We delve into the age-old decision that those of us lucky enough to live in a big city must eventually deal with.
When looking for a new home to purchase, do I put my money down for a freehold or leasehold property? Singapore has an interesting home title structure in that there are three types of ownership available – freehold, 999-year leasehold, and 99-year leasehold.
WHAT IS A FREEHOLD PROPERTY?
When you purchase a freehold property, you are essentially acquiring the rights to legally own the property outright in perpetuity. Now that’s not to say the government at some time won’t have a compulsory land acquisition on your home or an en-bloc collective purchase won’t take place. However, if that was the case then you’d be compensated. So you have that added security knowing that there are limited circumstances where if you fully own a home, it can be removed from your ownership.
WHAT IS A LEASEHOLD PROPERTY?
Given that there are two types of leasehold arrangements available, whichever one you choose could theoretically change the value of your home. Any 999-year leasehold can be thought of as similar to owning a freehold due to the length of time granted. This is similar to the lengths of time you would see in the UK. A 99-year leasehold should be thought of very differently. Whether buying new or used, there’s not as much time left until the lease reverts back to the freeholder, which in the case of Singapore would be the government. If the owner wants to continue living in their home, then they would need to extend their lease for another 99 years. This can be done through the Singapore Land Authority.
Leasehold properties also carry restrictions in regards to how you pay for them. If the property has less than 60 years to run on its lease, then banks usually won’t finance the purchase. A property with 30 years or less left to run on its lease can’t be purchased with the buyer’s Central Provident Fund (CPF). Due to these two restrictions, properties past these ages will start to depreciate at a faster rate.
WHERE IS THE MARKET CURRENTLY?
All things being equal, the current difference in price has freehold edging leasehold property by about 15-20%, which is quite narrow. This is due to the market being in a down cycle. However, some developments have a very close price gap between the two types of ownership. In the next 20 years, that price gap should be further apart as the market recovers and the supply of freehold land in Singapore diminishes.
HOW DO I DECIDE WHICH TYPE OF TITLE TO PURCHASE?
A leasehold property is typically less valuable than a freehold property based on the fact that one day the lease will run out. This is seen most prominently in regards to the 99-year leases. The Singapore government may allow owners to top-up their lease back to 99 years, though this is not a guarantee as was seen with The Arcadia condominium. However, if you are looking to rent out your home, there may be marginal benefits to the rental yield as the price you purchased the property for will likely be lower.
Realistically then you need to decide whether or not a marginally higher rental yield outweighs a potentially higher capital gain over the longer term and ownership of the property in perpetuity. If you take the latter, then this is an excellent way to hedge against inflation and preserve your wealth.
This article was originally published by WEALTH, Asia’s marketplace for investors. Written by Robbie Wilson
Poppy covers a wide range of topics at Billionaire, having spent the past 13 years at companies including Singapore Tatler, Her World Plus and Harpers Bazaar UK. She has a passion for fashion, jewellery and travel as well as an avaricious fascination with crime novels. Follow her at poppypskinner on Instagram.