Freehold not always better than leasehold

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#1
Do you agree with her? Nevertheless, a good read for property value investor...Big Grin

Freehold not always better than leasehold

Apart from location, the next most important question on a home buyer’s mind is probably the tenure of the property.

There are generally two types of tenure in Singapore: Ninety-nine-year leasehold and freehold. For all practical purposes, the 999-year leasehold property is considered to be the same as freehold because the difference in their values is negligible and banks will not impose any loan limits.

Freehold properties hold a few key advantages over their leasehold counterparts, namely higher en bloc potential, slower pace of depreciation and the absence of restrictions on the use of Central Provident Fund for home purchases.

In recent years, new leasehold condominiums have dominated the market. The proportions of new leasehold and freehold condo sales stand at 95 and 5 per cent, respectively, in the first half of this year. In contrast, back in 2006 and 2007, around 70 per cent of new sales were freehold. This could be attributed to the ramp-up of the Government Land Sales programme in recent years and the tightening of en bloc rules in October 2007.

Proponents of freehold properties argue that the price appreciation of such homes always outstrips that of their leasehold counterparts as the value of the latter will depreciate over the course of the lease.

In order to find out how properties with different tenures but similar attributes perform over time, let us compare two projects, Southaven I (99-year) and Southaven II (999-year). Both projects were developed by Ho Bee Group and share similar attributes such as location, product quality and facilities. Both projects were also launched for sale in 1995, but completed two years apart.

The price gap between Southaven I and II widened from only 8 per cent at its launch in 1995 to 18 per cent in 2013. However, this price trend alone is not conclusive due to uneven and thin transaction volumes. For example, in 2003, there were only five transactions for Southaven I and one for Southaven II.

The attributes of units sold in the same year were also not directly comparable as they could be on different levels or have different facings. Nevertheless, the comparison gives a good glimpse of how two projects with different tenures located right next to each other fare over time.

If we look at the broader market, freehold condominiums may not always enjoy superior price appreciation over their leasehold counterparts. An analysis of the freehold and leasehold indices over the last three property cycles shows that out of the three up-cycles, the freehold index only outperformed the leasehold index over one cycle between 3Q2006 and 2Q2008. This was the period just before the global financial crisis, when the en bloc frenzy reached an all-time high in terms of number of deals and transaction values.

During this up-cycle, the prices of freehold properties rose 54 per cent, outperforming leasehold properties, which appreciated 39 per cent. For the other two up-cycles, en bloc activity was muted, with fewer deals and much lower transaction values.

We can thus infer that en bloc potential plays a key role in determining the price performance of freehold and leasehold properties.

Interestingly, during the subsequent downturn, freehold condominiums also lost 27 per cent of their value, wider than the 24 per cent decline for leasehold condominiums.

Upon analysing the down-cycles, it emerged that, regardless of tenure, the higher the price appreciation during the upturn, the greater the fall during the downturn. This was what happened to leasehold properties during the dotcom crash. The prices of leasehold condominiums gained 46 per cent compared to 38 per cent for freehold condominiums. However, leasehold condominiums fell almost twice as much as their freehold counterparts when the market went into a slump after the dotcom crash.

In the landed segment, the performance of terrace houses seems to paint a different picture. Freehold terrace houses have outperformed the leasehold ones in all periods except for the downturn during dotcom crash.

In good times, they perform better than leasehold ones, and in downturns, they also seem more resilient. This could be because of the restrictions on foreigners owning landed properties in Singapore. Singaporeans make up 88 per cent of the buyers for landed transactions, but only three-quarters for the non-landed properties.

So, which is better, freehold or leasehold? Based on the analysis, the answer depends on whether one is buying a landed or non-landed property. If one is buying a landed property, historical data shows that freehold might be a better choice. If one is buying a leasehold non-landed property in the current up-cycle, given the challenging en bloc market, it could help to lock in more percentage gains.

It is never easy to determine which tenure is better as property values are influenced by multiple factors. The leasehold and freehold indices also have their limitations as they could be swayed by the types of transactions (data can be skewed by new launches) in the market.

All else being equal, freehold properties will always command a premium over their leasehold counterparts. Nevertheless, prospective buyers should not shy away from the latter, as well-maintained leasehold properties in excellent locations may deliver superior returns on investment compared to freehold properties with less desirable attributes.

