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The difference between a leasehold and a freehold property in Singapore

The real estate market in Singapore has been depressed for the last two years. While this has been a boon for new home buyers, investors who purchased properties for capital appreciation at the height of the boom in 2013 have seen the value of their investments depreciate sharply.

The price of a property in Singapore is broadly influenced by three factors.

While general market conditions and the location of the property play an important role in determining values, buyers should bear in mind that freehold properties command a premium over those that have leasehold tenures.

 

What are the main points of difference between freehold and leasehold?


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Source: Thinkstock/Getty Images

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Freehold properties have several distinct advantages over those with leasehold tenures. For one, they give an owner rights in perpetuity. It is possible to pass on ownership from generation to generation without any time limit.

In Singapore, there are two types of leasehold property. The first has a 99-year lease period. While this is fairly long and of little consequence at the beginning of the lease, it assumes greater importance when the lease tenure approaches its end.

Leasehold tenures can also be 999 years long. Property with a lease of this length is normally considered to be at par with freehold property as there is little practical difference between having perpetual rights and having rights that expire in 999 years.

 

A bank loan is easier to obtain for freehold property


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Source: Thinkstock/Getty Images

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Singapore property rates are among the highest in the world. Consequently, it is difficult to buy a home or make a property investment without taking bank finance.

But banks make a distinction between freehold and leasehold and are more likely to approve a loan that is secured by the former.

The reluctance of banks to extend financing for leasehold property increases as the lease approaches the end of its tenure.

A bank will probably not hesitate before making a loan on a property that still has 90 or 95 years to run on its 99-year lease.

 

Implications for HDB flats


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Over 80% of Singaporeans live in HDB flats. These have 99-year tenures and once this time period expires, the land on which they are situated reverts to HDB and to the government.

Does this mean that HDB flat owners will have to surrender their property when the lease expires? Although the official position is that the property will revert to the government, even the earliest HDB flats have many years remaining on their 99-year leases.

 

Selective en bloc redevelopment scheme


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One way out for HDB flat owners is the Selective En bloc Redevelopment Scheme (SERS). People who live in an HDB flat located in an area that is being redeveloped under this initiative will get an opportunity to move into a new home that has a fresh 99-year lease.

Apart from giving residents certainty for another 99-year period, this scheme has other advantages too. Flat owners will also get “a package comprising compensation and rehousing benefits.”

 

What exactly is the difference in value between freehold and leasehold property?


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Source: Thinkstock/Getty Images

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The Singapore Land Authority, a government body, has devised a chart giving leasehold values as a percentage of freehold values. According to this Differential Premium system, a property with a new 99-year lease will carry a 4% discount compared to similar freehold property.

As the remaining tenure of the leasehold property decreases, the discount rises. With 90 years of the lease remaining, the discount is 5.4% and with 80 years remaining, the discount increases to 9%.

It is important to remember that even though the values of freehold and leasehold properties differ, there is no difference in rentals between the two categories.

This effectively means that the return that a landlord enjoys on leasehold property is greater than the return on a freehold property.

 

Freehold or leasehold – check the status before investing


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Source: Thinkstock/Getty Images

Source: Thinkstock/Getty Images

At first sight, there is not much difference between freehold and leasehold property. But a closer analysis will reveal subtle dissimilarities, some of which can play a crucial role in the value of the investment.

For example, CPF money cannot be used to buy a home with less than 30 years of lease remaining. But for most practical purposes, home buyers and investors should not hesitate before purchasing a leasehold property.

Of course, it is essential to first gain a thorough understanding of the implications of the nature of the property’s status.

Real estate buyers should bear in mind that the prices of freehold and leasehold properties move in tandem. When values in the real estate market in Singapore finally change direction, owners of both kinds of property stand to benefit.

(By Ravinder Kapur)

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