99-Year vs Freehold
Many factors, such as capital appreciation and rental yield, come into play
By Teo Kuan Yee
Published: September 21 2010,
Home & Decor
Published: September 21 2010,
Home & Decor
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One sure indicator of a red-hot property market is the way 99-year homes are being snapped up. Their prices are also skyrocketing faster than freehold units.
In the past, most home buyers would give leasehold homes the snub, thinking that freehold ones are superior in terms of long-term value.
A freehold title allows the homeowner to have perpetual ownership of the property, while a leasehold title allows possession for a stated number of years, be it 99 or 999 years. When the lease expires, the title of the property goes back to the state.
If the current price tags of some leasehold properties are any indication, it seems most buyers now don't give a hoot about whether the property is leasehold or freehold. One much-talked-about deal was a 99-year leasehold bungalow in Sentosa Cove that reportedly went to a foreign buyer at a jaw-dropping $36million (or $2,403 psf) in June.
In fact, the average prices of Sentosa Cove bungalows rose by 55 per cent to $1,959 psf in the second quarter of 2010, over the same period a year ago, according to a Savills property report.
Foreigners do not mind leasehold properties as the 99-year lease is still better than 60-year leases in Hong Kong and China. Sentosa is considered a mid- to above-mid-value property compared to Hong Kong, Shanghai and other cities. Besides, buyers today are purchasing properties based on concepts and lifestyle. Sentosa Cove with its unblocked sea view and yacht berth, coupled with Singapore's security, is in demand.
Familiar concept overseas
Contrary to the conservative mindset of many Singaporeans who believe that freehold homes are always better, the concept of leasehold ownership is widely accepted and common overseas, from the UK to Indonesia and China.
Many foreigners are used to leasehold tenure and hence, most of these buyers are not deterred (by the leasehold status in Singapore). Another strong pull factor is that Sentosa Cove is the only landed property available to foreigners. With the integrated resort in the vicinity, it has attracted many foreign investors.
The property's location was the key factor in the "buy" decision, while tenure was a lesser consideration.
In the past, the preference was for freehold over leasehold properties as they offered more value for money. Over time, people have changed their mindsets as leasehold properties now occupy prime locations with good capital appreciation.
For instance, price transactions of resale leasehold properties like The Sail, with its glorious view of the new Marina Bay skyline, have risen.
Soft launched in 2005 at an average $1,080 psf, prices soared to $1,800 psf, or $1.7 million for a two-bedroom 936sqf unit in 2009. Some units were recently transacted for $2.4 million ($2,800psf).
The Sail is an iconic building with a prestigious location and an unblocked view of the central business district and Marina Bay Sands. Prior to its launch, the developer had marketed the property worldwide. The Sail has a good rental yield of 4-7 per cent and a lot of investors are buying it as their second home, thus making the prices escalate. This continues to attract more foreign investors.
Should you join the bandwagon?
Experts we spoke to all agree on one thing for the home buyer - common sense should prevail.
Ultimately, every home buyer has to decide according to his budget and preference, such as spatial needs, says Nicholas Mak, real estate lecturer at Ngee Ann Polytechnic.
"For investors, leasehold properties usually offer a higher rental yield (because of their lower capital cost). But that merely compensates the owner for the decaying lease," he explains.
Based on his studies from the past decade, leasehold properties rose and fell by greater margins during a boom and downturn respectively (see chart above). This shows that on a whole, leasehold properties are more susceptible to the ups and downs of the economy, as compared to freehold titles.
"When the rise in the property market is from the bottom up, leasehold condominiums could outperform freehold ones. Conversely, if the boom is top-down, freehold units would deliver better results. However, the faster the rise, the harder the fall," he warns.
"Leasehold properties are attractive to buyers who plan to rent out their property as tenure has no effect on its attractiveness or the amount of rent it can command," says Tay Huey Ying, Collier International's director for research and advisory. As most 99-year properties cost less, you are also getting a higher rental yield.
But buying ageing leasehold units also has certain pitfalls.
