Purchasing a new property is an exciting step, but one that comes with many factors to consider before a decision can be made. If you are still in the early stages of the process, you may be wondering what the difference is between “freehold” and “leasehold” properties – and more importantly, which one is right for you.
Well, look no further! In this article, we are going to walk you through the key features, advantages, and drawbacks of each type of property, to help you make a more informed decision in choosing your next home.
Freehold and Leasehold Properties: What Are They?
The key difference between freehold and leasehold properties is how long the property can be held. You see, when you purchase a freehold property, you are the sole and complete owner of the apartment. This means that the home is yours indefinitely, and you are even free to pass it on to future generations and generations that come after that if you so desire!
But this is not necessarily true for leasehold properties – although you may own a leasehold property after you purchase it, the land it’s sitting on still belongs to the landlord or the government. You have simply “leased” the land for a period of time, more commonly 99 years, after which the property will return to the landlord’s or government’s ownership. This means that even though you are happily living and enjoying the space during the period of your lease, you will have to find a new place eventually when the lease ends.
Freehold and Leasehold Properties: Advantages and Disadvantages
Now that we have covered the basics, what are the benefits and shortcomings of each property-type? The main factors to consider are, arguably:
Purchase cost
Rental income
Maintenance and Repairs
Resale Value
Length of time needed
Purchase Cost - Winner: Leasehold Properties
Let’s start with the beginning of the story: when you first buy the home. In general, freehold properties are much pricier than leasehold properties, mainly because the buyer can technically own the home forever. So in the short term, leasehold properties are definitely more affordable!
The low prices actually make leasehold properties very popular among the younger crowd, especially couples who are looking to purchase their first home. This is because the high affordability of these homes are definitely a major selling point.
Rental Income - Winner: Leasehold Properties
If your main intention in buying a property is to rent it out for extra cash, then a leasehold property may be the way to go for you! You see, the length of time on the lease would not matter much to tenants who are renting your place for a short while – provided the lease doesn’t run out while they are living there, of course.
As a result, given a freehold property and a leasehold property that are in similar condition, have a similar size, and are located in similar regions, the two property types would fetch about the same rental rate! Thus, simply because leasehold properties have lower purchase prices, you might get more bang for your buck by renting out a leasehold property, as compared to a freehold property, keeping all other things equal.
Maintenance and Repairs - Winner: Depends
All properties regardless of their tenure are usually good to begin with, but be wary if you are purchasing properties that have been around for quite a while. For many, it’s usually the older freehold properties that they are willing to purchase, some potential problem areas include, peeling paint, water damage, the presence of insects or termites, and the list goes on, and this may potentially cost you a lot more in maintenance and repair expenses.
Resale Value - Winner: Depends
Since freehold properties are generally more expensive at purchase, they will also sell for a price approximately 13% higher than similar leasehold properties. This is especially true if a leasehold property does not have many years remaining on its lease. When a leasehold property is bought new in Singapore, it commonly has either 999 years or 99 years remaining on its lease – and it is at this point that a leasehold property would be at its highest value (without taking future renovations into account). Over time, however, the value of a leasehold property would depreciate as the number of years remaining on its lease decreases.
Specifically, the market rate offered for a leasehold property decreases significantly once the lease hits the 78-year mark. Another significant decrease in the market rate will occur at the 30-year mark, where the property has only 30 remaining years before it is repossessed.
However interestingly, as freehold property owners usually buy their home with the mindset of passing it down to the next generation, you will notice much lesser transaction volume in the estate when you compare it to those of a leasehold property.
Why does the transaction volume matter? It is through these transaction volumes that influences the increase of the property price in the estate. In this sense, leasehold properties generally, will have a higher price increased as compared to freehold properties, in the short run.
