Buying a home: freehold vs leasehold

Buying a home: freehold vs leasehold

NICHOLAS MAK examines how both tenures perform in rising and falling markets as well as in collective sales

THE question of whether to own freehold or leasehold property seems a perennial one, with pros and cons shifting with market cycles and new trends. Here, we examine the issue from the perspective of both a home owner and investor, and see how both tenures perform in rising and falling markets as well as in collective sales.

Pros and cons: If the upswing in the property market is bottom-up, leasehold condominiums could outperform freehold ones. Conversely, if the boom is top down, freehold condominiums would deliver superior results
The chief attraction of 99-year leasehold property is that it is typically priced lower than a comparable freehold property. As a result, they are popular with HDB upgraders as entry-level private properties. Most mass-market homes are 99-year leasehold condominiums, with prices ranging from $500 per sq ft to $900 per sq ft. A typical family-size apartment could cost anything from $600,000 to $1.2 million.

For investors, leasehold properties usually offer a higher rental yield because of their lower capital cost. However, the higher yield merely compensates the owner for the decaying lease.

One of the more apparent disadvantages of owning a 99-year leasehold property is that the length of the lease is contracting daily. All else being equal, this would result in falling property value. However, certain external factors could slow the decline in value, such as if the property is sought after by tenants or buyers. This could be due to a prime location, improving infrastructure (such as a proposed MRT station nearby), or good amenities or popular schools in the vicinity.

When it comes to collective sales, there are usually fewer opportunities for them with 99-year homes. One reason is that many of them are still relatively new and in good condition. Thus, the owners do not feel any urgency to sell their homes collectively.

A more pertinent reason is that the premium payable to the government to top up a 99-year lease is quite high, based on the existing formula. And since developers factor the premium as part of the total land cost, the higher the premium the less the owner of the ageing leasehold would get in any collective sale.

As such, collective sales are not attractive to many owners of 99-year leasehold apartments unless the expense of maintaining their ageing properties are so high that a collective sale becomes the cheaper alternative.

A key benefit of owning freehold real estate is that the land value does not generally depreciate in the long term. Although all properties are subject to market fluctuations, the price of freehold land tends to be more stable than that of leasehold land over time. However, the value of a freehold property could still decrease over time due to the depreciating value of the ageing building. Over the long term, while the value of freehold land may increase or remain little changed, the value of the building would decline.

One factor that supports the value of freehold land in Singapore is its scarcity. Since all the land sold by the government is leasehold, the amount of freehold land would not increase. In fact, it might shrink over time if the government makes acquisitions of such land.

Another advantage of owning a freehold property is the potential of a windfall from a collective sale. If the value of the freehold land increases while the value of the ageing building declines, it could reach a stage where the redevelopment value of the property is worth more than the utility value of the existing building. As a result, the property owners may find a collective sale of their property to a developer to be highly profitable.

Some developers looking to acquire residential land for development may also prefer freehold land to ageing 99-year leasehold property because freehold land would not require the payment of a hefty premium for extending the lease.

For all these reasons, freehold residential properties are generally priced higher than 99-year leaseholds. The price range of freehold non-landed properties is also wider than that of comparable leasehold properties. Depending on the location, freehold property prices could vary from $600 psf to $4,000 psf or more. The majority of high-end residential properties are freehold.

For investors, one disadvantage of freehold property is the lower rental yield, a function of the higher cost of the property.

Also, while freehold properties have a higher likelihood of a collective sale than their leasehold counterparts, that can prove to be a double-edged sword. The property boom of 2005 to 2008 whipped up a collective sale frenzy. But some property owners who sold for a windfall found they could not get a replacement home in the same location from their proceeds. As the collective sale boom was powered by surging property prices, by the time en-bloc property sellers received their proceeds, the prices of comparable replacement homes would have moved out of reach.

Now, we look at the price performance of freehold and leasehold properties. Although freehold properties are usually priced higher than their leasehold counterparts, their rate of appreciation does not always outperform.

