Buying a condominium: Breaking down the freehold vs leasehold debate
It may seem a no-brainer to opt for freehold, but the choice isn't always straightforward. Appreciation rates for leasehold condos, for example, have been higher.
The debate on freehold versus leasehold will never end. But for the most part, the majority of Singaporeans are on the side of freehold units. We see the appeal, but consider the following before you buy.
In general, leasehold condominiums have appreciated by an impressive 86.7 per cent over the past decade. Meanwhile, freehold condominiums are lagging behind, at around 60.8 per cent. This could be because freehold condominiums are typically sold at a premium of 10 to 15 per cent, so it can be harder for them to outperform their leasehold counterparts.
Also, this demonstrates how the whole “freehold versus leasehold” debate is something of an abstraction. Factors like nearby amenities, quality of facilities, and rental yields are more significant than whether a condominium is freehold or leasehold.
DOES EN-BLOC FEVER HELP?
In theory, a freehold unit shows its ultimate quality during an en-bloc sale. These units are supposed to fetch higher prices during collective sales, as there’s no lease to run out on and owners are less compelled to sell.
Consider the en-bloc craze over the past decade; its height was in 2017 when Chinese developers flooded the market. It has since slowed down when the government imposed a steep 30 per cent Additional Buyers Stamp Duty (ABSD) on housing developers as part of the cooling measures on July 5, 2018.
To see if freehold properties really shine during an en-bloc, we looked at freehold versus leasehold appreciation at the time of the en-bloc fever. We can see that for 2017, freehold condominiums narrowed the gap a little with leasehold counterparts. Leasehold units only appreciated by around 12.2 per cent more than freehold for the period of 2017. The gap was wider at 13.6 per cent the year before, and around 15.4 per cent the year after.
So, there does seem to be more appreciation for freehold units when en-bloc sales are roaring, but perhaps not as much as many investors hoped.
COMPARISONS WITHIN LOCATIONS
As mentioned, factors like facilities and amenities matter more than the lease. For a fairer comparison, let’s look at leasehold versus freehold specifically in the Orchard (District 9) area.
We’re using this location because it’s a relatively small area, and most of the condominiums – freehold or leasehold – share the same amenities (the retail wonders and central location of Orchard Road). Also, many of the condominiums in this area are built to the same high standards.
Over the past decade, leasehold units in District 9 appreciated more than freehold counterparts. Leasehold units saw a rise of almost 80 per cent in per square foot price, while freehold counterparts only rose around 66.2 per cent.
Here's another look, this time, in a non-central location: District 15 (East Coast). We've picked this area as it is particularly inundated with condominiums. In addition, they share the same general amenities across the entire area (beach and foodie havens).
The results mirror what we saw in District 9 – leasehold properties saw a higher appreciation in price per square foot compared to freehold counterparts. The difference is around 15 percentage points, also very close to the gap we saw in District 9 condominiums.
APPLIES TO HOME BUYERS, TOO
Even for home buyers, who are less interested in price appreciation, freehold should not be your default choice. Remember that the 10 to 15 per cent premium you’re paying can impact affordability. Also, home owners should not presume that they will be staying in the condominium their entire lives.
In fact, our experience suggests it’s quite the opposite. Many home owners sell and move out long before the 99-year lease becomes an issue, such as when the children have left and they decide on a smaller place. In such a situation, they may have paid more for a freehold unit for no real reason.
This article first appeared on 99.co.