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Freehold Essay

This piece was inspired by yet another comment that I received recently. “Don’t talk to me unless it is freehold.” Is it really true that Freehold always trumps leasehold? In an ideal world, as ANZ bank is prone to say nowadays, Freehold properties in the same location as leasehold properties would sell for similar prices. However, that is not true, Freehold is always more expensive, and people tend to forget the real cost of buying Freehold vs Leasehold. For the same amount of money that you could buy a Freehold property, you could probably buy a leasehold property in a much better location. When we consider the eternal truth that for property, location is everything, we wonder why some of us have chosen to believe that “Freehold is everything”. To carry an illustration to the extreme, a freehold property in the middle of the Australian outback desert is not going to have as much property gain as a 99 year leasehold property in Singapore. If you consider some properties that have made the most capital gains over the last few years, such as The Sail @ Marina Bay, you could not help but notice that Freehold does not have the final word in property transactions.

So why does Freehold still hold such a special place in our psyche. For Asians, it probably went way back to when generations stayed in one house. For the Chinese, it could well probably in one of those 四合院 (Shiheyuan) old style houses. The idea of leaving something to the next generation is so ingrained and therefore, so seductive that people ignore the facts of the modern property market.

For my great great great great grandchildren and their great great…

The truth is that with rapid advances in construction technology as well as the rapid urbanisation of Singapore, population density is going to keep going up. Our urban landscape constantly undergoes evolution and change. Buildings keep getting torn down by developers seeking to utilise cutting edge technology and architecture design to put more people into the same amount of space. All this meant that the average Singaporean family is unlikely to stay in the same house for more than 10 years. It is terribly unlikely that your next generation would appreciate the design of the place that you desire to leave to them. Sadly, they will likely sell it and buy another place with a more modern design.

For many of us, the issue of Freehold vs Leasehold includes another dimension, that of affordability and quality of life. Stretching your budget just to get a Freehold property vs a leasehold property could have serious implications on whether you get to have the occasional sushi meal, as well as the well deserved year end holiday.

Consider the following table that tracks the estimated payment schedule as well as investment returns of two similar properties, one leasehold, the other, Freehold. Note how from the very moment the downpayment is paid, one starts to suffer from quality of life sacrifices, including the ability to have excess cash for contingency purposes or for alternative investments. The higher loan quantum also meant that the purchase of a Freehold property involves higher financing costs (interest). All this meant that Freehold properties, when purchased as investment vehicles for rental purposes, are particularly poor in generating rental returns. This is because of the stark reality that tenants don’ care whether your property is Freehold or leasehold, they just want it to be in a great location and have nice fittings. They would pay the same rent whether it is for a leasehold or a freehold property. In such a situation, your Freehold property would need to enjoy an at least a 10% capital gain before you recoup the extra downpayment as well as the interest payments that you need to make for a Freehold property. The situation for a Freehold property as far as investment goes is worse if there are no capital gains, or if interest rates are higher than 2%.

Of course, if capital gains are great at 20%, and if interest rates stay low at 2%, then the Freehold property would make more money in terms of capital gains. However, such a situation is still not a great argument for a Freehold property since if you could afford S$1.2M initially, you could have been better investing in a leasehold property in a better location, and get BETTER capital gain, as well as BETTER rental returns.

Proponents of “Freehold or nothing” point out that Freehold properties have enbloc potential and that Freehold properties retain their value better. However, leasehold properties also have en-bloc potential as long as it is in a prime location (the properties in the Tangoing Rhu area such as Costa Rhu and Sanctuary Green are great examples of leasehold properties in a prime location). In addition, leasehold properties are more likely to have a smoother en-bloc process due to most existing owners having the same mindset of wanting to renew their properties through the en-bloc process. With regard to the retention of value, it is our observation that leasehold properties sold within the 1st 10 years depreciate at about the same rate as Freehold properties.

So, does that mean that there is no case for Freehold? Not exactly. If you hate moving and want to live out your life in your next place of residence, then Freehold is the way to go. This is a lifestyle choice and you are entirely justified in paying for it. As long as your decision is not based on thinking that your next generation would continue staying in it, its cool. In planning for the next generation, the extra money that would have to be expended to get a Freehold property may very well be better spent saving up to help your kids with the downpayment needed for their own leasehold property.


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