When it comes to buying a private condominium, one of the key considerations is knowing whether the property is a freehold condo or a leasehold condo. Between the two, homebuyers tend to opt for freehold properties. That’s because the general consensus is that freehold property:
- Cannot be taken back by the government
- Can be handed down to the next generation
- Carries a higher value
But is the above true? In this article, we’ll explain the differences between a freehold and leasehold property and whether choosing a freehold property is always better.
3 Types of Condo Tenures in Singapore
- Freehold
- 99-year leasehold
- 999-year leasehold
Before we get into the freehold vs leasehold debate, you should know that there are three types of condo tenures in Singapore – freehold, 99-year leasehold and 999-year leasehold. The 999-year leasehold developments are in essence freehold properties.
The common understanding is that freehold properties can be held indefinitely by the buyer, while 99-year leasehold properties will revert back to the state after the tenure ends. The 999-year leasehold properties also technically revert back to the state after the tenure ends.
But if we take the 999-year leasehold tenure out of the picture, how do the freehold and 99-year leasehold tenures measure up against each other?
Freehold vs Leasehold Condos in Singapore
1. Leasehold Duration
The most obvious difference between freehold and leasehold condos is that freehold condos can be held in perpetuity while leasehold condos can only be held for as long as the lease is in effect. In short, there’s a countdown timer that’s slowly ticking down for leasehold condos. This countdown timer could greatly affect the property’s market value.
Freehold properties in Singapore are commonly thought of as being yours forever to pass down to generations to come. Consequently, they are perceived to and usually carry a higher market value/rental yield than their leasehold counterparts.
Will a Freehold Condo Maintain Its Freehold Status Forever?
The common misunderstanding is that the government cannot take back a freehold property and that the property owner will be able to hold on to it for life and hand it down to the next generation. This is however a myth.
Just because the condo is freehold now, doesn’t mean it will remain freehold forever. As we know, Singapore is small and our only constant is change.
Now, with the rapid redevelopment of the island with projects such as the North-South Corridor, new MRT lines like the Thomson-East Coast line and even building more high-rise residential projects for our growing population, your freehold condo might just need to make room for whatever’s coming up.
Sure, the government will likely compensate you accordingly at the existing market price, but you’ll need to go through the hassle of finding a new forever home.
Can Freehold Properties Be Put Up for En Bloc?
Another common misconception is that freehold developments cannot be put up for en bloc sale. This is another myth.
The truth is, if a developer attempts to buy your condo via en bloc, the sale will still go on if the majority of residents within your development agree to it. You will have no choice but to sell your home.
2. Cost of Property
A freehold condo is likely more expensive than its leasehold counterpart. For a property in a similar location, of a similar size and so on, a freehold condo might be 15% more expensive.
Increasing interest rates and borrowing costs means owning a freehold condo can translate to a substantial financial commitment.
3. Market Value
One of the most common reasons property buyers in Singapore opt to purchase a freehold property is because it’s perceived to be higher. But freehold properties do not always have higher market value.
A leasehold condominium located in the Central Business District (CBD) is going to carry a higher value than a freehold condominium in, say, Punggol. Location plays the most important role in determining the value of a condominium, not its tenure.
If a leasehold and a freehold condominium are located in the same area and enjoy the same facilities, it is true the freehold development will usually carry a higher value. But only if the leasehold development has less than 78 years left on the lease.
Are Leasehold Properties Affected by Lease Decay?
There is an assumption that for leasehold properties, the property value will drop drastically as the remaining years of your lease shortens. This is more commonly known as “lease decay”.
Back to the above example of a leasehold and freehold condominium being situated in the same neighbourhood. If the condominium has more than 78 years left on the lease, its value is usually still equivalent to a freehold condo. Only when the lease hits the 78-year mark does its value start to decline.
The difference becomes more significant when the lease hits its 40-year mark. Within 40 years left on the lease, banks will restrict financing the sale of the unit; within 30 years left, potential buyers won’t even be able to withdraw their CPF to fund their purchase.
But by this time, the condo residents would have likely attempted an en bloc sale. That said, during the 99-year lease, the leasehold condo is an owned asset, just like an HDB and a successful en bloc sale is not guaranteed.
4. Maintenance and Available Facilities
Your freehold condo could also fall victim to age, which means you may need to spend more on maintenance and repairs.
In addition, with more leasehold condos popping up near malls or MRT stations, your ‘ulu’ (remotely located) freehold property’s value might drop thanks to its less-than-stellar location.
5. Rental Yield
The formula for rental yield is annual rental income divided by the total cost of the property. This means that assuming the same rental income, the more expensive the property, the lower your rental yield.
Now, we know that the initial sale price of freehold condominiums is approximately 10% to 15% higher than leasehold condominiums in the area. When searching for a rental unit, tenants usually do not pay much attention to the lease of the property. They care more about price, location, and comfort.
As such, leasehold and freehold condos in the same area with similar facilities often command similar rental prices. So if you are looking to invest in Singapore property, you may want to opt for a leasehold condominium for a better rental yield.
So Which Is Better? Freehold or Leasehold Condo?
Ultimately, the decision lies in your hands. But the easy answer is to ask yourself what it is you are looking for. If property price appreciation is important to you, choose a condominium that is better located, one that is close to an MRT station or which the government has marked for future development.
But if what you are seeking is a property that can house the next generation, do bear in mind that many young people prefer to move out after marriage and don’t usually stay with their parents. Also bear in mind that freehold condominiums do not have that much of an advantage over leasehold condos and you would likely have to pay a premium for it.
Bearing all this in mind, good luck with choosing your next home!
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