Freehold or leasehold

WHICH gives you better returns in terms of capital gains? Freehold or leasehold? Neither really. The evidence is inconclusive.

Some years back, I made several comparisons. Depending on the period analysed or property cycle selected, you can declare one better than the other. What this really means is: You do get what you pay for.

There is some confusion in the market which only benefits unscrupulous agents. They will try to convince you that the tenure of the property they are selling is better. The general perception is that freehold is better. Yes, but only in ownership rights, not capital gains.

In terms of rental yield, the leasehold property comes out better because you are not likely get more rent on the basis of tenure.

To correct an earlier report, the price gap between the tenure types does not disappear during good times. It widens during bullish periods and narrows over downturns but it is always there.

The reason for the premium lies in ownership rights, not in housing services provided. The housing benefits (e.g. location, surrounding amenities, etc) for similar properties with different tenures are the same. From my observations, the premium is also not a fixed gap, i.e. $200 or $300 per sq ft, nor is it a percentage. It is a combination of the two. So, as prices rise, the percentage actually drops slightly.

Also, a lone leasehold among freehold does not fetch any more less than it should. Vice versa. But if you think about it, a leasehold among freeholds should fetch more as there is no competition whereas a freehold among leaseholds will stand out as being more expensive and having to justify its higher cost.

Recently, a developer made the news by selling the leasehold rights on a property to which it holds the freehold title.

Are there any potential pitfalls? Well, in a collective sale, the sellers may not get a better price than if the master owner were someone other than a developer. Which developer would allow a competitor to earn on a property which it could earn for itself? So, any sale would likely be a collective sale back to the master owner.

Another disadvantage of leasehold properties cited by some is that a lease top-up is never guaranteed by the master owner.

On that matter, I would say that no property is guaranteed, especially in a small place like Singapore. Freehold properties have been compulsorily acquired before. Nothing stands in the way of redevelopment.

A leasehold property is a depreciating asset. When a significant proportion of the lease has expired, its value may drop sharply. But this has to do with the policy of granting loans here. Some banks do not lend on leases with less than 65 years remaining. Without the aid of loans, demand for such properties shrinks due to affordability issues, not tenure per se.

In conclusion, we should not be overly-fixated with tenure because the substantial value of a property actually lies in its location – not tenure, not facilities, not fittings.

People often forget this, even developers. Sometimes, prospective buyers are blown away by the branded fixtures and fittings, forgetting that these depreciate over time.

HDB valuers very often experience problems from sellers because of extensive renovations done five years or more previously. These owners forget that designs get outdated, while some improvements are a matter of taste. Get a buyer who shares the same taste and you should be able to get well above market value.

Keep it simple if you intend to sell your flat a few years down the road.

The writer is the director of research and consultancy at Chesterton Suntec International. The opinions expressed here are his own.

Source: Today, 16 Jan 2010