If you had your choice between a freehold or leasehold condo in Singapore, which would you choose? This is the choice homebuyers face when looking to buy private property. There is apparently two types of buyers: buyers with no particular opinion about it, and buyers who are personally offended by being asked if they’d consider purchasing a leasehold condo.

There are obviously many factors to consider when you set out to buy property, but the one that gets raised the most is tenure, especially since choosing a forever home can be highly emotional. 

On the other hand, some homebuyers don’t understand the point of owning freehold property. These buyers are put off by the higher price, and/or place more value on other factors like the location, proximity to top notch schools, and amenities.

No matter which group you find yourself in, if you’re in the market for a new home it’s important that you be objective about the pros and cons of each type of property – leasehold and freehold. Reading this article may help you in that regard!

Table of Contents

Understanding Property Tenure in Singapore

Freehold vs. Leasehold

It Makes Sense to Buy a 99-year Leasehold Property When …

It Would Make Sense to Buy Freehold Property When …

Don’t Expect All 99-Year Leasehold Properties to be Equal

There May be More Important Considerations than Tenure

Conclusion

Understanding Property Tenure in Singapore

Land leases are classified either as freehold or leasehold. Owner of freehold property have a perpetual, non-expiring right of ownership of the property whereas leasehold titles give the purchaser the temporary right of ownership. With some exceptions, residential leasehold titles usually run for 99 years or 999-year leasehold, and industrial leases run for either 60 or 30 years. Upon the expiry of the lease term, the ownership of the land returns to the state.

Freehold properties were issued in the era prior to Singapore’s independence. As such, these buildings are owned indefinitely until the owner decides to sell. Owners in these cases are considered proprietors in that as owners of both the land and the building, they are responsible for maintaining both.

It is commonly understood that when someone buys a freehold property, they as the owner can hold it indefinitely, whereas a 99-year leasehold property will be returned to the state at the end of its tenure. The same thing happens to 999-year leasehold properties as they too are returned to the state once their tenure ends.

If we remove 999-year leasehold properties from consideration, the question is how do freehold properties stack up against 99-year leasehold properties?

Before discussing the pros and cons of each type of property, it’s important to understand the difference between leasehold and freehold property in Singapore. The following conclusions have been arrived at by many Singaporean buyers after researching and comparing the pros and cons of leasehold with freehold properties:

Freehold vs. Leasehold

Singapore’s Land Acquisition Act (1966)

Singapore passed a land acquisition law in 1966 that allows the government to recall leasehold and/or freehold properties under extraordinary circumstances, which are extremely rare, but possible. Notwithstanding the land is of freehold or leasehold titles, it can be acquired compulsorily by the government for public purposes such as to facilitate for MRT track, highway, or park. In return for giving up the property, the government will compensate the owner at market value.

En-bloc / Collective Sale

Forty-one projects were sold in collective sale / en bloc in 2018. Of that total, 6 projects (15%) were leasehold with 35 (85%) being freehold. Both leasehold and freehold properties can be sold in a collective sale. Freehold properties get a higher price in en-bloc sales because their owners are sacrificing more than the owners of leasehold properties.

Rental Yield

In the same vein, leasehold rental properties are able to generate a higher yield. The formula that determines rental yield takes the total annual rental income and divides it by the property’s total cost. Since tenants are usually unaffected by the property’s tenure, the annual income derived from rents is the same for leasehold and freehold properties. But the purchase price is what’s different. This fact is especially important for buyers purchasing the property as an investment rather than for personal use.

Aging & Lease Decay

All properties age over time, and both leasehold and freehold properties can be upgraded with repairs and refurbishment as needed. But leasehold properties are on a lease that diminishes with time, and when the lease ends it must be returned to the state. What makes things worse is that the land value doesn’t fall at a constant rate as the tenure on the lease decreases. In fact, the depreciation starts moving faster at the 40-year mark. Look at Singapore’s Land Authority Bala Table below:

Graph of leasehold values of land as a percentage of its freehold value, based on SLA’s Leasehold Table (“Bala’s Table”). Image credit: Juan Velasco, Centre of Liveable Cities

Let me introduce to you a Leasehold Table that was first adopted by the Land Office when Singapore was still a British colony. The Singapore Land Authority (SLA) refers to a discounted value tables showing the value of a parcel of land with different lease terms remaining, as a percentage of its value assuming it were freehold. It is widely believed that the table was prepared by a Land Office employee by the name of Bala, thus Bala’s Table. SLA published this Table  on 31 July 2000 to provide the public access to the table, and greater certainty to landowners and industry players, who could now calculate the premium they would have to pay beforehand. They could refer to the Development Charge (DC) Table rates payable for the change of use or increase in intensity of land, and adjusting the DC rate according to the residual tenure of the land as a percentage of freehold value shown in the Table.

