Thursday, August 7, 2014

Freehold VS Leasehold: The Never Ending Debate

As I have mentioned in previous posts, recently I have had renewed vigour to re-look at the property markets in the hopes to prepare myself to spot a good find and be able to leave the family nest and make it on my own.

I knew that this question would eventually come at me: Should I buy freehold (FH) or a 99-year leasehold property (LH)?

Fumbling around the internet, I found this interesting research document by OrangeTee discussing this issue.

Their final verdict? FH and LH condos perform roughly about the same, with periods of over and under performance. However, they think that if property characteristics and factors are similar enough, the FH property would always command a price premium over the LH because of 3 reasons:

1) No land depreciation - duh
2) En bloc potential
3) No CPF purchase restrictions

I would have to disagree with (2) though, I think that en bloc potential of a FH property largely depends on its current plot ratio. If there is a large differential between the current plot ratio and the future intended plot ratio maximum, I think that the property would have en bloc potential. However, if the plot ratio is largely maximised, I think it is very unlikely for that plot of land to go en bloc.

As interesting as it is, I still don't know what factors drive up and down the premium of a FH property over a LH property. What should be the appropriate premium of a FH property to a LH property? A bit more researching landed me at this blog article, which showed a table by the SLA regarding depreciation.


This table shows that FH property should only have a 4% premium over LH property at launch, but I think in reality most market observers can see that the price differential is between 10-20%. Of course, this exactly isnt an exact science at all. I think the formula in the above table might have to be tweaked a bit to be useful in today's market situation.

After all this talk, I still don't think I am any the wiser. Freehold property or Leasehold property? I suppose the amount of depreciation and remaining asset value is irrelevant if I live in it, since I am unable to extract value from the property anyway.

However, living in a property is just one aspect. What happens if I get married and I have to sell my property and move out? Or if my future wife is super rich that we can own 2 property, and we decide to rent out my place? In both these scenarios (well only the 1st one is likely, haha), it then becomes important how well my property retained its valued and how much has it "appreciated" (since it is depreciating also, it is more about how well it kept up with its FH counterparts than a raw figure).

This article and this one have changed my mind slightly. Instead of forking out a premium sum of money for a FH property, why not instead save the 20% difference? Or, alternatively, instead of paying $X for a FH property, why not pay $X for a LH property in a much better location?

I definitely have not made up my mind, but I think I am now leaning towards a LH property with an excellent location as compared to a FH property. As a strapping young man, the convenience of nearby amenities and being near important transport hubs are 2 huge benefits that would save me a lot of time, which is a precious thing to come by. A well spent minute today can save an hour worth of time in the future. Perhaps now the only problem is, what if there are FH and LH properties both at excellent locations?

Any property veterans out there that care to share their thoughts?

1 comment:

  1. RoyalShape Infratech@8506971685 offers Freehold residential plots in Noida Expressway, Sector-166 with all livable amenities starting from 50 sq yds in 10 lacs, 100 sq yds in 20 lacs onwards. Metro Station coming across the road in Sector-143 & 144.

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