Sunday Times: Freehold better than leasehold?
Freehold better than leasehold?
Price gap may vanish in boom but will appear as property ages; experts say younger set more open to leasehold homes
By Joyce Teo
Far East Organization is selling its latest project, The Shore Residences, on a 103-year lease even though it sits on freehold land as it wants to partake in the site's redevelopment potential. Experts say the move means the developer cannot yet get the full value for the property. If The Shore Residences were sold as a freehold project, Far East would price it higher, they say.
Leasehold homes may have become more popular in recent years, but there is still a price gap between freehold and 99-year leasehold homes. This gap may disappear during good times, but it will appear as the property ages.
Property experts reckon that freehold homes typically command a premium of about 10 per cent, or up to 15 per cent at times, over leasehold homes, assuming a like-for-like comparison.
In a prime location where freehold homes are plentiful, a lone leasehold property will usually fetch less than its freehold neighbors. Because of the price difference, a leasehold condominium unit will fetch a higher yield than a freehold one. For those looking to invest in a rental property, it would make sense to go for a leasehold property.
Tenants do not care whether a property is freehold or leasehold, and during boom times, buyers can be equally indifferent. 'In a bull market, developers would be able to launch any project regardless of the tenure,' said Ngee Ann Polytechnic real estate lecturer Nicholas Mak.
'The price difference between an older freehold project and a newly launched leasehold project can be negligible on a per sq ft basis.' The difference becomes apparent only later on. 'When times are good, there is marginal price differential between leasehold and freehold new launches,' said Colliers International's director of research and advisory, Ms Tay Huey Ying. 'But as the property ages and the lease shortens, the price gap will widen. 'Financing becomes tougher as the lease runs down and that affects prices, she said.
'Your freehold interest is for perpetuity versus an interest that diminishes with time,' she said. Time, however, can be extended. There is life after 99 years as the Government is prepared to top up or renew the lease if there are redevelopment or upgrading plans, according to property experts.
The only problem is that it is not 100 per cent guaranteed, Ms Tay pointed out. 'There is still uncertainty as the Government may not top up the lease if it has other plans for the site,' she said.
In new prime areas where there is residential space such as Marina Bay and Sentosa Cove, buyers simply have no choice but to accept leasehold as the norm. All the new residential developments there have 99-year leases, and some of them still managed to fetch eye-popping prices.
When the first condo project in Marina Bay - The Sail @ Marina Bay - was first released in late 2004 at $900 psf, some said it was crazy to pay so much for a 99-year leasehold condo. But confirmed plans for an integrated resort in the area quickly erased any reservations associated with the tenure. Sub-sale deals of units at this condo later reached prices of more than $2,000 psf.
Singaporeans used to have a serious obsession with freehold homes, experts said. But today, the younger generation is more receptive to leasehold properties as they tend to take a shorter-term view, said Ms Tay.
'They are more willing to pay a higher price for a leasehold property in a good location than a lower price for a freehold property that is located farther away,' she said. Also, there are some people who are simply not bothered by a 99-year leasehold title, said Mr Mak.
Buyers from China, for instance, do not mind 99-year leasehold properties as they are used to shorter leases of 70 years back home, experts said.
Freehold Better than Leasehold
9 Reasons Why Property Investors Fail
There are many reasons why investment fail. The common ones are as below:
Property Investment Treated as Stock Investment
Stock, shares or equity investment is different from property investment. Investors buy stocks to either earn dividends or to make profit out from the appreciation in value of the stocks. Profits from stocks are very much dependent on the performance of the company, or the general economy situation and the capability of the management team. Of course, when we invest in property we do want the property to appreciate in value. But this is not the only way to make money from an investment property. When the price of the property do not appreciate this do not equal to a bad investment. Many people gave up as soon as they see the value stagnant. In fact, the more savvy investors also look at rental returns, possible cash flows, wealth accumulation and even ROI through property investment.
This is a clear advantage of investing in property. This is the only known investment that banks are allowing to finance. While this is good news for investors, however some investors may be tempted to over leverage with the easy credit during a bull market. Many were forced to sell their properties, and usually at a huge discount when the market took a turn.
Lack of Clear Objectives
This is common among many investors. Many would only be concerned about capital appreciation. What about cash flow? What about wealth accumulation and other objectives that is applicable and suit individual's situation and risk appetite?
