Let’s define: 99 years, 999 years, and Freehold condos
A 99-year leasehold property will revert back to the government when the lease expires, while a property with 999-year lease is basically the same as a freehold property wherein the owner can hold on to it for an indefinite period. Properties with 999-year leases mostly date back from the Colonial era.
Just like in most rules where there are exceptions, there are some provisions for these properties where the property can be reclaimed by the government. An example is if the property is in the way of vital infrastructure such as a major highway, its freehold status will not prevent it from being taken from you. Another example is when other residents agree to an en-bloc redevelopment, you will be compelled to move out from your freehold condo.
In terms of prices, a freehold unit’s initial price can be around 10 to 15% higher than a leasehold unit in the same location, generally speaking.
Now that’s cleared out, let’s have a look at the price dispute:
99 years versus freehold: Which one has more value?
This is not an easy question to settle since there is an innate difficulty in isolating a property value’s individual cause. Here’s an example: a unit that still has 70 years remaining on its lease, but is right smack in the Central Business District (CBD), can probably command a higher price than a freehold unit located in the fringes of Punggol. Another scenario to consider: a freehold property close to an MRT station. Is it the freehold nature of the property that lends its high valuation, or is it its accessibility to the MRT station?
Thus, it is not surprising that investors and analysts have been at odds on the price effects of leasehold and freehold properties for the past twenty to thirty years. However, there are some salient points that everyone can agree on:
- Price differences happen when the property turns 21 and 40 years old
A freehold unit is usually priced 10% higher than a comparable leasehold unit, with all other factors – location, accessibility, and amenities – equal. While this difference in pricing does not take effect right at the start, it will eventually be apparent when a leasehold unit turns 21 years old (or with 78 years left on the lease) is compared to a similar freehold unit.
This difference gets even more significant when leasehold units reaches the 40 year mark because bank financing is restricted for units this old. Buyers can’t use their CPF either for properties that have only 30 years or less left on the lease. Understandably, the value will decrease if you will compare this leasehold to a freehold that is just as old.
The above must also be viewed with the knowledge that in reality, very few properties get to be that old before being subjected to redevelopment. As far as we know, the oldest condos (such as Lutheran Towers) were finished in 1974 and thus there are no condos that are now at that point of their lease. There is a huge chance to residents will agree to an en-bloc if their condos only have 30 or even 40 years remaining. (Note that with public housing, the Selective En-Bloc Redevelopment Scheme (SER) tends to renew HDB flats way before their lease gets to that point).
- Freehold has a better en-bloc price, in theory
A freehold development should have a higher en-bloc value because the owners are letting go of a lot. In contrast, a leasehold unit nearing the end of its lease should have a lower price based on the theory that the owners wouldn’t possibly be making much from it in the few years it has left.
If this theory is as clear cut as it would seem, one just has to place side by side freehold and leasehold units’ en-bloc prices along with a statement saying “This development is a leasehold that’s why it is cheaper”. However, what happens in reality points out that this oversimplification can be misleading.
There are several more factors that affect en-bloc offers other than being leasehold or freehold. Some of these are the zoning laws, the state of the market, and the amenities available. An example is what might be the case of the Peace Mansions wherein the zoning laws states that a condo of equal height cannot replace the freehold development. In this scenario, the en-bloc price will probably be lower regardless of it being a freehold because the limited vertical space means that there will be fewer units to sell. Available amenities also affect how developers formulate their en-bloc bid. Are there nearby malls and schools? How about proximity to train stations? These factors as well as future market behavior make it tricky to pin down pricing especially as no one can predict exactly what will happen 30 or 40 years from now.
- Leasehold is more advantageous for rental yields
In terms of rental yields, leaseholds have the upper hand as they are generally cheaper. Tenants are not concerned as well if the unit is freehold or leasehold. To put this into numbers: a leasehold condo bought for $1 million and rented out at $3000 monthly will have a rental yield of 3.6%. On the other hand, if you bought its freehold counterpart that costs 15% more at $1,150,000, there’s no guarantee of a higher rental income as tenants don’t care if the unit is freehold or leasehold. So if you will still be getting the same monthly rental income of $3,000, this means you only have a 3.1% rental yield.
For this reason, some landlords look into purchasing leasehold properties that are older as they will most likely cost less, with the potential of higher rental yield.
- Freehold advantage looks better on paper
Proving the freehold advantage seems to be more of an academic exercise, with the assumptions leaning towards the theoretical rather than practical when it comes to investing in property. As mentioned, one cannot easily settle which one is more advantageous for investors because most assumptions are hypothetical and there will be real-life factors that could disprove what looks logical on paper.
What investors need to do then is to keep in mind some key principles such as the prices of other properties in the area, the rental yield, and the amenities included in the URA master plan. These hold more sway in the real world than whether a unit is leasehold or freehold.
Homeowners are advised as well not to make assumptions that are too far off in the future, such as whether your grandchildren will be living in the same unit. Family situations can change as well as the actual living environments. Family members may move overseas or you’d like to have a change of scene after 40 years of living in the same place. Thus, before shelling out for the premium price of a freehold unit, have a think if you really need to hold on to a property for 99 years.