You might have heard from our older generation that you should go for a freehold if you want to buy a private property since it has a higher value and can be passed down to the future generations as compared to a 99-year leasehold that will depreciate sharply in value as the remaining lease shortens.
But is the above true? Let us do an analysis of both and understand which is a better choice for you.
An overview of 3 types of condo tenures in Singapore
Freehold – A property that can be held indefinitely by the owner.
99-year leasehold – The property reverts back to the state upon the expiry of its lease.
999-year leasehold – Essentially as good as a freehold. The property will still revert back to the state upon the expiry of its lease.
The common misconception about Freehold and Leasehold
Freehold
- The government cannot take the property back
- Have higher market value compared to leasehold
- Cannot be en-bloc
Leasehold
- No resale value as the development ages
- Lower market value compared to freehold
Unlocking the myths of Freehold and Leasehold
Freehold #1 – The government cannot take the property back
It is commonly misunderstood that a freehold property will remain in possession of the property owner and be passed down to future generations forever.
Some provisions allow the government to reclaim the land at any time if the property is in the way of future development for vital infrastructure (e.g. if the government is planning to build a new underground MRT network or an extension of a major highway, and your property is in the way.)
Freehold #2 – Have higher market value compared to leasehold
You might have heard from your friends or relatives mentioning “Location! Location! Location!” when buying a property, and it is true to a certain extent when it comes to measuring the value of properties.
For example, a leasehold property situated in the Core Central Region (CCR) is going to have a higher market value compared to a freehold property situated in the outskirts of Singapore.
Likewise, a leasehold property located right next to the MRT station might command the same price (PSF) compared to a freehold property in the same district but situated in a less accessible area.
Freehold #3 – Cannot be en-bloc
This is another common myth, that freehold properties cannot be put up for en-bloc sale. The fact is, if a developer or the residents proposes an en-bloc sale, you will have no choice but to sell your home if the majority of residents living in your development agree to it.
Leasehold #1 – No resale value as the development ages
True to a certain extent, the value drops as the lease tenure decays. However, due to the land scarcity in Singapore, by the time the lease is nearing its expiry, a developer or the residents will probably propose an en-bloc sale. And like we know, going through an en-bloc is like hitting a jackpot.
Leasehold #2 – Lower market value compared to freehold
As mentioned above, location is an important factor in determining the value of a property, and tenure is just one of the many factors affecting it. A leasehold condo in a prime area with a lesser lease might still fetch a better price compared to a freehold property located in the outskirts of Singapore.
Which has a better value? Freehold or Leasehold?
Theoretically, if we compare apple-to-apple, a freehold property will fetch a higher value compared to a leasehold property that is within the same district as both development ages. We observed that the value of leasehold property typically starts to decline when the lease hits the 78-year mark, and becomes more significant when the lease hits the 40-year mark, which by then we will see a potential en-bloc attempt.
Before that point, when the lease of the 99-year property is still fresh, it’s even possible that some leasehold properties depreciate slower than their freehold counterparts.
Which has a better rental yield? Freehold or Leasehold?
Leasehold properties can be better for rental yields. Rental yield is the annual rental income divided by the total cost of the property. If you are paying more for your property compared to others of the same size, you are having a lesser rental yield assuming both are fetching the same rental rate.
Within the same district, the initial sale price of freehold condominiums is usually 10-15% higher than leasehold condominiums. Now, tenants do not care about the lease type of the property, and the rental price is likely going to be the same for the same unit size. Hence, the rental yield for freehold properties is usually lower.
Our conclusion: Freehold or Leasehold?
Ultimately, it is still dependent on the long-term purpose of your purchase. If you are an investor that is looking for capital appreciation, choose a development that has a better location. It can be near transport hubs, malls, amenities, or which the government has marked for future development in the URA master plan.
For homeowners looking for a long-term stay and want to pass the property down to the next generation, don’t assume that freehold is the best too. The younger generation prefers to move out after marriage and don’t usually stay with their parents, and you will likely have to pay a premium for a freehold property.
In such a situation, they could have saved more for retirement by staying in a leasehold property.
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