There were two property cycles between end-1998 and mid-2009. The first market boom, which started at end-1998 and ended in mid-2000, was a bottom-up price recovery. Demand started in the mass-market sector and moved up to the mid-tier and finally the high-end segment.

During this 18-month period, the average price of 99-year condominiums rose faster than that of freehold homes. The average price of freehold condominiums grew by 38.2 per cent, while the average price of 99-year leasehold condominiums surged by 46.2 per cent.

But on the way down, leasehold home prices also fell more steeply. On the downcycle between mid-2000 and the first half of 2004, the average price of leasehold condominiums fell 26.1 per cent, steeper than the freehold price decline of 17.6 per cent.

The most recent boom that lasted four years from mid-2004 to mid-2008 started with high-end property and gradually filtered down to the mass market.

Even when the mass-market sector started to pick up in 2007, the momentum in the high-end segment did not let up. As a result, freehold condominium prices jumped by an impressive 64.7 per cent on average, while the average leasehold property price rose some 50 per cent.

When the property market here started to contract in mid-2008 due to the global financial crisis, freehold condominium prices fell 26.5 per cent year on year, just slightly more than 99-year leaseholds, which dropped by 23.8 per cent.

What this study shows is that if the upswing in the property market is bottom-up, leasehold condominiums could outperform freehold ones. Conversely, if the boom is top down, freehold condominiums would deliver superior results. However, this study also illustrates that the faster the rise, the harder the fall. So in a top-down property boom, owners of freehold condominiums who had enjoyed a sharper price appreciation should be nimble enough to lock in their gains before the downtrend sets in.

In comparing freehold and leasehold residential properties, there is no conclusive evidence to show that one is better than the other. Ultimately, the decision boils down to budget and preference.

The writer is a real estate lecturer at Ngee Ann Polytechnic

Source : Business Times - 25 November 2009

Buy Sell Rent invest In Singapore Property Real Estate

MINDY YONG

( +65 ) 91002985

mindy@mindyyong.com

Pine Grove residents keen to sell en bloc again

Pine Grove residents keen to sell en bloc again

PINE Grove residents are looking to sell their sprawling Ulu Pandan estate en bloc, after failing to do so in previous attempts during the 2007 boom.

They are not alone. Industry sources say there is a growing group of other estates that previously failed to sell en bloc but is now looking for reruns.

The collection of signatures at Pine Grove, a 660-unit former HUDC estate on 893,178 sq ft of land, started on Nov 15. If successful, this latest attempt will net each unit owner at least $1.6 million to $2.05 million, depending on unit size.

Many units are about 1,754 sq ft and will achieve a price of about $1.95 million each, according to an owner who declined to be named. Prices are based on a reserve level of $1.246 billion, he added.

The total price works out to at least $740 per sq ft per plot ratio, estimated a property expert. This is because the buyer of the site will have to pay an upgrading premium, plus a differential premium on top of the asking price to cover the cost of bringing the land tenure up to 99 years and site redevelopment.

Marketing agent Jones Lang LaSalle declined to comment.

Pine Grove’s collective sale attempts in 2007 failed to bear fruit, even though the average payout was eventually raised to about $2 million per unit.

At Tulip Garden in Holland Road, Bravo Building Construction failed to complete a $516 million collective sale purchase last year due to funding issues.

Residents of Chin Swee Road’s Landmark Tower were unable to attract a buyer in their collective sale attempts in 2007 and last year, but are keen to try again.

The sale processes at Tulip Garden and Landmark Tower are still in the preliminary stage and The Straits Times understands both have yet to officially appoint a marketing agent.

The estates are understandably eager to try again now that the economic outlook has improved and private home prices have risen, said DTZ South-east Asia research head Chua Chor Hoon.

The recent market slowdown has yet to significantly hamper owners’ expectations, given that the process of collecting signatures and launching the sale may take a while, said an expert.