Length of time needed - Winner: Depends
Because of the potential decrease in leasehold property prices after a certain duration of time, it is important to check the length of the lease remaining before you commit to the purchase of one. Evaluate the number of years remaining on the lease to see if the length would match your needs well. For example, if you are looking to buy a “forever home” or a property you want to hold for a long time, definitely go for a freehold property over a leasehold property that has few years remaining. Yes, the price will be a little higher for a freehold property, but for you, that could be far better than having to make an unwanted move if the lease period runs out while you are still living there.
On the other hand, if you are, for whatever reason, only looking for a short stay in a home, then even a leasehold property with slightly fewer than 30 years remaining might suit your needs well. That’s because the price is likely to be significantly lower, and if you plan to resell the house in just a couple of years, the property value may not have decreased significantly from the time you have bought it. So, in theory, you could get a house at a low price, use it as you please for the short time you need it, and then sell it again at little loss.
En bloc potential - Winner: Depends
We haven’t quite talked about the possibility of an en-bloc sale – when a single buyer (usually a developer) purchases the entire apartment building, including your apartment and the land it is sitting on. Not everyone in the building needs to agree to an en-bloc sale, so this might sound like a bad thing at first. But in reality, en-bloc potential is a major selling point even in many freehold apartments!
You see, because freehold owners own their houses indefinitely, they have no real need to sell it, which would compel the buyer to offer a rate that is higher than the market value to convince 80-90% of the residents in a freehold building to agree to the sale. This would translate to a much higher bidding price, if the owners are willing to let it go, that is.
In contrast, leasehold property owners might be more compelled to sell their home if the lease is ending, because this will cause their home’s value to drop to zero. So, buyers are likely to offer a lower price for leasehold properties in an en-bloc sale situation. However on the other hand, this also means a much higher chance of achieving a successful collective sale, as compared to a freehold property.
Investment value - Winner: Depends
Just to synthesize the points above, you can think of freehold properties as a “long term investment”, and leasehold properties as a “short term investment”. Because even though the returns for freehold properties may take longer to accumulate with the higher purchase cost, they do add up over time with their indefinite holding period.
For example, even though it’s a little less worth it to rent out a freehold property at first, this rental income will theoretically be available to you and all your future generations. In addition, in the event of an en-bloc sale, your home would likely fetch a higher price than similar leasehold properties. On the other hand, leasehold properties have a much higher rental yield, but do note on the significant decrease in value when the lease remaining dwindles. Well, at least there may be a chance still, to cash out if an en-bloc sale happens.
Additional consideration: Location
So far, I’ve spoken mainly in generalities, comparing between two theoretical properties that are virtually identical, except for their property type – one being freehold and the other being leasehold. But that’s not what we get in the real world, is it? In reality, location heavily affects the property value as well. Because of this, a leasehold property might even sell at a higher price than a freehold property if it outstrips the freehold property in terms of its locations. That is, if the leasehold property is located in a prime location with more shopping locations nearby, easier access to public transport systems, a better selection of schools and childcare centres nearby, and other amenities located only a stone’s throw away. All these factors can reverse the trends highlighted above – so it’s always important to access a properties location, and how well it can serve your needs.
Additional consideration: Condition of the home
Another factor that could potentially flip the resale value trend of the freehold and leasehold properties is the condition of the home itself. Buyers are attracted to beauty and convenience within a home, so if you are selling a well-maintained leasehold property, it might not necessarily sell at a lower price than a freehold property, even one in a similar location.
There are many ways homeowners can boost the market value of their homes to buyers. One of the most important of these include creating a clean and modern kitchen and bathroom. Interior designers find that these two rooms are some of the heaviest influencers on the resale value of a home. Other factors such as having ample lighting, updated appliances, more counter space, and the presence of a multi-purpose space can also boost the resale value of homes.
Conclusion
In conclusion, the choice between purchasing a freehold or leasehold property is far from straightforward. While trends can sometimes govern many aspects of these property types, which property type is “better” ultimately depends on your individual needs and circumstances. That said, the pointers above can help you make a more informed decision on your future home. Happy home-viewing!