Freehold vs Leasehold: Should You Even Care?

Kaewta Adulya @GoodPlaceHQ

When I was starting out in property, a friend once told me, “Khai Yin, there’s only one thing to remember… freehold good, leasehold bad.”

That it sounded something out of George Orwell’s Animal Farm (“four legs good, two legs bad”) should have sounded off alarm bells already. And I have since known to be extra wary of such truisms, and to treat them like pieces of cat poo infested with Zika virus.

As you’ll see in today’s guide, whether a piece of property is freehold or leasehold may or may not matter depends on why you’re buying the property for.

Freehold vs Leasehold: The Fundamentals

If you own a piece of freehold land, it means that you have ownership of that property forever, and you can pass it on to whoever you want, who can then pass it on to whoever he or she wants in perpetuity.

On the other hand, if your land is leasehold, the tenure is limited – usually by (the maximum) 99 years if you bought your property from the developer, and much less if you’re getting an extension.

In the case of the latter, when the tenure expires, the owner will need to apply to the state government for an extension of the lease. If the application is approved, a premium is payable depending on the prevailing market value of the land.

The Question Of Value Appreciation

There’s anecdotal evidence that values of both freehold and leasehold properties appreciate at a similar rate for the first 20+ years.

However, nearing the end of its tenure, the value of a piece of leasehold property predictably stops going up. In this respect, freehold properties win in the longer run, as far as value appreciation is concerned.

Additionally, older leasehold properties are also harder to sell because of the uncertainty in the renewal of the lease (which is under complete discretion of the local authorities).

Also, bank loans are harder to come by for leasehold properties with shorter tenures. Even if you manage to get a loan, the margin of financing may be comparatively lower to that of freehold properties.

As with everything else, prices of property are determined by the sacrosanct law of supply and demand, and if freehold properties are more popular, naturally, they will fetch higher prices, both in the short run and the long run.

The Case For Leasehold Properties

Location remains the biggest driver of demand in real estate, and you’ll see that some of the best locations in the Klang Valley are leasehold – for example: Bandar Sunway, (large swathes of) Petaling Jaya old town, Tropicana (near the golf course) and the Seputeh area in KL.

There is no doubt that the freehold status is a strong selling point for new projects. As such, developers understand the need to “make up” for the leasehold status of a new project that they want to launch. Therefore, for new projects at least, leasehold properties often give a better bang for the buck in terms of features, design, and concept when compared to freehold properties.

Finally, understand that freehold properties are limited in availability, and so the question of freehold vs leasehold will most probably be moot sometime in the future – simply because the buyers won’t get much of a choice.

So, Khai Yin, Does It Even Matter?

First, realize that even when you own a freehold land, you own it in perpetuity, the state government has the powers to forcibly acquire it from you. Therefore, the idea of “owning a piece of land forever” is somewhat fallible.

So, with everything else equal, yes, you should always opt for properties with freehold status. However, whether a property is freehold and leasehold should be secondary compared to other factors like location, developer reputation, concept, and upside opportunity.

Now with the price of houses becoming the single biggest concern especially among first-time buyers, it’s a question of whether a piece of property is affordable, and not if it’s freehold or leasehold.

About Khai Yin

When I am not writing for GoodPlace.my and helping my readers find properties though the DealMatcher service, I spend time doting on my three kids: Wenyi, Qinyi and Eian. My personal stuff, some published essays and contact details can be found at khaiyin.com

Comments

  1. If freehold properties are now limited and will become unavailable in the future, then by the laws of supply and demand, the premium for existing freehold properties is likely to rise even further! The choice is still there, it becomes a question of how much you are willing to pay for it!

  2. nokomis says:

    I’d take a closer look at this. I’m not so sure it’s quite so simple. We looked at leasehold properties in Singapore. We used psf as the measure of property value and compared aggregate prices in several leasehold districts to similar freehold properties. We looked at properties with both long tenures remaining as well as those entering the last third of their lifetimes.

    The result was that leashold properties almost always trade at a discount to freehold. That was typically around 30% for the periods we examined. The width of this discount changes with the buoyancy of the overall property market. It seems that when the market is rising, the discount narrows, while in a falling market, the discount widens.

    This means that in a weak market, leasehold properties represent a substantial bargain, while in a rising market, their value climbs faster than freehold properties. We found no evidence the often-mentioed 1%pa drop in value for leashold properties.

    Given the discount, leasehold properties offer more utility for the same price. That utility can be realised in either rents or in enjoyment of the property. Basically, the yield is typically higher or you get a nicer property for the same money.

    The behaviouor of leasehold prices offers opportunities for market timing on the capital value side. In weak markets, leasehold properties become better value, while in rising markets, they offer stronger capital appreciation. The mentioned caveats on properties reaching the end of their tenures applies.

  3. This is from another point of view on Freehold (FH) and Leasehold (LH).

    Let say same area, eg. kuchai. 2 Condo, similar level, 1 freehold selling RM700k, another 1 leasehold selling RM600k.

    1. RENTAL YIELD
    Tenant don’t care is FH or LH. tenant care about rental only, bro.
    Let say LH rent at RM2k (4% yield), your FH shall not far than RM100 and probably will rent at RM2.1k (3.6%).
    LH will gain higher yield.
    Well, LH will get rent out faster. Or, even your FH force to rent at RM2k too (yield drop to 3.4%), bro.

    2. APPRECIATION
    Let say we consider current 2016 the slow annual appreciation 6%, mean 6 x 16 years the price will goes to 96%, mostly 100%, which mean the price is double at after 16 years. FH RM1.4m, LH RM1.2m.

    LH have about extra 0.5% yield, 16years is 8% extra. (forget about accumulation, as use the minimum different yield).

    LH RM1.2m, let say now he need renew the title.
    Should the maximum to renew is 10%, which is RM120k.
    2nd hand owner pay RM1.2m + RM0.12m = RM1.32m cost.
    Compare buy FH RM1.4m, he can save RM80k, bro. Attractive enough?

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