Freehold vs Leasehold Property – Which is better ?

Introduction

A common consideration when selecting a property, be it for investment, homestay or both would be whether purchasing a freehold property is better than a leasehold property. 

It is safe to say that the notion of freehold property being superior to leasehold has been ingrained in our minds by our parents, relatives and similar subjective sources. 

This is similar to the conventional thinking that purchasing a condo nearer to the city centre is always more profitable than a condo in the city fringe. 

But is it really true, will purchasing a freehold property make you wealthier by reining in more capital appreciation ?

Generation 1.0 real estate investing 

• Freehold and 999 years leasehold is always better than 99 year leasehold property
• CCR luxury condos always make you more money than city fringe run of the mill condo
• What makes you look richer, will make you rich. 

Generation 2.0 real estate investing

• Freehold or leasehold does not matter, attributes that can trigger future buyer to pay more for property matters more
• Decoupling property to purchase 2nd property without ABSD
• Profit from sale of BTO to purchase two condo
• Nobody should know that you are secretly wealthy

Freehold vs Leasehold Singapore – Key Differences 

Cost of property 

First off, in most circumstances you will be looking to pay 10% to 15% more per square footage for a freehold condo vs a leasehold condo. There are a few pointers to consider when it comes to paying a premium for a freehold condo. 

To put things into perspective, purchasing a 1,100 sqft 3 bedroom unit in the city fringe RCR location like Bishan would look like what stated in the table below

Essentially due to the psf price premium, you could be paying the same quantum if not more for a smaller unit. 

Similarly, this premium will be translated to as your future resale price for your prospective buyer. So considering the affordability of your freehold condo vis a vis comparable 99 year leasehold condo is an important factor to note. 

Ease of financing

The upside of having a freehold condo, with a lease that does not deplete is the ease of financing. 

This appeals to both yourself and your future buyer purchasing your property, ageing leasehold condo often faced this challenge during its selling process. Due to its short remaining lease life, buyers are not able to take up the full 75% bank loan and may not be able to fully utilise their CPF for the payment of the property. 

Freehold condo facilitates bank loan financing

Banks are conscious of extending the full 75% loan to valuation limits for properties with less than 30 years of lease remaining. Similar to property owners like us, banks are wary of the depreciating value of property collateral with short leases. 

By practise bank will normally offer a lower 60% LTV loan for short lease property

Buyers will have no issue using their CPF to fund Freehold properties

Similar to bank loans, the CPF board also places a limit on the amount of CPF you can use to purchase a property with a short remaining lease. 

CPF rules as follow, if the remaining lease is less than 20 years or the remaining lease is not able to cover the youngest buyer until they reach 95 years of age. Buyers can only use a pro rate CPF quantum for the purchase of the property. 

Lease Decay

Freehold properties are not exposed to the concern of lease decay, while leasehold property will experience challenges of lease decay as they age. 

Lease decay is defined as the diminishing value of a property in tandem with its ageing lease. The decline in a leasehold property value as it ages is not gradual, price tends to experience a flattening phase as it comes close to its 20 to 25 year mark, and progressive depreciates at a faster pace downwards as it ages further. 

Buyers are generally reluctant to pay a premium for a ageing leasehold property that is approaching its 20 to 25 year mark due to the following reasons

• Concern over being able to resell it in the future
• Ageing facade and facilities of the property is not appealing to buyers
• Challenges with taking up the full 75% bank loan and full usage of CPF to fund property purchase

Effect of lease decay – Freehold vs Leasehold condo

Transaction Volume

Aside from tenure type and positive fundamental attributes, healthy transactional volume is essential for property price appreciation. 

Essentially, to sell your property at a higher price, you would need to reference your neighbours previous transacted price as your basis for pricing. If you lived in a development with little or no recent transaction then it would be a challenge for you to push for a higher price. 

Freehold properties generally tend to have a lower transaction volume than leasehold property. Owners of freehold condos tend to prioritise succession planning, and due to its non depreciating lease, owners may not have the urgency to sell their property. 

Reference the table for differences in transaction volume for Freehold vs leasehold properties in Singapore. 

Freehold vs Leasehold Property Sales Volume in Katong

Freehold vs Leasehold Property Sales Volume in Lorong Chuan

Rental Yield

Due to its lower psf pricing and lower purchase quantum, leasehold properties tend to have higher rental yield than freehold properties. 

