Choices within a choice segment

by Tang Hsu Jing
05:54 AM Dec 17, 2010

The landed residential sector has been a consistent star performer over the last year or so. It is a sector that has powered on even after the Government exercised round after round of property market cooling measures. The optimism was also evident in the keen interest from developers in the recent government-released landed housing plots for Phase 3 of Sembawang Greenvale.

Within this premium landed segment, there is significant difference in the price performance between freehold and leasehold properties. This article focuses on two districts, 10 and 16, where there are good and comparable freehold and leasehold landed residential properties. It is based on the analysis of caveats lodged in the Urban Redevelopment Authority's Realis system since 2000 for terrace, semi-detached and detached houses comparable in size and age.

For the purposes of this article, freehold and 999-year leasehold properties have been combined under the same category. The practical definition adopted for freehold properties is one where the owners have the right to own the properties in perpetuity: The tenure is of an indeterminate duration. Leasehold properties of 999-year tenure effectively function like freehold properties, although from a legal perspective, they are still leasehold properties. Lastly, leasehold residential properties are those whose land reverts back to the State at the end of the tenure, typically a 99-year term.

The premium of freehold landed properties over 99-year leasehold landed properties is typically about 15 to 20 per cent. However, this can widen during a hot market, when there is added interest in freehold landed housing. This trend was observed in the districts analysed. During the mid-2000s, the rate of capital appreciation for freehold properties began to increase faster than that of its leasehold counterparts, thus widening the premium for freehold landed properties. This can be rationalised by the inverse relationship between the age of leasehold landed properties and remaining years in the tenure, which slows down the rate of capital appreciation after some time. Thus, as one would expect, freehold properties have a better rate of capital appreciation in the long term.

Despite the better long-term rate of capital appreciation, freehold properties are more volatile in terms of prices and the annual rate of capital appreciation. This can be explained by the popularity and scarcity of freehold landed properties, especially during an upmarket.

Although tenure is an important factor, the immediate surrounding of the property is also important. If a freehold landed property is located in a less-superior location, the price performance of this property could be equivalent to a leasehold landed property. Factors such as noise caused by proximity to major roads/expressways, industrial properties or lack of accessibility contribute to price performance as well.

Although freehold landed properties generally exhibit better price performance than leasehold ones, due to the limited supply of landed homes in Singapore, leasehold landed properties are still valuable and much sought after.

Leasehold landed properties may also be a better option if you are looking to lease the property out for rental income, as the tenure of the property does not matter to the tenant. You may also consider the purchase of a leasehold landed property to enjoy specific attributes of the property, for example, individual character, design of the house, immediate environment, local amenities and so forth.

However, one should be aware that, when the tenure of a leasehold property dips below 30 years, it may be difficult to sell the property, as prospective buyers are not able to secure a bank loan. According to the Central Provident Fund Board, buyers are not allowed to withdraw from their CPF when the tenure is less than 30 years.

In a perfect world, everybody would prefer to buy a freehold property for the better price performance, perpetual ownership and the better wealth preservation factors. But in the real world, we are faced with other factors or challenges, such as budget constraints, the availability or supply, individual needs, investment objectives, and so forth, so that a leasehold landed property may be a more suitable purchase.



The writer is consultancy and research analyst at Knight Frank.

Source: www.todayonline.com