Should you buy a 99-year leasehold over a freehold condo?

Before we answer this question, some context is needed. In the property boom in Singapore over the past two years, the buyer appetite for the 99-year leasehold condo has been appreciably greater than that for a freehold condo. Focus on the volume of transactions in the chart below, which pretty much says it all:

leasehold-vs-freehold-condo-chart

Buyers are favouring leasehold condos…

The first chart includes three property boom periods. Bearing in mind that freehold condos and 99-year leasehold condos make up about 48 vs 52% of non-landed private housing stock in Singapore respectively:

From 2005 to 2007, there were more freehold and 999-year leasehold (considered freehold) property transactions than 99-year leasehold transactions.
From 2010 to 2012, around two-thirds of non-landed private property transactions were freehold
From 2016 to date, less than half of non-landed private property transactions were freehold (even as the percentage price premium of freehold property narrowed from 2010-2012 levels)

Based on the above chart, we can also see that the freehold condo, on average, commands a 20 to 30% psf price premium over 99-year leasehold unit.

It’s also interesting to note that, of all the resale condos in Singapore, around half of all 99-year leasehold transactions in the past two years involve new projects that TOP in 2019 or after:

leasehold-condo-new-projects

…but should you?

Why are we now seeing a significant preference for 99-year leasehold condos, with new launches being especially sought after? There could be a number of reasons, such as cooling measures and loan curbs limiting investible capital, limited freehold new launches and optimism for 99-year leasehold condos due to developers’ preference for 99-year leasehold condo stock in the current property boom. But, we’ll see that the preference for leasehold may also be perfectly rational personal considerations.

Having spoken to many of leasehold condo buyers over the past few months, it turns out there their considerations can be condensed into just three general guiding principles. If you nod your head at any of these, then go ahead and consider buying a 99-year leasehold over a freehold condo project:

There’s no substitute for a superior location
Buy leasehold to win at real-life Monopoly
A house is not a (permanent) home

#1: There’s no substitute for a superior location

For condo properties, location could well be a bigger determining factor for capital appreciation than tenure.Here’s our comparison between condos in Novena and Sembawang:

leasehold-freehold-condos-novena-sembawang

Looking at average psf prices in the 15-year chart, the 99-year leasehold condos in the prime district of Novena have had a much bigger upside than freehold condos in far-flung Sembawang. The following two points are also noteworthy:

The price difference between 99-year leasehold and freehold condos in Novena is negligible. 99-year leasehold properties had the higher average psf price in 4 of 10 years (2008-2017)
99-year leasehold property in Sembawang has seen a greater upside than the freehold condo property there

We’re not surprised by our key finding. After all, the first rule of property is always location, and a property that’s near to key amenities or the Central Business District (CBD) will have scarcity value. Tenure is of secondary consideration to location.

Whether you’re a homebuyer or a property investor, you should think along the same lines. Bear in mind a freehold property that’s inaccessible won’t attract tenants, or that you may find it a major hassle to live there (and wake up every workday dreading a long commute).

And when you try to sell the property, its value at that time will factor in these inconveniences — unless major redevelopments have taken place in the vicinity. Even then, your area might just be trying to play catch up to changes and improvements that have also taken place in other, better locations.

When savvy buyers know that freehold status won’t rescue a property that’s inaccessible, they go for the 99-year leasehold option. So, it’s typically Novena over Sembawang, or a leasehold unit right next to the MRT over a freehold condo that takes a feeder bus to reach — basically anything to get the best location within a set budget.

#2: Buy leasehold to win at real-life Monopoly

Here’s the thing: tenants don’t care whether your property is leasehold or freehold. If your leasehold property can match nearby units in attributes such as comfort and convenience, and is well-maintained, it should fetch a similar rental income regardless of the remaining tenure. So, if you want to be a successful Monopoly landlord kingpin in real life, consider buying an older — read: cheaper — leasehold condo to get a higher rental yield.

Now the formula for gross rental yield is (annual rental income)/(total property cost) x 100.

Let’s say you want to compare between two condos — one freehold and one leasehold — that fetch the same annual rental income of $40,800 per annum. Both were built in 1998, and the leasehold condo has about 78 years left on its lease*.

A 2-bedroom, 1,000 sq ft unit at the freehold condo costs $1.2 million, which with the rental income gives you a gross rental yield of 3.4%.

Meanwhile, a 2-bedroom, 1,000 sq ft unit at the 99-year leasehold condo only costs $950,000, due to the shrinking lease. However, the rental income of $40,800 is similar to that of the leasehold condo. The gross rental yield is thus 4.3%, significantly higher than its freehold counterpart.

This example assumes the condos are broadly similar except for the lease (e.g. one can’t be more leaky and run down than the other). Many time, comparisons are not so clear cut, as factors such as proximity to amenities, condo facilities and the quality of upkeep all affect rental yield.

*We based our example on two real-life projects.

[Recommended article: Calculate rental yield in Singapore: a quick and simple guide]

#3: A house is not a (permanent) home

We don’t mean this in a bad way. Leasehold buyers buy with a clear exit strategy. This is in contrast to intending to live in the same property till old and then passing the asset to the children, which is a freehold mindset. To leasehold buyers, home can mean a new unit in a new estate, and potential near- to medium- term benefits outweigh any sentimental value of home being a fixed physical location. When a leasehold condo can provide flexibility and opportunity for upward mobility, buyers don’t see why they should pay a hefty premium for a freehold condo.

Here’s what we mean when we talk about near- to medium-term benefits. For instance, a newly-married couple may want a house near a reputable primary school, and is prepared to move near a reputable secondary school when their kids grow up, and so forth. Or they might plan to take advantage of the next property boom to sell and upgrade before the lease runs down too much. Or they might be aiming to buy a second property five years down the road. (For the last example, the last thing they want is to be locked in to a freehold property with higher mortgage and lower rental yields.)

As long as the house isn’t seen as a permanent home, the permutations are endless, and so are the reasons for buying 99-year leasehold condos.

A blueprint for choosing a 99-year leasehold vs freehold condo

It’s important to know that all of the three guiding principles are interlinked. You can’t sell to upgrade if your location is bad; you can’t maximise rental yield if you bought a leasehold condo at too high a price; and you could lack resources to invest in a second property if you bought a freehold property first.

If you’re uncertain about buying a 99-year leasehold condo or a freehold condo, we’d recommend you consult a financial advisor or wealth manager to work out which one fits your long-term plans better.

Ultimately, we don’t know what type of buyer you are, but we know there’ll be a fair few readers who will see leasehold condos — and the people who buy them — in a whole new light after reading this!

Source: 99.co

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