One question hanging over the heads of homebuyers’ is whether the 99-year leasehold is really worth it, and if they should top up in order to secure a ‘forever’ home. However, does this mean that freehold properties are superior in every way?
As land is scarce in Singapore, properties are usually priced higher compared to other countries, and tied to a lease term.
Just late last year, 191 homes in Geylang were taken back by the government with no extensions allowed due to the end of their lease, which marked a first in Singapore history.
In turn, this has left many wondering if freehold condos are a better choice after all, as it supposedly means that they and their future generations will own the property indefinitely.
Before we dive into the specifics of which is more beneficial, let us first talk about the 4 different types of tenures you will see.
What are the different types of tenures?
*The number of 103-year and 110-year leasehold properties are few, and such units sit on freehold land that are owned by private developers. Towards the end of the lease, the private developer is then able to either re-acquire the land or extend the lease. This way, they are able to keep the land indefinitely whilst selling out lease-bound units.
Though there are 3 different tenures in total, the 999-year leasehold is often grouped together with freehold due to their similarities in duration.
**Though stated indefinitely, in cases where there are future plans for the land the property sits on such as the example below, owners will have no choice but to surrender their units.
What do the tenures entail exactly?
The 99-year, 103-year and 110-year leaseholds are pretty self-explanatory in the sense that once their respective time periods are up, the property will be returned to the state. Though the 999-year is quite similar, many tend to group these with freehold properties due to their longevity which will most definitely last many generations.
Does this mean that freehold will belong to the homeowner forever? In theory, yes, but this is only if there are no sudden plans. For example, if your home is sitting on a plot of land slated for future development like in this case where a 4-storey Thomson Road building was acquired in order to construct the North-South Corridor, it will not matter even if it was freehold.
In such cases, the government will of course offer compensation to the affected homeowners based on the market value of the land. Another scenario will be if sufficient residents agree to an en bloc sale - even if you are unwilling to follow suit, the building will still be sold.
What are the differences between the costs of freehold and 99-year condos?
Generally, due to their longevity, freehold properties tend to cost about 15-20% more than leasehold properties (assuming all other factors are the same). However, if we were to talk about the value of these 2 types of properties, the Bala’s table will be able to offer more insight.
From the table above, we can see that a 99-year lease property at its peak is worth 96% of a freehold’s value. This then drops to 80% at its 60-year mark, 60% at its 30-year mark and so forth.
It is important to note that the value is not depreciating at an even rate as seen from the curve above. Just like how an old HDB drops in value towards its later years, the same goes for an aging condo where in its later 30 years the value drops exponentially.
This will not be a problem a freehold condo will have to face as its lease is still considered ‘infinite’.
So are freehold condos superior in every way?
Surprisingly, not exactly. Though many would assume that a freehold condo would have higher market value as compared to a leasehold condo, it is not always true.
Location still plays an important role - a leasehold condo in the central area would have a higher market value compared to a freehold condo in, say, Woodlands.
It is also important to remember that newer leasehold condos generally perform as well as freehold condos when measuring their value. From SLA’s Leasehold Table, we can see that up till its 78th year, a leasehold condo is still worth 90% of a freehold condo.
Thus, if you are looking at a new launch and not intending to stay for longer than 20-years, it might be more cost effective to opt for the leasehold. On the other hand, if it is meant to be a home passed down for generations, then freehold is definitely the way to go as it will most likely retain its value even if the future generations decide to sell the property.
How will the tenure affect rental yield?
First things first, let's look at the formula in calculating rental yield which is:
Annual rental income / cost of property
Needless to say, the higher the cost of property, the lower your rental yield will be. It is important to remember that when it comes to renting a property, your tenants are not going to care how long the lease of the property is. The most important question going through their heads is more of a ‘how much is the monthly rental fee?’
Of course, factors like location aside, if we assume that condo A (99-year leasehold) and condo B (freehold) are the exact same in location, amenities, etc except for their tenure status, if their monthly rent are the same, condo B will definitely have a lower rental yield.
If you are looking to price up the monthly rent for a better rental yield as it is a freehold condo, chances are tenants will NOT pay a higher rent just because of its freehold status, as it does not affect their short-term stay at all.
If you are looking to invest, a leasehold condo most likely will provide you with better rental yield.
What other factors should you consider?
Though lease is an important factor, other factors that will affect you greatly include its location and whether future developments are probable in the vicinity. A freehold can seem attractive but compare that to a leasehold condo that is nearer to various amenities and your workplace and the latter will definitely be a better choice.
Ultimately, the decision lies in your hands as you will have to factor in all of your considerations to determine which will be the better choice. If location is key, and the only selections left are non-freehold condos, don’t let tenure sway you as it can be taxing to travel long distances daily.
Location can also determine price appreciation, so definitely consider it thoroughly. On the other hand, if it is a home you plan on staying in for the rest of your life and passing down to future generations, a freehold condo might be the best bet.
If you are still unsure of which is the better choice for you, do feel free to contact us here for an obligation free consultation. If you are already a homeowner and are thinking of upgrading or moving and need some advice, do reach out to us too!
Together, we can definitely work out the best course of action in securing your dream home.