Which is better - Freehold or Leasehold?
FREEHOLD or LEASEHOLD: Which is better?
There is absolutely no right or wrong decision. The choice ultimately depends on your objectives and goals.
For us, it is always important to establish our clients objectives whenever we discuss with our clients on their property plans.
To better assess your goals, you can contemplate on questions like: “Is this property for making profit or is it a property that you wish to pass down to your children in the future?”
We will share with you some interesting facts & figures on a “freehold vs leasehold” scenario that will hopefully enlighten you.
There will also be some examples shown. 1st example: Urban Residences & Minton (Nearby each other)
As you can see, Urban Residences is a FREEHOLD property whereas Minton is a LEASEHOLD property with 99 years lease from 2007.
The reason why we are comparing these two projects is simply because they are right next to each other.
Now let’s look at the historical price trend for these two properties.
As you can see, Minton launched at around 8xx psf and went up to its highest point at about $1300 psf.
Comparatively, the prices of Urban Residences did not move much.
It was from about $1200 psf and moved to about $1300 psf. (We are looking at the areas which has more dots and the dots represent transactions.)
Thus, from this chart, we can see that the LEASEHOLD property had a higher jump in terms of pricing as compared to the FREEHOLD property.
The question is WHY?
Why did Urban Residences prices not jump as much when compared to The Minton?
Did the owners buy at a high?
Maybe the area cannot command a higher price?
Of course, to be objective, we must also add in that after the surge for Minton, the prices remained rather stagnant.
If you are wondering why is that so, it is another topic altogether.
One reason is that if you have been following the property price trend, usually there is a surge in prices when a newly launched property reaches the TOP period as compared to when it is first launched.
This could be partly due to more demand for a property that has reached the TOP stage as buyers can collect keys and move in upon purchasing.
So back to this topic, as we said earlier, the pricing of the FREEHOLD property (Urban Residences) did not jump as much as the LEASEHOLD property (The Minton).
In fact, till today, the price of Urban Residences did not really move much.
Why is that so?
If you look at the chart, the dots represents transactions.
When you look at Urban Residences (which is the red line), there are way lesser dots as compared to The Minton (blue line).
This means that Urban Residences has lesser transactions as compared to The Minton.
Furthermore, looking at the above chart, from 2014 to 2018, there is no dots (transactions) at all!
Of course, we must note that Urban Residences is a very small development with only around 47 units as compared to The Minton which has 1145 units!
Logically, if there are lesser units, there should also be lesser transactions.
So what can we learn from this?
The volume of transactions in a development do affect the price.
Now did The Minton owners really make money?
Look at this table below:
There are a total of 211 PROFITABLE transactions.
Of course, there are definitely still a lot of owners that are sitting on a profit and did not sell as well.
If the unit is not sold, it will not be reflected in the profitable transactions.
There is a good number of owners that actually made a good amount of money.
In the chart, you can see that there are owners that made about $300k onwards with the highest making around $500k.
Now if we compare to Urban Residences which is a FREEHOLD development :
There is only 1 profitable transaction and the profit is just $119,421.
From this example, you can actually see that in terms of investment on NEW launches, the LEASEHOLD property actually outperformed the FREEHOLD property.
Now of course this is just one example.
To be very honest, there is no DEFINITE answer that if you buy a LEASEHOLD property you will definitely make money.
There are a lot of factors involved if you are comparing FREEHOLD & LEASEHOLD properties.
Which we will try to cover as much as we can in this blog post.
Thus, let’s look at another example!
2nd Example: Springdale & Southaven 1
Springdale is a 999 years leasehold (Which is arguably as good as a FREEHOLD) property whereas Southaven 1 is a LEASEHOLD property with 99 years lease from 1994.
For a fair comparison, we chose properties that are not only close to each other but also fairly close in the TOP date. (Same as my 1st example)
This is to ensure that there is not a huge difference in terms of the age from TOP as well as the condition of the properties we are comparing.
Just to side-track, the condition of a development is an important factor especially if you are looking at older developments. (For eg. Maintenance, etc.)
This is because it may also affect your sales price in the future.
Now let’s get back to my 2nd example.
Where are these two developments located?
Let’s look at the map below:
As you can see, these two developments are right beside each other.
Now let’s look at the historical price trend of Springdale & Southaven 1:
This time I took a more recent time period for the price trend chart.
If you look at the Springdale (red line) price trend, it was hovering at around $1000 psf but today we are at about $1200 psf.
Which means to say that even in the resale market, Springdale saw a growth of about $200 psf.
However, for Southaven 1 (blue line), the prices is hovering around $8xx psf to $9xx psf.
We do not see a huge gain in terms of the profit.
If you realise, Southaven 1’s TOP date was in 1997 and the lease started in 1994.
This means as of today, the age since their lease start date is about 26 years, which is close to 30 years.
Today, a lot of buyers are rather sensitive in terms of the remaining lease of a property especially when a property reaches about 30 years old or more.
