Freehold VS Leasehold – Which Is Better?
Ah finally, the age-old question and debate about which is the better one.
Ask any person on the street “Leasehold or Freehold” and 9 out of 10 will tell you “FREEHOLD OF COURSE!!”
If that truly is the case, then why does it seem like the debate about it never ends?
While it is obvious why most people seem like diehard fans of the “Freehold” camp, in this post, we seek to analyse both camps from a balanced viewpoint, as well as debunk some of the common myths of both, though more of “Freehold” in particular since they’re everyone’s favourite!
Freehold = No definite end to ownership of unit/land. Due to largely similar behaviours of 999-year leasehold properties (they are not exactly same as freehold) to freehold ones, in this post we shall classified them both under the same category of “Freehold” here.
Leasehold = Specific time limit of ownership. E.g. 60, 99, 103-year leases for residential For simplicity, we shall assume a 99-year lease when we mention “Leasehold”, unless otherwise stated.
It is worth noting that both are still subjected to the Land Acquisition Act by the State, which does not take into account the land tenure, but is more dependent on the authorities’ assessment of public needs.
1) Freehold is always more profitable than leasehold!
Yes we understand…everyone would prefer to stay safe and go for a freehold property instead of a leasehold one in case anything goes wrong we just hold right?
One thing we need to be clear is that developers know exactly how buyers think. They know that buyers always prefer freehold developments over leasehold ones, and most of the time, are willing to pay a premium price for it.
Let’s take a look at two condos in the prestigious Core Central Region (CCR) of District 11, which were both launched in the same year of 2009, one freehold and one leasehold, jus 200m away from each other.
In addressing Myth #1, profits are the key unit of measure for success.
If we compare the two condos, they both reached their peak prices at different timings: the Freehold in 2014 and the Leasehold in 2013. To be fair, we try to make Apple-to-Apple comparisons, so we chose to take their respective peak year prices.
From 2009 to 2014, the Freehold hit a maximum profit level of 22.1%, while the Leasehold hit a maximum of 55.18% in a timeframe shorter by one year.
This means that for a $1 million investment in each condo, the Freehold peaked at $221,000 profit in 5 years, while it took the Leasehold only 4 years to peak at $551,800 profit, before costs of course.
If you as an owner choose to hold both till today, your Freehold condo would have returned only 10.52% profit in 11 years. On the other hand, the Leasehold condo would still have bagged an impressive 50.60% profit in the same timeframe!
You may be thinking.. “Nevermind, I can always hold on to my Freehold and wait!”
Perhaps you may be right. But for now, unfortunately, based on the price movements over the past 7 years, it doesn’t seem like the Freehold condo tend to hold a significant advantage over the Leasehold condo in terms of appreciation potential as well.
Then why pay extra for the freehold?!
Why is this so?
There are many factors at play here, which we wouldn’t be able to finish today if we dive into all of them.
One of the factors that could have possibly resulted in this phenomenon is the significant gap in Entry Price.
It costs $17xx psf to get into the Freehold condo in 2009, and $10xx psf to get into the Leasehold condo, a whopping 70% price premium for the “Freehold” label!
Interestingly, to put into perspective, in today’s market, the premium price for a freehold condo comparable is only about 20% more than a leasehold project…for the rightly-priced projects of course.
We think it goes without saying that the higher the profit margin the developer is making, the lower your profit margin when you are going to sell in the future.
And with such a large premium for the Freehold condo over a Leasehold condo launched at almost the same time, it would be really hard to get the market to accept having to shell out more profits for your 10-year old Freehold in the future.
2) I can always hold on endlessly to my Freehold! Time is on my side!
Yes you’re right too.
As we mentioned earlier, nobody is going to take away your property in time to come, unless the authorities come knocking one day to exercise the State’s reversionary interest in your land early and compensate you only at market price. Touch wood!
Another point that all property owners must take note of is the running costs involved in the upkeep of their properties. It includes costs like condo maintenance fees, mortgage loan interests, replacements for wear-and-tear etc.
As time goes by, as long as your property purchase doesn’t turn in a gross profit, these running costs will continuously eat into your savings.
Meanwhile, from a prospective buyer’s point-of-view, the façade of an elderly condominium would unlikely surpass that of a newer, more modern one, regardless of the tenure of the property.
Not quite the image of a “condo” in most people’s minds nowadays
“TT, buyers can always a full-blown renovation and the unit will look brand new!”
Yep, that’s a common thought for most of us, myself included. Until I did just that for my first property in the form of a HDB resale…and eventually realized I faced at least 3 different water leakage points in my unit during the course of my Minimum Occupation Period.
Additionally, the overall maintenance of the condo isn’t something that a sole unit owner will be able to have a complete say about. Well, that actually belongs to the MCST, or rather the condo management in layman terms.
To put it across, we can think of it as a car purchase.
Given a choice, would you rather pay more for a newer, more modern car…or a seasoned and worn one that has lost a large part of its shine?
Which will you choose?
Sure, there will be people who appreciate old antique cars. But we suppose the overwhelming number of brand new cars on the road seems to paint us a pretty clear picture.
3) I get it now…so Leasehold is definitely better & more worth than Freehold!
Before we arrive at that conclusion, let’s take a look at another case study involving another two Freehold and Leasehold condos in D20, just across the road from each other and both within “a skilled javelin’s throw” (stone’s throw is overrated) from an MRT station.
Uh huh.. you didn’t see the wrong thing.
The Freehold here somehow outperforms in terms of 10-year returns, 42.49% compared to the Leasehold’s 30.90% appreciation.
This is getting confusing, isn’t it?
Probably your expression right now
Another of the many factors we have to take into account is the transaction volume of the condominiums.
A healthy transaction (buy-sell) volume will give rise to a greater potential for property price appreciation.
This is because bank valuation figures are constantly revised upwards or downwards depending on the prices of the units transacted, which in turn affects subsequent valuation prices of the remaining units.
However, transaction volumes in freehold condominiums can get rather tricky, as owners are mostly not in a rush to sell due to the non-existent lease decay.
As much as this seems like freehold owners are in control of their profit margins, it actually works against them as a lack of transaction volume from owners reluctant to sell would hinder in unit price appreciation from lacklustre valuation revisions.
So what should be my choice?
The one with the final answer is not us, but yourself.
The most important thing is to find out what are your objectives and priorities, and hence work that out properly with a trusted consultant.
For instance, if you are looking to maximise your capital gains for investment purposes, a freehold or leasehold tenure shouldn’t be the deciding factor alone.
Other factors like your investment horizon also plays an important role in your decision making process.
Ultimately, property purchase is a major commitment for most people, since a large majority of their net worth is decided by their real estate decisions.
After all, if it is so easy and straightforward then nobody will ever lose money in properties.
The least that you can do for yourself and your loved ones is to seek professional guidance to equip you with the right knowledge to make the best-informed decisions for yourself.
The right consultant should only help lead and guide you towards your own objectives, instead of you following them where they want you to go.
However, if you feel that my opinion may be of benefit to your decision making process, do drop me a text or give me a call at 91499929 and I will do my best to assist you in your next move.