99-Year vs Freehold Property

 Many investors in Singapore struggle with this question.

If they chose a property with a 99-year leasehold, they will be able to save on roughly 20% of the premium afforded to a similar property that was freehold.

However, a good number of them are deeply entrenched in the traditional mindset that they should own their properties forever.

They expect their properties to retain their value through the ages for their descendants and the many generations to come.

While this could have worked in the past, it is hardly practical in the modern Singapore landscape.

In the past, rich families built and passed down valuable estates and huge plots of lands to their heirs.

Members of the family lived in close proximity across the entire estate.

However, times have changed.

In the modern Singapore landscape, most residents live in high-rise buildings with limited space.

The next generation seek to build a home of their own, courtesy of substantial subsidies provided for by the government.

Instead of inheriting an apartment from their parents, they would gladly opt for a more straightforward support in cash terms.

Moreover, there would be limited potential for further appreciation of the apartment by the time they inherited the property.

At the rate the world is evolving now, passing down an ancestral home in Singapore for generations to come is simply not practical.

So, which would make a better investment, a 99-year leasehold property or a freehold property?

Statistics have reflected both profitable and unprofitable transactions for both leasehold and freehold properties.

The truth is, in and of itself, the tenure of a property does not determine the profitability of the investment.

How profitable a property is depends on a combination of various factors.

The most straightforward way to understand the profitability of a property is by scrutinising the demand for that particular property.

The demand of a property is derived from the price and desirability of the property.

The lower the price and higher the desirability, the stronger the demand will be.

With a strong interest and demand, the owner will then be in a better position to choose from a wider pool of buyers and negotiate a better price.

Similarly, a property that is not desirable or sought after will reflect a low demand.

Imagine a condominium unit that was built 30 years ago and has undergone considerable wear and tear.

Considering the average lifestyle standards in Singapore, not many buyers would opt to invest in such a property at the market price.

Simply finding a willing buyer who would take interest in an unattractive property would be an uphill task, much less convince them to fork out the 20% premium if it is freehold.

When there is close to no demand, the tenure of the property holds less weight in determining the profitability, if any, of the investment.

In addition, the buyer will also have to take into consideration the higher maintenance fees required to upkeep the property.

Some would argue that the property would still hold value as old properties have a good chance of being selected for en bloc.

We will cover that in a subsequent chapter.

In this time and age, rather than investing in properties to be passed down perpetually, a wiser approach would be to review and renew our property portfolios regularly.

There is a value life span for each property.

An astute property investor needs to know how to enter into the investment when there is a high potential for growth.

At the same time, we need to be able to identify a property that has fulfilled its potential and plan for an exit accordingly.

With the realised profits, we can then continue to build and diversify our property portfolio.