If you are comparing new developments in terms of FREEHOLD vs LEASEHOLD, it seems that a leasehold property has more gain. (Refer to my 1st example)
However, if you are comparing older developments (based on my 2nd example), it seems that older leasehold properties prices are more stagnant as compared to older 999 years leasehold properties.
And in certain cases, the prices of older leasehold properties may even drop.
So from our 2nd example, one of the key factors we should look at is the AGE of the property especially for leasehold properties!
For 999 years or freehold properties, age may not be a huge concern but of course as mentioned earlier, the condition of the development would be very important as this is what many buyers will look at.
Now let’s look at the profit of Southaven 1:
For this example, we are looking at the profit from 2014 to today.
In Southaven 1 there is a total of 55 profitable transactions.
But there is only one transaction (as seen above) that bought in 2014 and sold in 2018 which made a profit of about $145,000.
Beyond that, there are no other transaction where the Southaven owners made money from 2014 to today.
But if we look at Springdale :
There are actually 4 transactions where the Springdale owners made about $100k plus to $200k plus profit from 2014 to today. (which is further seen in the above historical price trend chart of Springdale & Southaven 1)
Summary on the above two examples:
In our first example, the LEASEHOLD property made profits. (New Properties)
In our second example, the 999-years leasehold (as good as FREEHOLD) property made profits. (Older Properties)
As real estate consultants, we realised that there a lot of fine details we must look at to determine whether we stand a higher chance of making profits and not just based on whether it is a FREEHOLD or LEASEHOLD property...
For example, look at your own property portfolio.
Maybe you have a lot of plans and you are thinking of changing your leasehold property to a freehold property OR changing your freehold property to a new leasehold property
There are many situations that you can be in
So you need to research based on factors like:
1) Your own current property
– Is it a FREEHOLD or LEASEHOLD?
– Are you going to KEEP IT or SELL IT?
– If you SELL, How much will you make?
2) Your next property purchase
– How much upside potential?
– Are you going to KEEP IT or SELL IT in the future?
– If you plan to sell, what is your EXIT strategy?
What are the factors to have a higher potential of profits?
Let’s go back to our 1st example on Urban Residences & Minton.
First factor to take note: LAND SIZE / NUMBER OF UNITS
As you can see, we actually highlighted three things.
The Land Size, Year of Completion and Number of units
Urban Residences is a very small project with a land size of only 2205 sqm.
Minton, on the other hand, is larger with a land size of 43,127 sqm.
Do note that for this example, the year of completion is very close to each other (Just one year apart.)
The key thing to take note is the vast difference in terms of the number of units.
For developments that have a low number of units, the chances of the price going up is not high.
In fact, if we look at newer properties like Minton & Urban Residences, freehold does not really have an edge over leasehold.
Especially if the properties are relatively young. (Minton’s year of completion was in 2013 which makes it just about 7 years old)
For properties that are less than 20 to 25 years old, the prices will not see a huge drop or may even see some increase.
Second factor to take note will be the AGE OF THE PROPERTY FOR LEASEHOLD
Now let’s look at our example of Springdale & Southaven 1:
Springdale’s land size is 26,987 sqm while Southaven 1’s land size is 11,063 sqm.
The completion date is also close to each other.
Southaven 1 was completed in 1997 but the tenure started from 1994 which means it is about 26 years into the lease.
This is where we should also take note that as the age of the property start to get older, we will start to see a slowdown in the price growth.
If you are buying a freehold property, age does not matter however the condition and maintenance costs comes into play.
However, if you are buying a leasehold property, then age is a huge factor!
The third factor will be the demand & supply.
If you look at property itself, regardless of freehold or leasehold, it is all about demand & supply.
Because when a leasehold property get older, the demand will actually drop.
Buyers like you & me may be somewhat worried to purchase an older leasehold property.
Also, for us personally, when we go into a smaller development, it does not seem enticing enough for me to buy a property there.
Of course there are still a handful that prefer smaller developments due to it being less crowded etc.
However, when we compare the facilities, it usually loses to bigger developments.
Many buyers are usually more enticed by the facilities of bigger developments.
The first two factors such land size and age actually determines whether there will be demand.
Even the amount of maintenance fees will determine whether there is a higher demand!
Therefore we cannot ignore even the small factors as it also drives the demand and if the demand is high, the prices will definitely have to go up.
Like what we mentioned earlier in this blog post, there are many other factors that determine the profit other than just the FREEHOLD or LEASEHOLD status.
If you are going for newer properties, such as a new launch, it might be better to go for leasehold properties.
Because in the market, the prices for a FREEHOLD new property is usually higher than a LEASEHOLD new property.
However, if you are going for OLDER properties, there may still be some good freehold property that you can look at.
In fact, for a cheaper PSF, you can still get a freehold property but it is most likely going to be OLD.
But you still have to look at other factors such as the demand & supply in the area, the condition, the maintenance costs, etc.
At the end of the day, especially in today’s market with measures like the Additional Buyer Stamp Duty (ABSD), it is important to review your property portfolio to ensure it is working hard for you.
If you want a more in depth analysis, consult us at Singjia or alternatively, leave us a message and we will be happy to assist you.