How to Decide Between A Freehold or A Leasehold Property
In general, freehold properties are given a higher regards in terms of value in Singapore.
When asked to chose between a leasehold or a freehold property, most people will tend to gear towards freehold properties.
While it is technically true that freehold properties last forever ( other than the fact that the government can still take it back when they need the land ), does that mean that it will always be the better choice of the two?
If you be considering between a freehold or leasehold property, here are the main 5 factors that you should consider.
Affordability
Purpose of the property - own stay or rental
Long term stay or short term stay
Location
Size of development
Affordability
When comparing a Freehold and Leasehold property, the immediate difference will the the price point.
Freehold VS Leasehold Price Difference since 2012
Looking at the graph above, a freehold non landed property is generally about 20% higher than its leasehold counter part.
Depending on the unit size that you intend to purchase, this 20% difference could often mean the difference in being able to purchase a unit of a bigger size when purchasing a leasehold property.
If you have a budget of $1.5m, you might only be able to buy a 2BR unit vs a 3BR unit if you are going for a leasehold property.
Identifying your affordability with the unit size that you are intending to purchase will assist you to streamline your entire search process and determine your selection much faster.
Purpose of Property - Own Stay or Investment
Freehold VS Leasehold Price Growth since 2012
If you are an investor who is looking at making the most out of your investment, you will be glad to know that although leasehold properties are cheaper than freehold, they actually performed better overall in terms of growth.
According to the chart above, leasehold properties in fact grew 12% more than freehold properties in the last 10 years.
However, take note that this is only half of the equation as investment properties will also need to factor in the rentability and rental yield to make it a good investment.
Having said that, it is quite certain to say that there are more leasehold properties that has a higher rentability and rental yield than freehold properties.
If you are using the property for your families own stay purposes, then I would say that both will be equal as other factors like convenience, education, amenities and transport will be a higher concern to you when selecting the property.
Let’s say if the location that you want your family to stay in only has a choice between older leasehold properties or freehold properties, then I would say go for the latter.
Freehold properties tend to be able to hold their value better than leasehold properties as they do not have to be concerned about lease decay.
A freehold property will also be more desirable if looking at the angle of enbloc potentials as it is more beneficial to developers to procure land with freehold tenure than leasehold tenures.
Long term stay or short term stay
Property Ownership As Part Of Legacy Planning
Do you have intentions of passing down the property to the next generation?
Or do you simply intend to stay for a short time frame of 5 years and move on to the next property?
As pointed, the only way that you can pass down a property to the next generation is if the property still belongs to you are the time of your passing. That can only be achieved with freehold properties.
Even thou the property might go through a collective sale if it is in a desirable location, it will most likely fetch a very handsome price.
For leasehold properties, the value of the property will began to depreciate once it crosses a particular age. In the case of most properties, that age is between 30-35 years.
And it will continue to depreciate at a much higher rate the older it gets.
So if you intend to pass down the property to the next generation, the safer bet will be to go for freehold properties.
If your intention is to only stay for a couple of years before moving on to the next property, then leasehold properties might serve you better.
Their entry price will be lower and usually younger leasehold properties outperform freehold properties in terms of short term growth.
Location
When picking a property, location will account for at least 50% of the reason for purchase.
When zooming in to a particular location, price of properties will also defer greatly.
Freehold VS Leasehold Properties in District 5
Freehold VS Leasehold Properties in District 15
When looking at the charts above, freehold properties performed much less than leasehold properties in D5 and the reverse is true for D15.
This is because the volume of freehold vs leasehold properties in the area differs greatly.
So if you are intending to purchase a property in any area, focus on the demographics of your future buyers and see if it fits what your property can offer in the future.
There are leasehold properties that can defy the lease decay and still manage to grow in value if they have a particular advantage in the location.
One of the reasons might be the presence of a popular school that is within the 1km of its vicinity.
Size of development
While location plays a big part in choosing your property, the size of the development can be a big deciding factor too. Taking D15 in particular, the area consist of a lot of boutique developments which are smaller than 50 units.
Number of boutique developments in D15
But in a total of 287 developments, how many of them had a growth of at least 20% over the last 10 years?
Number of boutique developments in D15 with growth of more than 20%
Only 19 of them!
In comparison, while there are lesser large developments in D15, the percentage of developments having at least 20% growth is much higher.
Number of developments with more than 150 units in D15
Number of bigger developments in D15 with growth of more than 20%
Out of a total of 39 developments, 17 of them seen at least 20% growth in the past 10 years. This is at least 50% of all the developments vs less than 10% of all boutique developments in the same area.
While there are other factors like unit size, and immediate amenities and schools to consider, this is quite evident that larger developments outperform boutique developments by a fairly wide margin.
One of the contributing factor is also the fact that boutique developments tend to have less facilities, higher maintenance fees and less transactions over the years, thus affecting its valuation.
Conclusion
In Summary, these 5 simple but important factors can help you form a game plan in deciding whether you should look at purchasing a freehold property or a leasehold property.
If you require an in-depth consultation to assist you to decide whether you should be looking at the freehold or leasehold property in your area of preference, book a consultation with me and let me help you with that.