Generally, the value of a piece of land varies with its lease tenure. The land value is higher if the remaining lease is longer. However as you can see from the table, the value of land does not fall at a constant annual rate as its lease period falls from 99 years to eventually zero. When a person purchases a piece of land, he is actually paying for the right to use the land or the right to receive a stream of future rental income. Let’s say this person expects to receive S$100 per square foot (psf) per year from ownership of this land, he would hence receive a payment of S$100 psf every year for 99 years. However the S$100 today would not be worth the same in the future, say 30 years or  60 years or 99 years later. Thus, to get the present value of the land rent in one lump sum, the future rental payments of S$100 psf per year must be discounted at a rate close to the opportunity cost of the money. Researcher Kwek Sian Choo and Dionne Hoh of Centre for Liveable Cities studying this table suggests that it has used a discount rate of 3.5% to peg the leasehold values as a percentage of freehold value for leasehold term. On the reason 3.5% is used for the discount rate, we shall leave this topic for another article.

This is something to be concerned about if a development is nearing the end of its lease. The value of the property will depreciate more dramatically as the years go by.

When the lease gets close to ending, the development will likely be earmarked for redevelopment and the new project will start fresh with 99-year leases. In reality, no one knows when or if this will happen.

Property Pricing

As you might expect, leasehold properties typically go on sale at 10%-15% less than freehold properties in a comparable location if the properties are of a similar age and offer the same amenities. Freehold properties are going to get a premium on price all things being equal.

Scarcity Value of Freehold Properties

The sites of Government Land Sales (GLS) are now all 99-year leasehold properties since the government is no longer releasing freehold land. Therefore, people who own freehold property have more bargaining power when they put their condos up for sale on the open market. This is why they are priced higher than leasehold resale condos.

CPF Rules

The amount of money that can be withdrawn from CPF to buy property depends on how much time remains on the lease and whether it will cover the youngest buyer until they reach 95 years of age.

*For HDB flats, the time of purchase refers to the date of the flat application. For Executive Condominiums and private properties, the time of purchase refers to the date the Option to Purchase or the Sale & Purchase Agreement was exercised.

No monies from CPF can be used to buy a property if the time remaining on the lease is under 20 years. This rule ensures the continuation of cautious use of CPF monies.

CPF members over 55 years of age must find a property with enough time remaining on the lease to cover them until they reach 95 years of age, before they are allowed to withdraw monies from their CPF account above the Basic Retirement Sum. This rule helps CPF members have a home for the rest of their lives as well as a basic income in their retirement.

Bank Loans

When considering financing an older property, banks have the same feelings as buyers, usually being more cautious about processing a loan on these properties compared to a property with more time remaining on the lease. Banks use the Loan-to-Value (LTV) restrictions when determining how much to lend on a property.

This would have a substantial impact on your financial plans, since it is more likely than not that you would need to come up with more cash. If you are already under financial pressure, paying more cash every month on your mortgage would give you less cash for other needs.

It Makes Sense to Buy a 99-year Leasehold Property When …

You would be reasonable to consider the purchase of a leasehold property if you appreciate flexibility and understand market volatility. In past generations buyers were interested in finding a forever home, but many of today’s buyers want more flexibility when it comes to home ownership. Many may not even be planning to hold the property for more than a fraction of the time remaining on the lease.

Due to the lower outlay to buy the property, which can result in a higher rental yield, buyers consider leasehold properties a good investment. Many plan to lease it out in order to generate rental income, or to sell it for more when the market goes up. These buyers understand the factors that make this a smart move for their purposes, and consider them more important than tenure.

Finally, when the disparity in prices becomes sufficiently wide between leasehold vs. freehold properties, it may be wise to purchase a leasehold property as it will be less expensive. However, you need to understand that lease decay will accelerate at the 40-year mark. Therefore, it may not be smart to buy a property that is getting to be too old.

It Would Make Sense to Buy Freehold Property When …

It would be perfectly reasonable to consider purchasing a freehold property if you’re looking for a forever home that you can pass down to future generations. If you can afford the higher price and want the security of owning freehold property that you can’t get with leasehold property, then it makes sense to consider buying a freehold property.