Hence, if you are purchasing the unit for passive rental cash flow, a leasehold property could be more apt in fulfilling your objective. 

Freehold vs Leasehold Rental Yield – Woodleigh area

Holding duration for capital gain 

Considering the fact that a freehold property costs 15% more than a leasehold property and there is also less transactional volume to help build a basis for pricing, you would need to hold on to a freehold property for longer holding duration for both breakeven and profitable gains. 

Assuming you were to compare a brand new freehold condo vs a brand new 99 year leasehold condo, the price appreciation of the freehold condo could be pale in comparison to the leasehold condo in the earlier years of both its tenure. 

But the strength of a freehold condo really shines through when its surrounding leasehold condos are all ageing and its freehold lease remains perpetual. 

Quick intro – Decoupling Expertise

Quick introduction, before you decide to commit the next 5 mins reading this article.

We are decoupling expertise, a team of specialist realtors that specialise in helping Singapore property owners derive the best strategy to purchase their second investment property without ABSD.

Aside from decoupling property, we specialise in property research. Helping client that values owning high capital return property, shortlist and identify worthy condo developments to look into

Drop us a text if you like to shortlist prospective properties or confirm your thoughts on a current property

Are freehold condos more profitable than leasehold condos ?

Moving on to discuss one of the most important considerations residing top of mind for everyone. 

Does the premium pricing of freehold properties translate to greater profitability in comparison to leasehold condos ?

Freehold condo is not always more profitable than leasehold condo 

Running a few price trend analysis for freehold vs leasehold property in Singapore, shows otherwise. In fact, in aggregate under most circumstances, leasehold property tends to appreciate more than freehold properties. 

Freehold vs leasehold Singapore – Overall Price Appreciation

Freehold vs leasehold Singapore – OCR Area

Freehold vs leasehold Singapore – RCR Area

Freehold vs leasehold Singapore – CCR Area

Summarising the price trends above, leasehold properties tend to appreciate faster in price over the last 5 years as compared to freehold properties. 

The core central region marks the only exception where a freehold property’s price appreciates faster than a leasehold property. 

Situation in which Freehold condo is more profitable

Having said that, the general price trends that favours leasehold properties, may not give sufficient merits to Freehold properties. There are instances in which freehold properties outperforms leasehold properties. 

In the following section, we will dive deeper into situations in which freehold condos performance trumps a leasehold condo. 

#1 – When competing leasehold properties in the area are all ageing

Analysing the performance of over 500 Freehold condo developments, reveal certain freehold condo developments that significantly outperformed its leasehold peers in the area. 

This situation normally occurs when there is a lack of new leasehold condo launches in the area and the surrounding competing leasehold properties are all ageing. This provides an opportunity for Freehold condos to shine and tilt buyer’s interest in their favour. 

Price Appreciation – Freehold property outperforming leasehold in Lorong Chuan

Price Appreciation – Freehold property outperforming leasehold in Katong

Referencing the table above, both locations Lorong Chuan and Katong are areas that attract buyers of higher net worth and place emphasis on property with freehold status. The fact that its surrounding leasehold properties are all over 10 years of age, the competitive advantage is apparent for freehold property with perpetual lease.

#2 – When price disparity between freehold property and new launch condo is significant

Referencing the Lentor area, with the government’s announcement of a new township in the lentor area, multiple new launch developments are launched in the area. 

Opportunities arise for owners of The Calrose, a freehold condo development situated a stone throw away from all these new launches. 

Its price disparity, being priced much lower than the benchmark prices set by the new launches, coupled with its freehold status, resulted in significant price appreciation.

The same setup is observed for Blossoms located in the Woodleigh area and Leceister One in the Potong Pasir area. 

Freehold Condo, The Calrose’s profitable price appreciation in Lentor 

Freehold Condo, Blossoms @ Woodleigh profitable price appreciation in Woodleigh

Freehold Condo, One Leicester profitable price appreciation in Potong Pasir

PSF disparity for Freehold property resulted in affordable purchase quantum 

From a quantum perspective, buyers are looking to purchase these Freehold developments at a significantly lower psf as compared to the new launches or existing leasehold development at around the same quantum. 

