Are Freehold Properties Superior to Leasehold Properties?

Freehold properties refer to real estate assets where the owner has indefinite ownership rights over both the property and the land it occupies without any time limitations imposed.

Leasehold properties, on the other hand, come with a specific lease period. While the lease term can vary, it typically ranges from 99 years to 999 years. In Singapore, leasehold properties revert to the State at the end of the lease period. For the purpose of this discussion, we shall focus on the most common type of leasehold ie the 99 years leasehold.

Freehold properties are generally perceived as having higher value and potential for long-term capital appreciation. Leasehold properties are often priced lower compared to freehold properties, since they come with a definite ownership period.

Rather than focusing on the question of whether it is worth paying more for freehold, the more pertinent question to the investor would probably be, does freehold properties promise a higher return on investment (ROI)?

Freehold land in Singapore, being limited in supply, is deemed rare, leading to the perception that the upward trend of freehold properties is guaranteed. However, it is essential to consider the demand side of the equation. In the modern era, millennials may prioritize different financial priorities and experiences over the concept of inheritance, potentially impacting demand for freehold properties. Younger buyers might lean towards leasehold properties, paying less upfront and allocating funds to other endeavors like travel or home renovations. Thus, the notion that freehold properties promise higher profits for investors remains uncertain.

Another aspect to consider is the impact of lease decay on leasehold properties. As a property’s lease approaches its expiry date, its value can decline significantly, raising concerns for future owners regarding resale potential. Freehold properties do not face this issue, making them more “valuable” in this regard.

For investors focused on rental yield, the picture changes again. From a tenant’s perspective, whether a property is freehold or leasehold does not matter. Hence, the rental a freehold property can fetch vs that of a leasehold property is the same. Since freehold properties are typically more expensive, this translates to lower rental yields compared to leasehold properties.

In conclusion, determining whether freehold or leasehold properties are better depends on individual priorities. Is rental yield or capital appreciation more important? Are you considering passing down the property to future generations? Is the leasehold property nearing the point where its value may significantly decrease? Other crucial factors include location and accessibility, as an older freehold property in an inconvenient location may be less appealing compared to a newer leasehold property in a prime area, assuming relative pricing parity.

To make informed decisions, it is advisable to consult a trusted real estate advisor who can provide historical data, market insights, and help assess the investment potential of specific freehold or leasehold properties.

* It is a myth that the government cannot reclaim all freehold properties. In specific cases such as infrastructure development, the government may acquire freehold properties with compensation based on the existing market value.

Disclaimer: The opinions expressed in this article are solely those of the author and do not constitute financial, legal, or professional advice. The information provided is for general informational purposes only. Any reliance you place on the information within this article is at your own risk. The author shall not be held liable for any errors, omissions, or inaccuracies in the content nor for any decisions made or actions taken based on the information provided. It is recommended that you consult with a qualified professional or financial advisor before making any financial or investment decisions.

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