Buyers who want the flexibility offered in terms of architecture, rental processes and loan applications may find freehold properties more to their liking than leasehold. In addition, owning land in an area with few options can feel satisfying if you want a home you can live in when you’re retired. But it all comes down to pricing and how large the gap is between a leasehold property and freehold. If it’s relatively small, like $100,000 to $200,000, then it makes sense to choose freehold property.

Don’t Expect All 99-Year Leasehold Properties to be Equal

It’s important to know that not all leasehold properties are the same, or even similar. While the government issues lot of leasehold properties, other leasehold properties are issued instead by certain developers.

Far East Organisation (FEO) is the developer behind properties like Cabana, Alana, Greenwood Mews, and The Shore Residences. Properties in these developments will revert back to them rather than the state. The 99-year leaseholds being issued to owners are taken out of the 999-year/freehold tenure by the developer whose goal is to retain his interest in the land.

In this case, buyers need to understand that the en-bloc potential of these buildings is very limited. Given the fact that the developer will at some point regain interest in the land, odds are that buyers will never see huge profits on their property from an en-bloc windfall.

There May be More Important Considerations than Tenure

Now that you’ve been informed of the pros and cons of both types of properties, you may now want to look at the bigger picture. The truth is that there are some factors that may be of more importance than tenure. These should also be considered if you want to get the clearest possible perspective: 

1. Location & Easy Access

The old adage “Location, Location, Location” is very familiar to those in real estate. Whether you’re looking for a home to live in or an investment property, its location is the most important factor to consider. Properties located in prime areas, or in easily accessible locations, like near a major highway or MRT station, will always be in demand.

2. Available Amenities

Neighbourhoods with amenities like excellent schools, parks, playgrounds, and gyms offer a better quality of life. Buyers are willing to pay more to live near amenities like these. A condominium that has amenities within the building itself is also a feature that can add to its value.

3. Master Plans for Future Developments

Being aware of what’s included in the most recent URA Master Plan regarding future developments allows buyers to make smarter choices. Planned developments in the area can hugely impact the resale value of any property, whether it’s freehold or leasehold. This is why it’s vital to know how empty lots are zoned in the area of a home you’re thinking of buying. It’s also important that you find out the plot ratio, so that you have a clear picture of the height and density of the developments planned for the area.

4. Purpose of Property

As discussed earlier, buying a property to live in is totally different than buying it as an investment, which means that there are different considerations. A freehold property may appeal to the buyer seeking a forever home to pass down to future generations, whereas a leasehold property will likely be cheaper, offering the buyer more flexibility, especially if they’re looking for a short-term asset. 

5. Developer’s Reputation

Aside from the factors mentioned above, you may be surprised to learn how important it is that the developer have a good reputation when people are trying to decide on which condominium to buy. Buyers know that developers who’ve built an outstanding reputation over the years can be counted on to have higher quality workmanship and better finishes in their building.

A developer with a great reputation may be able to persuade a buyer to select a leasehold property rather than a freehold. But a developer with a poor reputation involving defective projects might find it difficult to sell units in later developments, even the freehold ones.

6. Economic Outlook

The economic outlook including factors like cooling measures that will impact property prices must also be considered. Although the goal is always to buy low and sell high, the market isn’t always predictable. Real estate prices can vary on a daily basis, and you can’t always rely on statistics. Buyers may feel it’s important to price watch, but a better strategy might be to maintain a general awareness and to move cautiously when making big investment decisions.

Putting all these factors into perspective helps buyers understand the heterogeneity and unpredictability of the real estate market. Remember that each development has its own unique features, and no two developments are alike. Statistics can show you how the market is trending and what seems to motivate buyers, but they do not reveal the attributes of a particular development that make it intrinsically more desirable and thus more valuable. Therefore, when deciding on leasehold vs. freehold properties you need to take a deep dive into the key aspects of each property.

7. Transaction Volume

When all is said and done, whether it’s a freehold or leasehold property, what truly determines its pricing is the volume of transactions.

Conclusion

It is clear that tenure is a vital consideration, but it would be wise to avoid placing too much weight on any one factor when deciding on which property to buy. This is one of life’s biggest decisions, which means you should be fully informed on all factors before making your choice.

At Pinnacle Estate Agency, we strongly believe in sharing our real estate knowledge to the public.⁠ For more content like this article, check out our Singapore Property Guides.