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Which is Better: Freehold vs. Leasehold Condo Singapore

Freehold versus leasehold condo Singapore about which one is better.  The biggest argument stems from the premium each agreement provides.  While it may seem obvious that one has greater returns than the other, when they are broken down, it is hard to differentiate.

The typical answer given for a premium on the rentals is about 10 percent.  That of course, cannot be true, especially when certain clauses can appear in agreement.  One needs to take a closer look at the numbers to understand what they are implying.

When you try to find the difference between a 60 and a 99-year leasehold, the difference does not get to 10 percent until it hits the 78-year mark.  The Singapore Land Authority (SLA) crunches the numbers to determine the discount rate on various tenures.  The math used by the SLA is straightforward, but different factors can affect the calculation.  There isn’t a simple decay formula that can apply to a leasehold agreement.

 

Freehold versus Leasehold Condo

A leasehold does have a limited lifespan, and the factors should reflect a higher return on investment.  The return on capital depends on the lease’s lifespan and would make sense that it present an option of lower risk and higher return when compared to a similar freehold agreement.

In practical terms, the leasehold value should have a greater discount than freehold leases in the purchase price.  Leaseholds provide a higher rental yield than a freehold agreement since priced rents are not affected by the tenure of the project.  Decaying tenure is where the excess of returns comes from, and that is why a leasehold agreement has a higher rental yield.

 

Price Gaps

Since Q3 2013, freehold non-landed homes have dropped more than four percent.  Christine Li, a research director for Cushman & Wakefield, said that the price gap had closed significantly.  “In 2002-2003, the difference was around 35 percent between freehold properties and a non-landed lease.  Recently, the gap has shrunk down to around 15 percent,” Li stated.

“It is possible that the government may not loosen cooling measures, and the Total Debt Servicing Ratio (TDSR) doesn’t let up on en bloc sales, leasehold properties can outdo freehold properties.  Amenities and location do contribute to the attraction of leasehold properties,” Li went on to say.  There are some that believe the numbers are skewed, due to the number of sales.  The lower transaction rates may be a contributing factor to the shrinking gap.

Other factors, such as a collective sale can contribute to the price performances of the two types of leases.  When the en bloc market is in demand (such as 2014), the price gap reached up to 44 percent, which was greater than in 2013 (33 percent).

 

What is the Better Option?

If you are an investor and torn between these two choices; freehold versus leasehold condo, a freehold property might sound like the logical decision.  There’s no limit to ownership with a freehold agreement, which looks appealing.  Though, depending on the end goal, an investor should consider a leasehold, as well.

If an investor gets a leasehold for 99 years but sells it after 10, the new owner takes over the remaining lease.  There is a higher initial cost for a leasehold since it is an indefinite tenure.  It is ideal for land, but not so much for condos.

In July and August of 2014, 16.5 percent more paid towards a freehold home in the Core Central Region.  In the Outside Central Region, premiums were up to 44.5 percent for freeholds.  It is not surprising to know that 99-year leasehold homes performed better in gross rental yields in that same time frame, in the Core Central Region.  It turns out it is a better investment than a freehold lease, earning about 25.8 percent more than the freehold leases.

The Outside Central Region showed that freehold owners fared better than their Core Central Region counterparts.  The Land Tenure Rule points towards the leasehold spectrum since there is a higher return.  Not only that, but freehold condos are more expensive, and if you do not plan on using it for a long time, it is throwing money away.  If you are a landlord, you would be better off going for the leasehold condos.

 

Conclusion

There is hard data that shows freehold investments can become a burden over time, and perform worse than their leasehold counterparts.  You should consider the length of time you want to keep the condo and whether it is worth the long-term investment. So freehold versus leasehold condo is really up to depend on your investment goals.

Talk to Dylan about your investment goals and he will be able to come up with the proposal on how can you reach your goal with the lowest risk and still gives you a good return. He will also share with you Singapore property market direction and policies that might affect you.

If you have any questions, you can contact Dylan at 94567022 or at dylan.tanbt@gmail.com to help you answer any investment questions regarding freehold and leasehold properties.