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26-10-22, 16:50
Buying leasehold property is fine, but freehold status has niche appeal
Oct 24, 2022
In Singapore, the government typically sells land for residential and commercial use with tenures of 99 years. Generally, industrial land parcels are sold with shorter tenures. For historical reasons, some land parcels have freehold tenure or long leasehold tenures that start from 929 or 999 years.
A property’s land lease outstanding represents the number of years during which a property can be used for owner occupation or to generate rental income. With a new 99-year leasehold home, one has around 94 years to live in and/or collect rent after factoring in time to complete a development, versus an indefinite period for a freehold home.
New freehold private homes may cost around 10 per cent more than 99-year leasehold ones. The premium is about 4 per cent for freehold versus 99-year leasehold land, according to the table used by the Singapore Land Authority that shows leasehold values as a percentage of freehold value.
https://i.imgur.com/hqG5HUJ.png
In the first nine months of 2022, the median price of terrace houses sitting on initial land leases of 99 years reached a record S$1,214 per square foot (psf) on land area, up 15.3 per cent from S$1,053 psf for the whole of 2021, based on analysis by List Sotheby’s International Realty (List SIR) using URA Realis data.
Still, one enjoys a huge saving buying an older leasehold terrace house versus a freehold one. According to List SIR, the price gap between 99-year and freehold/999-year terrace houses is around S$715 psf.
Market acceptance
Many individuals and institutions buy leasehold properties. Launches of new suburban 99-year condominiums - AMO Residence in Ang Mo Kio, Lentor Modern near Lentor MRT and Sky Eden@Bedok in Bedok Central - saw strong take-up.
Even in largely freehold prime landed home enclaves, there are houses that sit on initial 99-year land leases, such as those at Victoria Park Villas in the Farrer Road vicinity. Perennial Holdings is developing 99-year leasehold bungalows on the former Caldecott Broadcast Centre site in the Caldecott Hill Good Class Bungalow Area in District 11.
There is appetite among buyers for older leasehold homes, including those with land lease tenures of under 60 years. In July, a five-room HDB flat at Block 28 Marine Crescent, with land lease outstanding then of over 51 years, sold for S$1.01 million. The Straits Times said the buyers are a couple who plan to live out their retirement years in the unit.
Outside of homes, private equity group KKR announced the completion of its purchase of office building Twenty Anson, which is its first real estate office investment here, in April. Twenty Anson sits on a site with a land lease outstanding then of about 84.5 years. BT reported that the transaction price was close to S$600 million.
In March, CapitaLand Integrated Commercial Trust : C38U +5.49%and CapitaLand Open End Real Estate Fund entered into an agreement to buy a Grade-A office building at 79 Robinson Road in Tanjong Pagar, which sits on a site with a land lease outstanding then of around 45 years, for about S$1.3 billion.
In catering to the future of work, the Urban Redevelopment Authority is exploring rolling out more short-term lease sites to provide more options and flexible spaces, under its latest Long-Term Plan Review. This will potentially allow Singapore to refresh its land uses in shorter cycles and facilitate businesses in accommodating future uncertainties.
Financial perspective
Financially, it may not be sensible to spend more to buy freehold property. For a buyer, say, one who is aged 25 and would like to buy a home to live until 100 years old, a land lease tenure of 75 years suffices, in theory.
For an owner-occupier, the savings that come from buying a leasehold home versus a freehold one can translate to servicing a smaller home loan or tying up less funds in a non-income generating asset.
The higher yield that a property investor typically gets from buying a leasehold versus a freehold unit helps boost investment returns. 79 Robinson Road was bought at a net property income (NPI) yield of around 4 per cent. Perhaps the NPI yield may be about 3 per cent for a freehold office building in the Central Business District. If a buyer funds 50 per cent of a property’s purchase with debt at a cost of 3.3 per cent per annum, the annual return on equity from properties with NPI yields of 4 per cent and 3 per cent are 4.7 per cent and 2.7 per cent respectively.
The present value of a property whose income grows at 2 per cent annually for 150 years and 200 years versus 100 years is 4.5 per cent and 5.5 per cent higher respectively, assuming a discount rate of 5 per cent. The difference reduces when a higher discount rate is used. Amid rising interest rates, expect investors to apply higher discount rates, which will lower the value ascribed to long-dated future income.
Nonetheless, buyers of leasehold properties should be mindful of land lease decay. While there have been en bloc sales of leasehold properties where the land lease was topped up, leasehold properties may see their value run down to zero as their land leases mature. The government’s policy generally is to allow land leases to expire without extension, as it needs to recover land upon lease expiry to re-allocate it to meet fast changing socio-economic needs in land-scarce Singapore.
A property’s freehold status will not save it from being potentially bought by the state for public purposes such as economic and infrastructure developments and public programmes. Also, location, unit layout, positioning of a development, and building specifications may weigh more with potential tenants or buyers than land lease tenure.
Still, some buyers like freehold properties. Entities linked to the Tanoto family bought freehold commercial properties such as Chinatown Plaza in 2018, three adjoining sites near the Botanic Gardens in 2021, and Tanglin Shopping Centre in 2022. The Ng family’s Far East Organization kept the freehold land titles when it developed and sold homes such as The Shore Residences in Katong to end-buyers on 103-year land leases.
While sales of leasehold properties dominate, families who focus on stewardship of assets over multi-generations may be keen on freehold assets and pay premiums for such assets, which are increasingly scarce. In turbulent times, some may find the draw of possibly owning an asset forever irresistible.
https://www.businesstimes.com.sg/opinion/buying-leasehold-property-is-fine-but-freehold-status-has-niche-appeal
Oct 24, 2022
In Singapore, the government typically sells land for residential and commercial use with tenures of 99 years. Generally, industrial land parcels are sold with shorter tenures. For historical reasons, some land parcels have freehold tenure or long leasehold tenures that start from 929 or 999 years.
