Freehold better than leasehold?

Far East Organization is selling its latest project, The Shore Residences, on a 103-year lease even though it sits on freehold land as it wants to partake in the site’s redevelopment potential.

Experts say the move means the developer cannot yet get the full value for the property. If The Shore Residences were sold as a freehold project, Far East would price it higher, they say.

Leasehold homes may have become more popular in recent years, but there is still a price gap between freehold and 99-year leasehold homes.

This gap may disappear during good times, but it will appear as the property ages.

Property experts reckon that freehold homes typically command a premium of about 10 per cent, or up to 15 per cent at times, over leasehold homes, assuming a like-for-like comparison.

In a prime location where freehold homes are plentiful, a lone leasehold property will usually fetch less than its freehold neighbours.

Because of the price difference, a leasehold condominium unit will fetch a higher yield than a freehold one. For those looking to invest in a rental property, it would make sense to go for a leasehold property.

Tenants do not care whether a property is freehold or leasehold, and during boom times, buyers can be equally indifferent.

‘In a bull market, developers would be able to launch any project regardless of the tenure,’ said Ngee Ann Polytechnic real estate lecturer Nicholas Mak.

‘The price difference between an older freehold project and a newly launched leasehold project can be negligible on a per sq ft basis.’

The difference becomes apparent only later on.

‘When times are good, there is marginal price differential between leasehold and freehold new launches,’ said Colliers International’s director of research and advisory, Ms Tay Huey Ying.

‘But as the property ages and the lease shortens, the price gap will widen.’

Financing becomes tougher as the lease runs down and that affects prices, she said.

‘Your freehold interest is for perpetuity versus an interest that diminishes with time,’ she said.

Time, however, can be extended. There is life after 99 years as the Government is prepared to top up or renew the lease if there are redevelopment or upgrading plans, according to property experts.

The only problem is that it is not 100 per cent guaranteed, Ms Tay pointed out.

‘There is still uncertainty as the Government may not top up the lease if it has other plans for the site,’ she said.

In new prime areas where there is residential space such as Marina Bay and Sentosa Cove, buyers simply have no choice but to accept leasehold as the norm.

All the new residential developments there have 99-year leases, and some of them still managed to fetch eye-popping prices.

When the first condo project in Marina Bay – The Sail @ Marina Bay – was first released in late 2004 at $900 psf, some said it was crazy to pay so much for a 99-year leasehold condo.

But confirmed plans for an integrated resort in the area quickly erased any reservations associated with the tenure. Sub-sale deals of units at this condo later reached prices of more than $2,000 psf.

Singaporeans used to have a serious obsession with freehold homes, experts said.

But today, the younger generation is more receptive to leasehold properties as they tend to take a shorter-term view, said Ms Tay.

‘They are more willing to pay a higher price for a leasehold property in a good location than a lower price for a freehold property that is located farther away,’ she said.

Also, there are some people who are simply not bothered by a 99-year leasehold title, said Mr Mak.

Buyers from China, for instance, do not mind 99-year leasehold properties as they are used to shorter leases of 70 years back home, experts said.

Source: Sunday Times, 3 Jan 2010