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Freehold Or Leasehold?

>> Saturday, January 16, 2010

Which gives better returns? The evidence is inconclusive.

As a result of this confusion, it has benefited many agents who will provide proof that the tenure of the property that they are selling is the more superior one. Twisting the facts to suit the situation and justifying the premium of a higher price.

Regardless, the general perception is that freehold is better. Hence, although the price gap between freehold and leasehold widens during bullish periods and narrows over downturns, it is still always there. However, this gap is not clearly defined, it is neither a fixed number (eg. $200 psf more) or a fixed percentage (eg. 5% higher).

From a rental perspective, rent is not determined by tenure. The prospective tenant is not concerned at all about the tenure. Hence, assuming the same rent, leasehold will achieve a higher rental yield due to the purchase price differential.

From an ownership perspective, freehold can be held in perpetual length of time whereas leasehold, the extension is never guaranteed by the master owner. However, in a small island like Singapore, land ownership is never guaranteed. Freehold properties have been compulsorily acquired before, nothing stands in the way of redevelopment.

A key drawback to note for leasehold is the policy of granting loans. Some banks do not give loans on leases with less than 60 years remaining. Without the aid of loans, demand for such properties shrinks due to affordability issues, resulting in lower prices.

In conclusion, leasehold or freehold? There is a Chinese saying, "Yi Fen Qian, Yi Fen Huo", you get what you pay for. So, do not be overly-fixated with tenure because the substantial value of the property is not determined by tenure. As the popular 3 rules of property goes 1. Location, 2. Location, and 3. Location.

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