A property’s land lease outstanding represents the number of years during which a property can be used for owner occupation or to generate rental income. With a new 99-year leasehold home, one has around 94 years to live in and/or collect rent after factoring in time to complete a development, versus an indefinite period for a freehold home.
New freehold private homes may cost around 10 per cent more than 99-year leasehold ones. The premium is about 4 per cent for freehold versus 99-year leasehold land, according to the table used by the Singapore Land Authority that shows leasehold values as a percentage of freehold value.
https://i.imgur.com/hqG5HUJ.png
In the first nine months of 2022, the median price of terrace houses sitting on initial land leases of 99 years reached a record S$1,214 per square foot (psf) on land area, up 15.3 per cent from S$1,053 psf for the whole of 2021, based on analysis by List Sotheby’s International Realty (List SIR) using URA Realis data.
Still, one enjoys a huge saving buying an older leasehold terrace house versus a freehold one. According to List SIR, the price gap between 99-year and freehold/999-year terrace houses is around S$715 psf.
Market acceptance
Many individuals and institutions buy leasehold properties. Launches of new suburban 99-year condominiums - AMO Residence in Ang Mo Kio, Lentor Modern near Lentor MRT and Sky Eden@Bedok in Bedok Central - saw strong take-up.
Even in largely freehold prime landed home enclaves, there are houses that sit on initial 99-year land leases, such as those at Victoria Park Villas in the Farrer Road vicinity. Perennial Holdings is developing 99-year leasehold bungalows on the former Caldecott Broadcast Centre site in the Caldecott Hill Good Class Bungalow Area in District 11.
There is appetite among buyers for older leasehold homes, including those with land lease tenures of under 60 years. In July, a five-room HDB flat at Block 28 Marine Crescent, with land lease outstanding then of over 51 years, sold for S$1.01 million. The Straits Times said the buyers are a couple who plan to live out their retirement years in the unit.
Outside of homes, private equity group KKR announced the completion of its purchase of office building Twenty Anson, which is its first real estate office investment here, in April. Twenty Anson sits on a site with a land lease outstanding then of about 84.5 years. BT reported that the transaction price was close to S$600 million.
In March, CapitaLand Integrated Commercial Trust : C38U +5.49%and CapitaLand Open End Real Estate Fund entered into an agreement to buy a Grade-A office building at 79 Robinson Road in Tanjong Pagar, which sits on a site with a land lease outstanding then of around 45 years, for about S$1.3 billion.
In catering to the future of work, the Urban Redevelopment Authority is exploring rolling out more short-term lease sites to provide more options and flexible spaces, under its latest Long-Term Plan Review. This will potentially allow Singapore to refresh its land uses in shorter cycles and facilitate businesses in accommodating future uncertainties.
Financial perspective
Financially, it may not be sensible to spend more to buy freehold property. For a buyer, say, one who is aged 25 and would like to buy a home to live until 100 years old, a land lease tenure of 75 years suffices, in theory.
For an owner-occupier, the savings that come from buying a leasehold home versus a freehold one can translate to servicing a smaller home loan or tying up less funds in a non-income generating asset.
The higher yield that a property investor typically gets from buying a leasehold versus a freehold unit helps boost investment returns. 79 Robinson Road was bought at a net property income (NPI) yield of around 4 per cent. Perhaps the NPI yield may be about 3 per cent for a freehold office building in the Central Business District. If a buyer funds 50 per cent of a property’s purchase with debt at a cost of 3.3 per cent per annum, the annual return on equity from properties with NPI yields of 4 per cent and 3 per cent are 4.7 per cent and 2.7 per cent respectively.
The present value of a property whose income grows at 2 per cent annually for 150 years and 200 years versus 100 years is 4.5 per cent and 5.5 per cent higher respectively, assuming a discount rate of 5 per cent. The difference reduces when a higher discount rate is used. Amid rising interest rates, expect investors to apply higher discount rates, which will lower the value ascribed to long-dated future income.
Nonetheless, buyers of leasehold properties should be mindful of land lease decay. While there have been en bloc sales of leasehold properties where the land lease was topped up, leasehold properties may see their value run down to zero as their land leases mature. The government’s policy generally is to allow land leases to expire without extension, as it needs to recover land upon lease expiry to re-allocate it to meet fast changing socio-economic needs in land-scarce Singapore.
A property’s freehold status will not save it from being potentially bought by the state for public purposes such as economic and infrastructure developments and public programmes. Also, location, unit layout, positioning of a development, and building specifications may weigh more with potential tenants or buyers than land lease tenure.
Still, some buyers like freehold properties. Entities linked to the Tanoto family bought freehold commercial properties such as Chinatown Plaza in 2018, three adjoining sites near the Botanic Gardens in 2021, and Tanglin Shopping Centre in 2022. The Ng family’s Far East Organization kept the freehold land titles when it developed and sold homes such as The Shore Residences in Katong to end-buyers on 103-year land leases.
While sales of leasehold properties dominate, families who focus on stewardship of assets over multi-generations may be keen on freehold assets and pay premiums for such assets, which are increasingly scarce. In turbulent times, some may find the draw of possibly owning an asset forever irresistible.
https://www.businesstimes.com.sg/opinion/buying-leasehold-property-is-fine-but-freehold-status-has-niche-appeal