Monday, 23 June 2014

Freehold vs Leasehold


Despite having been investing in property for close to a decade, I just discovered a small rare class of properties in Singapore which where leasehold for 9999 years! You heard that right, not 999 but nearly ten thousand years! Examples of these properties are Opera Estate along Figaro Street and Perpetual Apartments around the Geylang vicinity in Singapore.
There are a few forms of land tenure practiced in Common Law today:
  • Fee Simple – freehold estate land that the owner holds forever without condition
  • Estate in Perpetuity – freehold estate that the owner holds forever, however the land is subject to the terms under the State Lands Act (eg natural resource extraction)
  • Leasehold – The ownership of land is of a fixed duration as specified in the lease document (eg 9999, 999, 99, 60, 30…etc)
The freehold vs leasehold question has been an age-old debate. I was raised in a family who firmly value property ownership. My parents believed that properties where meant to be acquired, maintained and passed on to the next generation. Therefore, buying a leasehold property was never an option.     
When making an investment decision, we should always consider our entry point, exit point, risk and investment horizon. The decision to purchase a freehold or leasehold very much depends upon our investment strategy.

If we view our property investments to transcend generations, a freehold property would definitely make sense.

The property market is however cyclic, therefore the investment horizon is within multiples of the property market cycle, a freehold and leasehold matters very little. During an uptrend, both freehold and leasehold properties will appreciate in tandem.

Under some special circumstances, the government may also approve the top-up of leases. Some examples in Singapore include are Eng Cheong Tower, 1 Shenton Way (One Shenton), NatWest Centre (The Clift), Grangeford (Twin Peaks), Ong Building (76 Shenton) and HMC building (Lumiere).

In conclusion, while in it may seem common knowledge that freehold properties are superior, don’t underestimate the investment potential of leasehold properties as well.

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