Breaking the New Launch Conflict: Leasehold or Freehold?

The ultimate question many homebuyers struggle with is the tough decision between choosing between a freehold property and a leasehold. Traditionally, the older generation prefers freehold properties as they can be kept for an infinite amount of time. But you should never leave such an important decision as buying a home to emotions, it should be supported by facts and data.

The longstanding common misconception surrounding the debate over freehold & leasehold homes is that many believe that freehold properties tend to be more valuable, thus reaping a profit is almost guaranteed. Therefore, people prefer owning freehold properties as they think it'll bring them higher financial gains. But is this statement true? We shall explore the pros and cons of freehold and leasehold properties, and you can decide for yourself.

*Note that when we refer to leasehold, we are referring to 99-year leasehold, because 999-leasehold is essentially viewed as a freehold in Singapore's context.

Paying a premium for freehold, how much more?

Source: PropNex Investment Suite

In the current market, the price difference between a freehold and a leasehold is between 15 per cent to 20 per cent, which has been quite a consistent figure for the past 10 years. Purchasing a freehold property usually comes with a premium but given the fact that you can own it indefinitely, it comes as a worthy price to pay for many.

Leasehold Performs Better in the Near Term

Source: PropNex Investment Suite

All across the private residential condominiums in Singapore, leaseholds have grown substantially by 45.9 per cent in the past decade (2013-2023). And freeholds have gone up by 35.9 per cent, shy of about 10 per cent as compared to leaseholds.

The reason for leasehold's growth is still largely attributed to its affordability as compared to freehold. On top of that, leaseholds are usually better situated as compared to their freehold counterpart, fuelling the demand over the years.

It is to be noted that because freehold properties are sold at a premium as mentioned earlier, that is why it takes longer for them to hit various growth milestones like leaseholds. Realistically, leasehold and freehold are essentially similar in terms of their build quality, the biggest difference being the tenure.

Leasehold Sees Better Rental Yield

Tenants generally disregard a property's tenure as it does not affect the way they live, they are usually more concerned about the price of rent. Consider two developments standing side by side, each boasting comparable qualities, with the only discernible difference being one's freehold status and the other's leasehold status. In such a scenario, the distinction between the two may hold little significance for you as a prospective tenant.

Hence, opting for a leasehold property often yields a higher rental return compared to freehold properties, determined by dividing the annual rental income by the property's total cost. This aspect is particularly noteworthy for investors prioritising profit over personal use, as the annual rental income remains steady despite the difference in your initial cash overlay.

Facing Lease Decay Head On

Lease decay is a process and an effect of a leasehold running down its lease. As the clock ticks down on the lease, the owner of the property is closer to returning the property to the landowner. Apart from the leasehold period, lease decay affects the property price as well.

The Bala's curve is derived from the Bala's Table that was adopted by the Singapore Land Authority (SLA).

According to the Bala's curve, the vital concern of owning a leasehold is that its value depreciates over time. Even though the reality is that leasehold property's value doesn't depreciate as linearly as Bala's curve stipulates, it's a rough guideline to work with. In fact, there have been properties (Neptune Court, Orchard Court, Mandarin Gardens, Hillcrest Arcadia etc..) that defied the Bala's curve. Hence, it is critical to understand the market.

As the property ages, it also gets harder to sell mainly due to financing issues, such as difficulty in securing a mortgage loan from the bank.

The En Bloc Advantage

It is a relatively known fact that freehold properties have an unequal advantage when it comes to en bloc. The thing is, freehold properties pose lesser complications when going through an en bloc process due to the fact that it does not have a lease and is protected against lease decay.

And even though buying a freehold property comes with a premium, owners tend to see themselves commanding a better price in an en bloc - speaking generally. In actual fact, the price of an en bloc property is largely based on location, and also the physical condition of the property as it would deteriorate with age.

What's your decision?

I'm sure by now you should know that purchasing a property entails far more than just grappling with the choice between freehold and leasehold. It's a decision that requires careful consideration of numerous factors. Property ownership represents a significant investment, one that carries substantial financial obligations. Therefore, it's crucial to thoroughly explore all available options before making such a significant commitment. From assessing your budget and financing options to evaluating the property's location, size, amenities, and potential for appreciation, each aspect plays a pivotal role in ensuring that you make an informed decision that aligns with your long-term goals and aspirations. By conducting thorough research and seeking expert guidance, you can navigate the complexities of the real estate market with confidence, ensuring that your investment brings you not just a place to live, but also long-term security and satisfaction.

Understanding Singaporeans' love for freeholds, we have another article pointing out three important factors when looking at freehold properties here.

Views expressed in this article belong to the writer(s) and do not reflect PropNex's position.