"Be aware of the more restrictive financing available for such leasehold properties (beyond 40 years old) as this could affect their resale (potential)," warns Huey Ying.
For example, the CPF board only allows CPF funds to be used for 99-year homes with 30 or more years left on their lease.
"For remaining leases of between 30 and 59 years, CPF withdrawal limits will be pegged to the purchaser's age and the remaining lease of the property," she says.
Banks also want a healthy buffer for the remaining lease.
"Generally, banks might either reject or reduce the quantum of financing if the property has a remaining lease of less than 60 years at the point of application. The loan tenure may also be reduced if the remaining lease falls below 40 years on loan maturity, because the marketability of the property will be impacted as the lease shortens," says Phang Lah Hwa , head of Consumer Secured Lending at OCBC Bank.
It pays to shop around as the loan tenure period differs with bank policy.
"Our experience is that most banks require the property to have a minimum remaining lease of 30 to 40 years when the loan is fully repaid. For instance, if you bought a property with a 60-year remaining lease, the maximum loan period might be 20 years if the bank requires a minimum lease of 40 years. So if a bank requests for 30 years (of remaining lease), the maximum loan tenure would be 30 years," explains Dennis Ng, founder of Mortgage Consultancy Portal, www.HousingLoanSG.com.
This 10-year difference in the loan period would result in heftier monthly repayments.
Why pay a premium?
Thoughtful property pros consider the conflicting arguments for and against leasehold properties as splitting hairs.
Colin Tan, research director at Chesterton Suntec, sums up the argument succinctly: "The top priority for buyers who plan to occupy the units should be housing needs, not investment potential."
"If you need more space, consider leasehold. If you have spare cash, then consider freehold. When buying for investment, (ask yourself) which is your priority - rental returns or capital appreciation? If yield is important, buy leasehold. For capital appreciation, if you think the demand for freehold will grow faster than that for leasehold, then buy freehold."
Nevertheless, here's more food for thought. "The premium between the two depends on the number of buyers who prefer one over the other. In reality, the premium stops growing when some people have had enough and ask themselves why they should pay beyond such a premium, when in practical terms, it makes no difference," says Colin.
In the past, most home buyers would give leasehold homes the snub, thinking that freehold ones are superior in terms of long-term value.
A freehold title allows the homeowner to have perpetual ownership of the property, while a leasehold title allows possession for a stated number of years, be it 99 or 999 years. When the lease expires, the title of the property goes back to the state.
If the current price tags of some leasehold properties are any indication, it seems most buyers now don't give a hoot about whether the property is leasehold or freehold. One much-talked-about deal was a 99-year leasehold bungalow in Sentosa Cove that reportedly went to a foreign buyer at a jaw-dropping $36million (or $2,403 psf) in June.
In fact, the average prices of Sentosa Cove bungalows rose by 55 per cent to $1,959 psf in the second quarter of 2010, over the same period a year ago, according to a Savills property report.
Foreigners do not mind leasehold properties as the 99-year lease is still better than 60-year leases in Hong Kong and China. Sentosa is considered a mid- to above-mid-value property compared to Hong Kong, Shanghai and other cities. Besides, buyers today are purchasing properties based on concepts and lifestyle. Sentosa Cove with its unblocked sea view and yacht berth, coupled with Singapore's security, is in demand.
Familiar concept overseas
Contrary to the conservative mindset of many Singaporeans who believe that freehold homes are always better, the concept of leasehold ownership is widely accepted and common overseas, from the UK to Indonesia and China.
Many foreigners are used to leasehold tenure and hence, most of these buyers are not deterred (by the leasehold status in Singapore). Another strong pull factor is that Sentosa Cove is the only landed property available to foreigners. With the integrated resort in the vicinity, it has attracted many foreign investors.
The property's location was the key factor in the "buy" decision, while tenure was a lesser consideration.
In the past, the preference was for freehold over leasehold properties as they offered more value for money. Over time, people have changed their mindsets as leasehold properties now occupy prime locations with good capital appreciation.