Christine Li is Head of Research and Consultancy at property firm OrangeTee.
http://www.todayonline.com/business/prop...-leasehold
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#2
enbloc potential is an embedded option in SG property investment. And plot ratio is always going up. (never go down).

FH property will have 1 less hurdle to enbloc vs L99 - lease top-up by SLA. which cost money (more as lease run down) and subject to approval.

so if specifically look at enbloc potential, freehold is definitely preferred coz less money goes to SLA top-up so more profitable.
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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#3
Just like stocks, some are for short term and some are for long term. For flipping 99 lease. For long term FH.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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#4
From what I know/feel, freehold or leasehold that are less than 10 or 15 yrs usually will not show much difference in the price movement. After that, then the price movement difference will start to be more obvious.
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#5
(15-11-2013, 10:59 AM)Temperament Wrote: Just like stocks, some are for short term and some are for long term. For flipping 99 lease. For long term FH.

in SG, property value comes from the land value. In Iskandar, its value mainly comes from the building itself.

Msians so 'nua' in maintaining their property, value all destroyed. SG building 'lok kok' also got people snatched...haha..
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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#6
My View. If one is buying for rental income, it is better to go for LH. FH properties usually are in less desirable location then LH. Tenants will not care whether if the property is FH or LH. What they are looking for is convenient and the condition of the house. On the other hand, if buy for own stay and perhaps with intention to pass on to next-of-kin, then FH could be better.
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#7
If going for rental, still have to look at capital value. Coz need to exit investment in future. so at least
wont lose money (in a bad market)

If not, will be like K green (business trust). Pay out dividends while concession maturity keep getting nearer.
It is like a self-liquidating trust. and you are paying "using brain" mgt fees for them to do "no brainer" cash mgt.
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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#8
(15-11-2013, 11:01 AM)NTL Wrote: From what I know/feel, freehold or leasehold that are less than 10 or 15 yrs usually will not show much difference in the price movement. After that, then the price movement difference will start to be more obvious.

Agree with the impact becoming significant after around 25 years. Mathematically we can see that LH99 price appreciation will taper starting around the 2/3 of it's life ie 67 or 70years and start depreciating like any 30 year lease. HDB flat has not been around that long yet. The psychological impact of heartlanders who think prices can only go up will be in for a shock.

Will be interesting to see how HDB will tackle this issue in 2020-2030 by maybe taking back those old flats so that the psychology will not be impacted and hence affect expectations, or just try to manage the negative wealth effect. HDB already start doing some "pattern" on the property loan side.
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#9
(15-11-2013, 03:13 PM)specuvestor Wrote:
(15-11-2013, 11:01 AM)NTL Wrote: From what I know/feel, freehold or leasehold that are less than 10 or 15 yrs usually will not show much difference in the price movement. After that, then the price movement difference will start to be more obvious.

Agree with the impact becoming significant after around 25 years. Mathematically we can see that LH99 price appreciation will taper starting around the 2/3 of it's life ie 67 or 70years and start depreciating like any 30 year lease. HDB flat has not been around that long yet. The psychological impact of heartlanders who think prices can only go up will be in for a shock.

Will be interesting to see how HDB will tackle this issue in 2020-2030 by maybe taking back those old flats so that the psychology will not be impacted and hence affect expectations, or just try to manage the negative wealth effect. HDB already start doing some "pattern" on the property loan side.

older HDB flats in mature estates has an embedded SERS option. HDB exchange new (smaller) flats with your old (bigger) flats (like in Aladdin...hahaha).

Flats in Punggol/Sengkang may not have this embedded SERS option.
Still too much land there.
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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#10
In s'pore, it is location location and location.

If you have a leasehold ppty next to a MRT, sure..the number of years will run out, but before that happens, opportunities will likely present themselves to the owners to unlock the value of the remaining lease. It will come as a premium compared to similar ppties away from the mrt.

Next to prime schools is another thing. Again, opportunities will present themselves.
But schools can shift, not MRT. Once built, almost impossible to re route.

Nothing beats the convenience of living near a MRT station, especially those below ground stations.

If you have FH and near MRT, its a goldmine. IMO.
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