Is there still a premium behind freehold property?

Owning something freehold offers security, though it might just be an emotional one for families and foreigners

Jun 29, 2021

DOES a property's land tenure matter? Judging by the material premiums paid by buyers for freehold units here, it apparently does.

A study of private non-landed residential transactions by researchers from the National University of Singapore's Institute of Real Estate and Urban Studies showed that freehold property in Singapore was sold at 10.4 per cent higher on the average per unit price than comparable leasehold properties.

This premium is calculated after controlling for property age, unit size, distance to MRT stations and expressways, and other unobserved planning region variations, the study published in The Business Times earlier this year showed. Such a premium exceeds the premium of 4 per cent for having a perpetual right of use relative to a use with a term of 99 years that the Singapore Land Authority (SLA) uses in computing land lease upgrading premiums.

But what drives buyers to pay a premium for freehold property and will such premiums be sustained going forward?

Strong sales on 99-year land

For context, new private home sales in Singapore have been strong. The charge is led by large scale developments sitting on initial land leases of 99-year land such as Treasure at Tampines, The Florence Residences and Normanton Park.

In Singapore, many sites for new developments are awarded through government land tenders.

Private residential and commercial development sites put up for tender by the Urban Redevelopment Authority and Housing Development Board typically have land leases of 99 years, while industrial land sold by JTC Corporation may have land leases of 20 years or 30 years.

For historical reasons, there are also land parcels that are being used for various purposes, which have freehold tenure or long leasehold tenures starting from 929 or 999 years that are akin to being freehold in nature.

A space user probably does not care too much about the land's tenure. A tenant takes up space and commits to a certain rental level based on factors such as location, unit specifications, building quality, and standards of maintenance and property management, while being indifferent to the land lease tenure

Singapore properties held by real estate investment trusts (Reits) listed here are also typically leasehold.

A Reit may prefer buying a commercial property with 70 years of land lease outstanding than a freehold one, which may cost more because of its freehold status.

If both properties generate the same net property income, the yield hungry Reit enjoys a better yield by buying the former.

As for new private homes, buyers appear fine with purchasing units on original land leases of 99 years, which may have a land lease outstanding of around 94 years by the time a purchaser takes possession of a unit. Having a land lease outstanding of 80 years should cover the entire life of an owner occupier who is in his twenties.

As private homes are costly, any savings on purchase price from buying leasehold units would be welcomed by owner occupiers and investors. For an investor, paying less for a leasehold unit, can mean that cash flow from rental income more easily covers the mortgage payments.

If home prices rise, owners of both leasehold and freehold units enjoy capital gains.

Premium gap

So why do buyers pay material premiums for freehold units?

Perhaps buyers worry over land lease decay. If outstanding land lease of a private home falls to 40 or 50 years, demand may drop as potential buyers could find it tricky securing financing from banks.

Yet, a counterpoint is that there are various examples of older leasehold residential projects that have been sold for redevelopment under a collective sale, with the buyer being able to top up the land lease to 99 years.

Such projects include large choice sites that used to house Housing and Urban Development Company homes such as Farrer Court (now D'Leedon), Tampines Court (now Treasures at Tampines) and Normanton Park (the new development keeps the name).

Outside of the residential space, subsidiaries of SingHaiyi, Chip Eng Seng and Hong Kong-listed Chuan Holdings jointly won the collective sale tender for Maxwell House at a price of S$276.8 million in May. Built in 1971, Maxwell House has a 99-year leasehold tenure starting from 1969.

The successful joint tenderers will obtain regulatory approval to redevelop the property into a mixed-use development with gross floor area of at least 21,746 square metres (sq m) and get a fresh 99 year lease.

For strata owners of older buildings, who are keen to exit via a collective sale, the running down of the land lease of a project could help pressure owners to sign up for a collective sale at a price where chances of success are high.

Freehold isn't forever

Still, there is no guarantee that authorities will extend a land lease.

In general, the government's policy is to allow leases to expire without extension. In land-scarce Singapore, the government needs to recover land upon lease expiry to re-allocate it to meet fast changing socio-economic needs.

Extensions of land leases from the state are considered on a case-by-case basis where they are in line with planning intention and help to further specific economic and social objectives.

Possibly, in a world full of volatility, owning something of freehold tenure gives a sense of security.

However, the government has a right to compulsorily acquire private land whether freehold or leasehold, without the willing consent of its owner, for public purposes.

In April, the SLA gazetted the acquisition of the 776 sq m plot of freehold land at 68 to 74 Thomson Road. The 57-year-old mixed-use building sitting on the plot will be demolished to allow excavation works for an upcoming North-South Corridor tunnel just metres away to begin safely.

Nonetheless, having freehold tenure may be a selling point with some foreign buyers. When I worked in Shanghai a few years ago, some well-heeled Chinese persons were envious that my employer was selling freehold homes in Singapore. Freehold tenure of residential units is unheard of in China where typically residential projects are sold on original land lease tenures of 70 years.

Freehold properties in Singapore would likely command premium pricing arising from scarcity, as the bulk of new supply comes from leasehold developments.

Rich families, who aspire to hand down wealth through the generations, may value handing ownership of freehold property from generation to generation.

Far East Organization (FEO), privately owned by the Ng family, has sold apartment units at a few projects such as The Scotts Tower in Orchard and The Shore Residences in Katong on 103-year land leases.

FEO keeps the freehold title of the land, which means that a future generation of the Ng family could potentially get another bite of the cherry to undertake a new development when the existing land lease expires.

Listed groups such as City Developments and GuocoLand, which have tycoons as major shareholders, have also sold long leases in non-residential properties with original 999-year or freehold titles.

So perhaps the allure of freehold properties lies in their being like family heirlooms that can be passed down through the generations as part of a family's legacy.