For instance, price transactions of resale leasehold properties like The Sail, with its glorious view of the new Marina Bay skyline, have risen.
Soft launched in 2005 at an average $1,080 psf, prices soared to $1,800 psf, or $1.7 million for a two-bedroom 936sqf unit in 2009. Some units were recently transacted for $2.4 million ($2,800psf).
The Sail is an iconic building with a prestigious location and an unblocked view of the central business district and Marina Bay Sands. Prior to its launch, the developer had marketed the property worldwide. The Sail has a good rental yield of 4-7 per cent and a lot of investors are buying it as their second home, thus making the prices escalate. This continues to attract more foreign investors.
Should you join the bandwagon?
Experts we spoke to all agree on one thing for the home buyer - common sense should prevail.
Ultimately, every home buyer has to decide according to his budget and preference, such as spatial needs, says Nicholas Mak, real estate lecturer at Ngee Ann Polytechnic.
"For investors, leasehold properties usually offer a higher rental yield (because of their lower capital cost). But that merely compensates the owner for the decaying lease," he explains.
Based on his studies from the past decade, leasehold properties rose and fell by greater margins during a boom and downturn respectively (see chart above). This shows that on a whole, leasehold properties are more susceptible to the ups and downs of the economy, as compared to freehold titles.
"When the rise in the property market is from the bottom up, leasehold condominiums could outperform freehold ones. Conversely, if the boom is top-down, freehold units would deliver better results. However, the faster the rise, the harder the fall," he warns.
"Leasehold properties are attractive to buyers who plan to rent out their property as tenure has no effect on its attractiveness or the amount of rent it can command," says Tay Huey Ying, Collier International's director for research and advisory. As most 99-year properties cost less, you are also getting a higher rental yield.
But buying ageing leasehold units also has certain pitfalls.
"Be aware of the more restrictive financing available for such leasehold properties (beyond 40 years old) as this could affect their resale (potential)," warns Huey Ying.
For example, the CPF board only allows CPF funds to be used for 99-year homes with 30 or more years left on their lease.
"For remaining leases of between 30 and 59 years, CPF withdrawal limits will be pegged to the purchaser's age and the remaining lease of the property," she says.
Banks also want a healthy buffer for the remaining lease.
"Generally, banks might either reject or reduce the quantum of financing if the property has a remaining lease of less than 60 years at the point of application. The loan tenure may also be reduced if the remaining lease falls below 40 years on loan maturity, because the marketability of the property will be impacted as the lease shortens," says Phang Lah Hwa , head of Consumer Secured Lending at OCBC Bank.
It pays to shop around as the loan tenure period differs with bank policy.
"Our experience is that most banks require the property to have a minimum remaining lease of 30 to 40 years when the loan is fully repaid. For instance, if you bought a property with a 60-year remaining lease, the maximum loan period might be 20 years if the bank requires a minimum lease of 40 years. So if a bank requests for 30 years (of remaining lease), the maximum loan tenure would be 30 years," explains Dennis Ng, founder of Mortgage Consultancy Portal, www.HousingLoanSG.com.
This 10-year difference in the loan period would result in heftier monthly repayments.
Why pay a premium?
Thoughtful property pros consider the conflicting arguments for and against leasehold properties as splitting hairs.
Colin Tan, research director at Chesterton Suntec, sums up the argument succinctly: "The top priority for buyers who plan to occupy the units should be housing needs, not investment potential."
"If you need more space, consider leasehold. If you have spare cash, then consider freehold. When buying for investment, (ask yourself) which is your priority - rental returns or capital appreciation? If yield is important, buy leasehold. For capital appreciation, if you think the demand for freehold will grow faster than that for leasehold, then buy freehold."
Nevertheless, here's more food for thought. "The premium between the two depends on the number of buyers who prefer one over the other. In reality, the premium stops growing when some people have had enough and ask themselves why they should pay beyond such a premium, when in practical terms, it makes no difference," says Colin.
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