THERE are generally two types of property tenure in Singapore: 99-year leasehold and freehold. We consider 999-year leasehold to be the same as freehold, because their difference in value is negligible.
Freehold properties hold a few advantages over their leasehold counterparts - higher en-bloc potential, slower pace of depreciation and no restrictions on the use of Central Provident Fund for home purchases.
In recent years, new leasehold condominiums seem to have dominated the market. The proportions of new leasehold and freehold condominium sales stand at 95 per cent to 5 per cent respectively as of first half of 2013.
In contrast, back in 2006 and 2007, around 70 per cent of new sales were freehold. This could be attributed to the ramp-up of the government land sales programme in recent years and the tightening of en- bloc rules in October 2007.
Proponents of freehold properties might argue that the price appreciation of freehold properties always outstrips that of their leasehold counterparts. This is because leasehold properties will depreciate over the course of their lease.
In order to find out how properties with different tenures but similar attributes perform over time, we picked Southaven I and Southaven II for illustration. Both projects were developed by the Ho Bee Group and share similar attributes such as location, product quality and facilities. Both projects were also launched for sale in 1995, but
completed two years apart.
The price gap between Southaven I and II seems to have widened from only 8 per cent at its launch in 1995 to 18 per cent in 2013. But this price trend alone is not conclusive due to uneven and thin transaction volumes. The attributes of units sold in the same year were also not comparable. But it gives a good glimpse of how two projects with different tenures located right next to each other fare over time.
If we are to look at the broader market, freehold condominiums might not always enjoy superior price appreciation over their leasehold counterparts. Our analysis of the freehold and leasehold indices over the last three property cycles shows that out of the three upcycles, the freehold index only outperforms the leasehold index over one cycle between Q3 2006 and Q2 2008.
This is the period just before the global financial crisis when the en-bloc frenzy reached all-time high in terms of number of deals and transaction values.During this upcycle, freehold properties moved up 54 per cent, outperforming leasehold properties which only appreciated 39 per cent. For the other two upcycles, en-bloc activities were fairly muted with fewer deals and much lower transaction values. We can thus infer that en-bloc potential plays a key role in determining the price performance of leasehold and freehold properties.
Interestingly, during the subsequent downturn, freehold condominiums also lost 27 per cent of their value compared to 24 per cent for leasehold condominiums. Upon analysing the downcycles, we observed that regardless of tenure, the higher the price appreciation during the upturn, the greater the fall during the downturn.
This was what happened to leasehold properties during the dotcom crash between Q3 2000 and Q2 2002. The prices of leasehold condominiums gained 46 per cent as compared to a milder 38 per cent for freehold condominiums. However, leasehold condominiums fell almost twice as much as their freehold counterparts when the general market went into a slump after the dotcom crash.
In the landed segment, the performance of terrace houses seems to paint a different picture. Freehold terrace houses have outperformed the leasehold ones in all periods except for the downturn during dotcom crash. In good times, they perform better than leasehold ones and in downturns, they also seem more resilient. This could be because of the restrictions on foreigners owning landed properties in Singapore.
So, which is better, freehold or leasehold? Based on the analysis, the answer depends on whether one is buying a landed or non- landed property. If buying a landed property, historical data shows that freehold might be a better choice. If one is buying a leasehold non-landed property in the current upcycle, given the challenging en-bloc market, leasehold could help to lock in more percentage gains if it is bought and sold at the right time.
Indeed, property values are influenced by multiple factors. However, if we assume all else being equal, freehold properties will always command a premium over their leasehold counterparts.
The writer is the head of research and consultancy at property firm OrangeTee.
The Business Times
Source: AsiaOne
(PDF 28KB)). This is the first decline since 1Q2009.