Leasehold Vs Freehold

Source : The New Paper, 10 Feb 2007

In boom times, Lease is more

Which would you rather buy - a leasehold property or freehold?

For many Singaporeans, it’s a no-brainer.

Why? Ownership of the freehold property lasts generations (unless it’s acquired by the authorities) compared to leasehold, where the fear is that after 99 years, you may lose your home.

But if the largest en-bloc sale on Tuesday is any indication - where CapitaLand paid a staggering $548 million for the leasehold Gillman Heights - it just goes to show that en-bloc possibilities are not limited to the freehold market.

Just last month, the leasehold Minton Rise at Hougang was also sold en-bloc for $209 million to the Kheng Leong group. With the market looking up, this leasehold or freehold dilemma will be on many home-buyers’ minds.

Consider this: The number of new homes sold hit a staggering 11,147 last year, far exceeding the sub-10,000 units sold during the last three peaks in 1996, 1999 and 2002, according to figures released by the Urban Redevelopment Authority last month.

For a home-buyer, the price difference between a freehold and leasehold unit in the same area could be a premium of as much as 40 per cent.

Here’s an example: Four years ago, we compared some properties in the East Coast area, such as the freehold Amber Park and the 99-year leasehold Mandarin Gardens.

Both units were three-bedroom apartments of about the same size.

Back then, Amber Park was about 15 years old, while Mandarin Gardens was about 21 years old. We polled 50 people then and asked: ‘If you have to live in one of the above developments, which would you choose?’

Without knowing the price and land leases, 42 out of 50 chose Mandarin Gardens - the main attraction being the condo’s huge grounds and facilities.

But when told that Mandarin Gardens is leasehold, 46 out of the same group of 50 chose Amber Park.

Today both properties have seen the same price increase of about 25 per cent. (See comparison above.)

But if you had bought the two properties to rent out, you’ll realise that Mandarin Gardens gives you more bang for your buck.

Currently, the monthly rental at Amber Park is about $3,500.

This means a yield of about 4 per cent a year ($3,500 x 12 months divided by the property value of $1.07m).

In comparison, the monthly rental at Mandarin Gardens is about $2,800.

But its rental yield of about 5 per cent a year is better than Amber Park ($2,800 x 12 months divided by the property value of $668,000).

ERA Singapore vice-president Eugene Lim explained:

‘The tenant doesn’t care if the property is leasehold or freehold. If the age, size, location and facilities of the two places are about the same, the rental should be similar too.’

During a boom, prices of both types of properties will appreciate. The reverse happens when the market dips, said Mr Colin Tan, Chesterton International’s head of research and consultancy. He said: ‘Some may say that freehold has better capital gains. But it’s inconclusive if one type of tenure is better than the other. In some areas, the freehold gains are better but in other areas, leasehold does better.’

Tenure aside, the location, the surroundings, and even a new MRT line does affect property prices.

In the past, it was true that a leasehold property’s value depreciated sharply after 60 years.

Then, you couldn’t use your CPF to pay for properties with less than 60 years on the lease.

This forced potential buyers to use only cash to pay for the unit if bought at the cut-off mark.
That affected the asking price drastically.

This policy was revised in 2005 for properties with less than 30 years on the lease, which is good news for leasehold property owners.

For leasehold properties, however, going en-bloc is not a given compared to freehold ones. This is because there’s still the issue of lease top-up which needs approval, property watchers said.
And for that to happen, the plot ratio must be hiked where there is potential for intensifying the use of the land.

For auditor James Tang, 37, property location is foremost on his mind.

His dream is to own a freehold property, both for the prestige factor and also so that the place will be ‘mine forever’, he said.

He said: ‘It’s a notion that we want to leave something for our children that can last forever. But knowing how upgrade-crazy Singaporeans are, it may make sense to just jump from a leasehold property to another.’