are 99-year leaseholds, and ownership reverts to the state once the tenure expires. While some buyers prefer freehold properties, others are deterred by the added premium and prioritize other factors like location or amenities.
Types of Condo Tenures in Singapore
1. Freehold Properties
- Freehold properties can serve as a generational asset and pathway to financial freedom. For instance, The Atelier and Pullman Residence.
- The properties fetch higher prices during en bloc sales.
- Freehold properties have a scarcity value, resulting in more robust and resilient prices than leasehold properties.
- Emotional buying can lead to unrealistic expectations for passing down a property to future generations.
- Unforeseeable changes in the surroundings and competition can impact the value of a freehold property.
- Maintenance costs for an aging freehold property can be higher.
2. Leasehold Properties
- Significantly cheaper than freehold properties
- Higher rental yield
- Appreciating investment potential
- Finite ownership with decreasing value as the lease shortens
- Concentrated in particular locations
- Property value may decrease drastically as the lease decays
Freehold Vs. Leasehold Condos Comparison
1. Leasehold Duration
Starting with the most obvious differences, freehold condos are typically held in perpetuity, while leasehold ownership like One Pearl Bank only lasts up to 99 years. This limited time frame can affect the value of the property.
Freehold properties are often considered permanent investments you can pass down through generations. Due to this, freehold condos are usually better in demand.
2. Market Value
For many potential property buyers in Singapore, the perception is that freehold properties are of higher worth than leasehold. However, this may only sometimes be the case. A condominium located in a Central Business District (CBD) would naturally carry a greater value than one located in Punggol – location being an essential factor here – irrespective of its tenure. That said, a freehold property would usually be priced higher when a freehold and leasehold condominiums of similar facilities are located in the same area
3. Property Cost
The price of a freehold condo is usually higher than that of a leasehold property in the same area with similar size and specifications. The cost difference can be as high as up to 30% in many cases. Buying a freehold home requires more money upfront due to increasing interest rates and borrowing costs.
4. Maintenance and Facilities
The age of your freehold condo could lead to increased expenditures on repairs and upkeep. Furthermore, growing leasehold condos being constructed near shopping malls or MRT stations might dent the worth of your “remote” freehold property. Do remember to consider your location carefully before making a decision.
5. Rental Yield
For investors, the formula for rental yield is straightforward: annual rental income divided by the property cost. This means that with the same rental income, a costly property will produce a low rental yield.
Regarding Singapore properties, freeholds are about 10-15% more expensive than leaseholds in any area. Ignoring the property type, tenants may focus more on price, location, and comfort. As a result, any freehold and leasehold property with the same features in one area will have similar rental prices. Thus, if you want to invest in real estate in Singapore, a leasehold condominium is your best option for higher yields.
A good example for comparison is between D’leedon and Leedon Residences. D’leedon, a leasehold property located at Leedon Height has an average transacted PSF of $1,900. Located close to MRT, Orchard and wet market, it has become popular development with strong rental demand among expatriates. On other hand, Leedon Residence, a freehold development, it is located right next to D’leedon. It has a higher psf of around $2,600. For rental demand wise, it is not as good as D’leedon.
At times, people value freehold property because of its tenure. However, from an investment perspective, it may not sound as lucrative as a leasehold property.
Which One Should You Choose?
- In general, freehold properties are more valuable than 99-year leasehold properties.
- However, price differences between the two occur at the 21- and 40-year mark, where leasehold properties experience significant drops in value.
- Freehold units may fetch a better price during en-bloc, but leasehold is better for rental yields.
- Freehold ownership provides more flexibility and control over the property, but this advantage is more theoretical than practical.
- Leasehold properties also offer advantages such as lower upfront costs and lower borrowing cost.
- Ultimately, the choice between freehold and leasehold depends on the individual’s priorities and circumstances.
FAQs
Will A Freehold Condo Maintain the Freehold Status Forever?
It’s common for homeowners to believe that a freehold property is permanent and can be passed down the generations. However, this may only sometimes be the case in Singapore. With redevelopment projects like the North-South Corridor and new MRT lines like the Thomson-East Coast line, your freehold condo may need to make way for larger projects.
The government will likely compensate you for the market price. However, this still means you must go through the hassle of finding a new place to call home. Therefore, it’s important to note that freehold properties may not remain freehold forever.
Can A Freehold Land Be Put Up for En Bloc?
The myth that freehold properties are somehow exempt from en bloc sales is false. If a developer moves to purchase your condo through an en bloc sale, it will be possible as long as most residents in your development agree. In such cases, you will have little choice but to sell your home.
Are Leasehold Properties Affected by Lease Decay?
Lease decay is the gradual reduction in the value of a leasehold property as the lease approaches its expiration date. The properties are affected by lease decay, especially as the lease gets closer to the end of its term.
