I bought a leasehold property. Should it matter?
As leasehold
properties are becoming more commonly available, it would be wise for
purchasers to know what that means to owners in the long term. For many people,
especially owner-occupiers, they may not mind the common leasehold tenure of 99
years as it seems like a long time away.
How many people
live for 100 years anyway?
So first things
first — should land tenure be a deciding factor when purchasing a property?
Land tenure is
a major consideration when purchasing a property, but there are also many other
important factors to consider such as pricing, location and access to amenities.
“If you are an
investor, for instance, who is buying a property for investment or buying for your own stay, you may sometimes
prefer to buy a leasehold property because the rental yield of leasehold
properties is generally higher,”
Here are some pros and cons of purchasing a leasehold property:
Pros:
1. Cheaper
house prices!
Assuming two
properties are exactly identical where one is freehold and the other is
leasehold, then the price of the leasehold property would be lower simply
because the market prefers freehold properties.
“I would say it
would vary anywhere between 10% and 20% if both are brand-new properties with
full lease. As the lease gets shorter, the gap widens up,”.
2. Higher
rental yields
Assuming that a
leasehold property is cheaper than a freehold one, the lower entry cost could
mean higher rental yields although one also has to take into consideration
other factors such as maintenance cost and the location.
Cons:
1. Property
loses value as lease shortens
One
disadvantage of owning a leasehold property is that its value starts to
depreciate as it gets closer to the expiry of the lease.
2. Tougher
financing options
In fact, banks
will usually stipulate a certain minimum number of years remaining on the lease
before they are willing to accept the property as collateral for financing
purposes, meaning that as the property gets older the likelihood of being able
to secure financing on the property diminishes.
3. Transfer
needs state consent
The other often
cited disadvantage is that the transfer of leasehold properties requires state
consent. In other words: bureaucracy.
Renewing the lease
The tenures of
all leasehold land are renewable, unless the land is needed by the state
government for public usage such as for building schools, hospitals, roads and
public transport like the mass rapid transit and light rail transit.
Usually a
homeowner would file their applications to renew the lease of a leasehold
property when there is a major change of circumstances such as when the owner
has to sell the property. The owner would then try to renew the lease in order to
get a better price with a new or extended lease.
“As the lease
premium is pegged to the valuation of the land, it may be advantageous to renew
the lease in a down market, provided that you do have the extra cash available
to pay for the renewal premium,”.
According to
Section 103 of the National Land Code 1965, the tenant of a leasehold property
has to care for the land as defined by the land legislation and may be
responsible for property development and maintenance. If the state deems the
tenant unfit to govern the land, the security of the tenure may be compromised.
The state can then forfeit the lease for non-performance.
For strata
property owners, they would need to do it collectively with other owners as
well as the Management Corporation of the development as there is common
property involved.
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Real Estate Negotiator
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