Source : Straits Times - 25 November 2009

Buy Sell Rent invest In Singapore Property Real Estate

MINDY YONG

( +65 ) 91002985

mindy@mindyyong.com

Ranking of CPF flawed: Expert

Ranking of CPF flawed: Expert

NUS don says Mercer report fails to consider unique features of system

By Lorna Tan, Senior Correspondent

Mercer overlooked the fact that the CPF is designed to meet housing and health-care needs, Prof Chia noted. Prof Chia is part of the committee that introduced CPF Life — ST FILE PHOTO . ST PHOTO: NG SOR LUAN

AN EXPERT on the Central Provident Fund (CPF) system has criticised a recent global report of pension plans that rated Singapore poorly in some key areas.

National University of Singapore (NUS) Associate Professor Chia Ngee Choon has raised her concerns with The Straits Times over a report released by consultancy firm Mercer last month. She pointed out it failed to take into account some unique but significant features of Singapore’s system that would have altered the country’s relatively low ranking.

The inaugural Melbourne Mercer Global Pension Index was based on a survey of 11 nations. The index has sub-indexes, including one on the adequacy of the retirement income or how much income is available to a retiree.

It pointed out that Singapore’s net income replacement rate is ‘particularly low’ due to the nature of the CPF and the members’ ability to access funds for a number of purposes.

Commentators have noted in the past that a lot of CPF savings are tied up by housing and health-care costs, for example.

The adequacy sub-index has the highest weighting in the overall index, so a poor score here can badly affect the overall ranking.

The Netherlands was first with an overall score of 76.1 out of 100, followed by Australia, Sweden and Canada. Singapore was eighth with 57. Ranked among the lowest were Japan (41.5), China (48) and Germany (48.2).

Singapore achieved low scores of 51.7 and 49.1 for adequacy and integrity, respectively.

Prof Chia, who is a member of the National Longevity Insurance Committee which introduced the CPF Life annuity scheme, said Mercer did not consider special features of the system here. It appears they overlooked the fact that the CPF is designed to meet housing and health-care needs, she noted.

Although a large proportion of a retiree’s funds is tied up in home ownership and health costs, these items add to his security.

She added that the Government provides various avenues for Singaporeans to unlock the value of homes through subletting, downgrading and the lease buyback scheme.

She suggested the inaccuracies in the report could also have stemmed from the fact that Singapore relies almost exclusively on a mandatory system where the individual fully funds his own retirement. This is different from other countries, where the government may promise a guaranteed sum, making any comparisons controversial and difficult.

On the integrity sub-index, Prof Chia pointed out Mercer’s indicators to measure the soundness of Singapore’s system were targeted mainly at private pension schemes such as the Supplementary Retirement Scheme. But this has only a small share here.

She suggested that indicators irrelevant to Singapore’s system should have been marked ‘not applicable’ and the overall score re-scaled if the report is evaluating the integrity of the overall pension system here.

Responding to her comments, Mr Ben Facer, Mercer’s retirement, risk and finance leader for Asean, said they are ‘entirely valid’.

For such future reports, Mercer plans to include more countries and other aspects of retirement security. ‘The key is to have components where information is publicly available so that it is objective, and have features that are easily comparable,’ said Mr Facer.

When contacted, the Ministry of Manpower (MOM) said the CPF Board would respond to Mercer.

Mr Chan Beng Seng, director of income security policy at MOM, said: ‘CPF Board will be writing to Mercer to clarify the methodology and assumptions used in the report. Prof Chia’s reaction to the Mercer report is balanced and demonstrates a good understanding of the CPF system in Singapore.’

He added that recent developments in the CPF system, such as raising the draw-down age, the new interest rate framework and the introduction of CPF Life, would further enhance the effectiveness of the CPF in meeting the retirement needs of its members.

‘MOM and CPF Board will continue to benchmark itself to global practices,’ he said.

Source : Straits Times - 25 November 2009

Buy Sell Rent invest In Singapore Property Real Estate

MINDY YONG

( +65 ) 91002985

mindy@mindyyong.com