• Joshua Loo

Freehold vs Leasehold Properties, Who Cares?

Updated: Sep 18



Without batting an eyelid, almost all Singaporeans will no doubt go for freehold properties 95% of the time. However, seasoned investors know that there are some circumstances where leasehold properties can provide good value.


In this article, I discuss some reasons why investors might have a preference of one term tenure over the other, and what are the disadvantages to these.


Freehold Estates



Inheritance Owners


Why This is Beneficial

Traditionally, property investors prefer freehold properties as a form of a legacy for their children. They believe that property investments will consistently appreciate over time, and holding it for a long period is the best method for financial freedom. The most carefree form of investing. All the homework is done upfront before purchase.


The Disadvantage

This might be possible during the early days of Singapore’s rapid development. However, Property investment today is more complicated than having the buy and forget mentality. Surrounding developments play a huge role in the price of your property. Poor management will easily result in holding onto a property for too long, beyond what is competitive in the market.


Remember, your asset will remain locked within the property, and outgoing expenses such as paying for maintenance and tax still apply. In addition, most of these investors tend to be wealthier than the average Singaporean, and other forms of investments might be safer/profitable without locking in huge equity.


Enbloc Seekers


Why This is Beneficial

Seeking a maximum return on investment, these investors go for properties with the highest en-bloc potential. Having your selected property for en-bloc will speed up your property investment goals by a hefty sum.


The Disadvantage

From another viewpoint, all properties in Singapore can be considered with En-Bloc potential. My previous articles mentioned that Singapore is severely limited in land. When new supply of real estate consistently enters the market, the existing properties in the open market will need to be removed to make way.


Other than a select few, I believe it is not in anyone’s best interest to select a piece of property based on its enbloc potential, as this is akin to “tossing dice”. Finding an en-bloc property is possible, but unlikely. In addition, investors are easily swayed with listings stating “en-bloc potential”. If such properties have a high chance to en-bloc, wouldn't it be in the seller’s interest to hold onto it?


Check my thoughts about en-bloc properties Stop Holding on to Your En-Bloc Property!


Location Does Not Have Much Leasehold Properties


Why This is Beneficial

One main reason in which why a property investor will choose a freehold property over a leasehold property might be its location.


Some planning areas in Singapore can have a high concentration of freehold residential areas. One example is Balestier. Due to the lack of leasehold properties, there will not be a significant advantage to owning a freehold property. Rather, it will be necessary as it will be the minimum standard.


The Disadvantage

With the surplus of freehold condos in a particular area, land tenure plays little importance in comparison. Other characteristics should be prioritized.

Leasehold Estates



Price Sensitive


Why This is Beneficial

This is most evidently seen from the Bala’s curve. The author suggested that the start of a fresh 99-year leasehold has a discount rate of 3.5%.


Bala’s curve was first introduced in the 1940s when Singapore was still a young nation. I believe that there are many changes introduced since then, and new supply of leasehold properties is cheaper than freehold by 10-15%.


However, we can draw the parallels between these land tenures with this discounted cash flow model.

Image credit: Juan Velasco, Centre for Liveable Cities

This 10-15% discount can be a reason to why investors will purchase a leasehold property, as the price will be more affordable than a freehold unit.


The Disadvantage

No direct disadvantage. However, analyzing the value of a property based of the discount a leasehold property can bring is a fallacy. This leasehold value is theoretically based of a non-existent freehold unit, and assuming a discount is present just based on its land tenure is dangerous.


For new launches, analyze the entry price versus existing properties to see if it is worth the rebuilt premium.


For resale properties, check to see the existing lease and condition of the unit still makes it a viable purchase and worthy competition to new launches and its nearest competitors.



Clear Exit Strategy


Why This is Beneficial

These investors will exit the purchase once the investment is profitable, and/or there are no penalties to the quick sale (i.e. Seller Stamp Duty). Such deals can be found in both the resale open market and the new launch supply market.


The Disadvantage

The Singapore real estate market is in tight control, and there are seldom cases where such investments are an easy find. Easy access to information online means that profitable deals are readily discovered by the general public, which makes them an open secret.


Rental Yield


Why This is Beneficial

This is the strategy used by most Singaporeans in order to defray the hefty mortgage costs. Based on our explanation of Bala’s curve, it is understood that leasehold properties will be sold at a percentage of its freehold value. This results in higher rental yields as the tenant does not place a premium on land tenure.


The Disadvantage

No direct disadvantage. However, these property owners do not have a clear exit strategy on when to sell the leasehold property. There comes a point in time where the returns from rental yield might not be enough to uphold the depreciation over time.


Location Does Not Have Much Freehold Properties


Why This is Beneficial

District 7 consists of only leasehold properties, with Waterloo View as the only freehold property. This makes prices highly competitive than freehold properties in other areas.


District 7 is a fantastic area that is primed with potential, and this is shown in the Master Plan. This can be the reason why most of the land tenure is leasehold, to prevent excessive land banking.


The Disadvantage

Having rapid development within District 7 provides plenty of capital growth opportunities. This is however a strong selling point used by developers to market properties at a high cost. Understand your risk tolerance and always purchase a property that is within your means.

Summary


Choosing the right land tenure for your property purchase is not an easy decision, and depends strongly on the investor’s own preference and risk tolerance.


There is no overwhelming disadvantage between freehold and leasehold properties. With the right investment strategy, both types can be highly lucrative for the keen investor.

Need further help deciding which are the best investment properties besides the land tenure as a criterion? Contact me (Joshua) at +65 96329840 or send your queries to estatemagnates@gmail.com! My consultations do not have a charge, and it is a service outreach! I will not be pushing any products. Let us discuss the steps that you can take to achieve your property investment goals.


The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee, or other group or individual. The author does not accept any responsibility whatsoever for any harm or loss arising from accessing or relying on information contained in this blog post.

 

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