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Freehold vs. Leasehold Properties

Posted by SG Property Review on October 4, 2017
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The debate between new launch Condo vs resale and Freehold vs leasehold properties, are always the hot topics. Location and prevailing market conditions must not be the only determining factors that a property buyer/investor in Singapore must consider before sealing any condominium purchase deal.

Freehold properties provide ownership rights in perpetuity. This means a freehold unit could be passed on from one owner to another, or from a generation to another minus any time limit.

In comparison, a buyer/investor could only own a property within the duration of its 99-year tenure if he/she invests in a leasehold. Upon expiration of that lease term, the property’s overall ownership would be returned to the government, which in turn could opt to re-construct the property or use it for some other purpose.

There is a sub-type of leasehold properties and that is the 999-year-long tenure. Obviously, such properties are almost the same as freehold because the rights provided to the owners are almost perpetual, similar to a freehold.

To understand the actual differences between a freehold and a leasehold, take a closer look at the following factors.

Property valuation

Based on a Differential Premium chart released by the Singapore Land Authority, any new 99-year leasehold will have a valuation that is 4% lower compared to a counterpart freehold property. The value of leaseholds decrease further in comparison to freeholds as the remaining tenure of lease decreases. To illustrate, the price gets 5.4% lower if the tenure drops to 90 years, and further dips to 9% lower in comparison when the remaining years of tenure decreases to 80 years.

However, in terms of rentals, the values of both categories do not differ. But because of the gap in acquisition prices, a landlord tends to get higher returns when renting out a leasehold property, which he acquired for less cost.

Bank financing

Financing a property purchase though banks is very common because real estate prices across Singapore are among the most expensive in the world. For the purpose of approving and providing home loans, such lenders set the distinction between a freehold and a leasehold ownership.

In general, it is easier for banks to provide home loan approval if a property to be purchased is a freehold. Any bank would be more particular about the remaining tenure duration of a leasehold. It would set aside any hesitation if the property to be financed still has about 90 to 95 years left on its lease term. But banks tend to get more cautious if the leasehold has less than 70 years left on its lease duration.

Government buyouts and en-bloc

Whether freehold or leasehold, a property could still be reclaimed by the government for security or infrastructure development. Thus, if your home is along a major highway, your freehold ownership would not spare it from being acquired by the state if there is a need for certain projects.

Freehold ownership also does not prevent your property from being subject to a possible en-bloc redevelopment in your community. A developer could always attempt to make an en-bloc and possibly force you out if at least 80% of other property owners in the area agree to sell their units.

The only consolation is that freehold properties usually command about 10% to 15% higher initial acquisition costs compared to leasehold units in the same area during government buyouts and en-blocs.

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