With the same budget of $1.9 to $2.0 mil, buyers are looking at a larger 3 bedroom freehold unit vs a smaller 3 bedroom newer leasehold unit. 

#3 – Area where there is old wealth with a focus on succession planning

In the earlier introduction, we hinted at your golf playing uncle being the one taunting about the benefits of a freehold property. Try to recall the stereotypical location where these uncles live. 

Top of mind location would be Bukit Timah, Thomson, Tanglin, East Coast. 

And these are places that freehold property tends to do better in, as the are areas in which the wealthier buyer segment prefers to live. These are buyers that have already achieved financial success in other means via their career or business. When it comes to real estate, they will be looking to prioritise succession planning and status. 

Boutique Freehold Condos that generally performed the worst

Now that we have established the situation in which you have a high chance of making money by owning a freehold property, let’s point out the freehold properties that you should try to avoid. 

From our research, it is shown that small boutique freehold condo tends to perform the worst. 

Other factors influencing the profitability of a freehold or leasehold property

As a side note, when it comes to evaluating the investment potential of freehold or leasehold property. It is important to take other influencing factors into consideration with the property’s tenure type.

From our experience, these fundamental attributes often play a greater role in influencing a property’s profitability and capital gain potential beyonds it freehold or leasehold status. 

• Potential demand from surrounding HDB upgraders
• Upcoming URA transformation plan for the location of property
• Proximity to MRT
• Proximity to reputable school, within 1km and 2km radius
• Proximity to international school
• Proximity to expat’s place of work
• Surrounding area supply of competing property
• Layout of units within the development
• Price of units in comparison to other developments

For more details of Which condo is good for investment in Singapore, refer to the article link inline. 

Enbloc potential of freehold vs leasehold property

Freehold status developments are deemed as scarce to developers as the Singapore government has stopped putting up land with freehold status up for bidding in the GLS, government land sale scheme. 

Hence Freehold properties tend to have a higher perceived value in the eyes of developers. But property owners looking to purchase freehold property with the appeal of an enbloc opportunity need to take other factors into consideration beyond its freehold status. 

Other factors that developer consider when reviewing enbloc projects

Condo plot ratio

Plot ratio determines the height and maximum number of units that can be built on a particular plot of land. Developers tend to favour under utilised development that can be redeveloped into a larger development with more units for sale.

Location 

A prime location, with proximity to amenities, place of work and reputable school will be something that a developer will be looking at.

Land Size

Palatable land size matters, given the penalty to be imposed on developers for not being able to sell out units before it TOP, developers are mindful of getting overly large plots of land. 

Neighbourhood

A desirable neighbourhood with well established amenities and future government development will be appealing for developers

Freehold property can still be taken back by government

One of the notions of a freehold property is the perpetuity of lease, but this is not always true under special circumstances, the government has the right to buy back the land that your freehold property is sitting on. 

Land Acquisition Act

The land acquisition act allows the government the right to repurchase any privately owned land for the sake of national development, in the interest of public good. 

The government would trigger the land acquisition act under the following circumstances.

• For any public purpose
• by any person, corporation or statutory board, for any work or an undertaking which, in the opinion of the Minister, is of public benefit or of public utility or in the public interest; or
• for any residential, commercial or industrial purposes

Price in which government will pay for your freehold property 

Government will repurchase the land back at market value. 

Examples of government buying back land

• Katong – development of Thomson East Coast MRT Line
• Thomson – development of North South Corridor

Is Freehold better than leasehold ?

There really isn’t a perfect answer for this question.

Whether Freehold or leasehold is better, it depends on your objective and the comparable alternative available.

For example if you are 55 years old, you and your wife already own a second property and are planning for early retirement, with an emphasis on succession planning. Your consideration would differ greatly from a couple in their early 30s with an emphasis on growing their asset via capital appreciation. 

In the section below will highlight the general framework when you should be buying a freehold and when you should be buying a leasehold condo

Should I buy Freehold ?

Generally it is worthwhile considering a freehold property when

• Succession planning is a priority
• Area you are looking to live in comprises of mainly old leasehold condo
• When the price disparity between new leasehold condo vs older freehold condo is significant

Should I buy a leasehold condo ?

• When your priority is shorter term capital appreciation 
• When affordability is your main concern
• When the leasehold condo has better attributes than the freehold condo