Lack of Knowledge
Well, it is not uncommon to see herd buying instinct. While this is not totally wrong, it is better to understand at least the demand and supply of the type of property before investing in them.
Inability to identify priorities
Again a common mistakes here. Many are faced with too many priorities and got confused, and hesitated and never really got started.
Lack of Persistence
Well like all investment, investment in property do also carry certain degree of risk. Like all market the property market is also subject to its up and down cycles. Many panic when the market turn bearish, and are eager to sell their property and made a hasty retreat as a result without understanding the situation and careful consideration. Many are even willing to exit even when there is financial loss despite the availability of other options.
Lack of Clear Plan
Making money from property also needs careful planning to avoid unnecessary cost and downtime. What is the market situation and the market rate? How am I going to maximize the income productivity from the property?
Lack of Support
Do you have the time and contact necessary to manage your property? Did you also choose the right partner to work with?
Failure to Manage your Time
Many would think that it is easy to manage or to rent out the property on their own. However, the time spent and sometimes additional stress encountered would not be worth the money paid for a professional to manage it for you.
Property Investment Lesson
For new investors.
We bought our first property, a 5 room HDB premium flat in 1996. Like everyone else we were very happy to own our first home that we can be proud of. We spend about S$30,000 renovating the new flat and moved in soon. Back than everyone was talking about making money from property. We hope to sell the flat in 5 years and make some money from it. How did it turn out?
Well, we could have done much better. How and why?
The housing market was near its 1997 peak. We were young and had just entered the workforce not so long ago. We had some saving in cash but little thing else. When we were shopping for a home, my fiancé who is now my wife said this "why don't we get a smaller flat, then upgrade?" My response...... "we can surely manage, honey". Anyway, both of us are graduates and we were earning pretty decent back then.
Why was it a mistake?
Well, we spend much of our cash into our flat because we had little CPF. We borrowed about S$250,000 for that flat. Our flat was the premium type and costed higher back than. For about S$170,000 we could have gone for a 4 room HDB. If we have gone for the smaller flat we could have only borrowed about S$120,000 about half of what we have borrowed! What would be the effect?
Tremendous! Remember about building wealth nest? Let's not talk about the complicated topic on capital appreciation for the 5 room vs. the 4 room flat. If we had started conservatively we would build our wealth nest faster!
Example: If repayment of loan is 30 years at an interest rate of 4%.
What would be the different you may ask? What would be the impact? We would have paid S$621 lesser every month if we had gone for the 4 bedroom unit, and could have saved about S$7500 every year. That would be about S$75,000 in 10 years time, assuming everything being equal. With this saving we could have paid for the downpayment for another property assuming we did plan or save additional money for property investment!
So there are a few lessons here.
Cooling Measure Singapore
Well, the property market has taken a hit after 7 round of cooling measures.What are my views on the cooling measures?
I had given a talk on the property market in Indonesia for the investors there. The topic was about how did our property market rebound just about a year after what was touted as the most severe economic crisis in 2008. How is this related to the cooling measures?
Well, our property market rebound because first of all we had good economic fundamentals and strong financial systems in Singapore. But very importantly since the 1997 property slump, I believe the authorities in Singapore have learned that the market cannot be left to it own devices. That means the market has to be managed.
Unlike the slump in 1997, the prices of the property took about 10 years to recover. Yes! 10 long years. But the prices of the property took only about 1 year to start recovering, despite the severity of the global crisis in 2008. Why is that so? One of the many reasons (the one that we are interested here) is that the government had various measures in place to simulate demand and at the same time reduce supply. Coupled with an open economy policy that help the demand side of property the prices recovered fast.
What are these measures in place that simulated the demand? These are the previous measures put in place to curb excess demand during the boom time. Like now, we had 7 different type of measures that are managing demand. Without these measures there are basically no room for any regulatory stimulus to bring back the demand. How than can the property market pick up again in a short period of time? Reducing supply is not an option and are less effective as it would not encourage expenditure or simply taking up of the property in time of crisis. Hence, during a bull run it is necessary to curb excessive, speculative demand, so when the bear market returns, we have "weapons" to bring back demand from those buyers who would have otherwise bought during the bull market.
I am seeing this from a long time view. So the cooling measures is not at all scary or bad. If the authorities are vigilant and can be alert enough to adjust the measures according to the market situation, if you are a value investor and believe in steady long term growth, this is then a good news for you. We might have slower rate of growth, but we can be less volatile and has lesser investment risk comparable to others.