Freehold May Not Be Forever

Source : TODAY, Weekend, February 23, 2008

So when will freehold condo prices fall to match those of leasehold?

FREEHOLD condominium ownership is no longer forever in Singapore, yet the myth of freehold property being held in perpetuity and resultant higher pricing linger on.

While it may seem like Singaporeans will have a hard time letting the myth go, it may only be a matter of time until logic overcomes emotion and premiums for freehold condos drop.

Freehold has long been the preferred property choice in Singapore for almost anyone who can afford it, whether it is a house or a condominium.

The marketing pitch is that the "ownership of freehold property lasts generations", as SGHousing puts it, and the legal concept is that "an owner will have the full ownership of the land and the property in perpetuity", as CKS Property Consultants has said.

Ownership forever certainly does command a premium. The difference in price between 99-year leasehold properties and freehold properties is about 20-25 per cent, according to CKS, and it can be as much as 40 per cent or more. And, traditionally, why wouldn't freehold cost more? If you are looking out for the interests of future generations, then the best way to assure their well-being is to pay more for freehold property.

Leasehold is different because "unlike freehold property, you cannot bequeath it to your descendants when the lease is up" as one writer in an online forum puts it.

As Singapore developed, most freehold property owners have also gained even greater confidence that their property will not be taken away.

In days of yore, the Government readily exercised its rights under the Land Acquisition Act to convert kampungs and plantations into Housing and Development Board (HDB) estates and roads. As the amount of privately owned land diminished, so has the frequency of the Government acquiring freehold property for other development. Bequeathing freehold property to the next generation then seemed more certain.

The reasons for paying more for freehold go deep, and the difference may result more from emotional and cultural ties than anything else. Whether it is the ancestral village, the ancestral home or the old family homestead, families have long been linked their family home by strong emotional cords.

Freehold property for condos or houses may be the Singapore equivalent of the ancestral home, so it has retained an aura of being held in perpetuity — perhaps made even stronger by the contrast with the more prevalent leasehold property in Singapore.

Since the owner has had a right to keep it forever and pass it on to the children, it feels like freehold should indeed command a premium.

It has also become more apparent that the premium attached to freehold is not just based on economics. With banks making loans for properties with shorter leases remaining, and with some leases being extended, even more of the differences used to justify higher prices for freehold property may have disappeared.

And if the issue were just financial, so that parents wanted to pass on profits from an en bloc sale to their children, then it also should not matter whether the property was leasehold or freehold as long as it was sold for a gain.

In reality, though, freehold has changed and it is no longer forever. If 80 per cent or 90 per cent of the owners agree to sell a condominium, even if it is freehold, then the other owners that planned to pass the property on to their heirs will see their dreams vanish.

The changing rules for condo ownership have thus negated much of the difference between freehold and leasehold. A freehold condo that the owner intended to bequeath to the next generation can literally be swept from under their feet, just as would happen with the sale of leasehold property or the end of a 99-year lease.

But if the legal changes on condo sales have erased the reasons for paying a premium, since it is increasingly unlikely that one will own a freehold condo in perpetuity, then why haven't the mindset and the differential in pricing changed along with market practices?

One reason may be that the shift has been so sudden and so subtle that pricing does not reflect the change. Most owners may not really have reflected upon the idea that freehold is actually more like leasehold and they have not changed their traditional mindset.

The idea that freehold property lasts forever and should cost more has become so embedded in our psyche that the concept of freehold being virtually the same as leasehold has not changed, even though freehold property is being sold when some owners want to hang on.

Another reason could be that since freehold property costs more and is perceived as more prestigious, owners and developers and property agents all have a vested interest in maintaining the myth of the superiority of freehold property to maintain premium pricing.

Who would want to point out the obvious and see the value of their property or their commission drop?

On reflection, though, more owners are likely to begin to realise that freehold has become much more like leasehold.

And since the prevalence of 99-year leases means that most are likely to be extended or renewed anyway so that Singaporeans can continue to live here, long-term ownership of 99-year leasehold HDB flats or condos seems as likely to continue as ownership of freehold.

When, then, will the reality of market forces cause prices for freehold condos to begin dropping to leasehold levels? When the realisation that freehold is not really freehold strikes home, what will the price decline be for such properties?

It remains to be seen when a change will occur, but look out for a drop in freehold prices as buyers finally realise that freehold, 999-year and 99-year condos really are not all that different. All may be equally likely or unlikely to stay in the family for perpetuity.

Richard Hartung - The writer is a consultant who has lived in Singapore since 1992.