Should I Buy a Freehold Condo?

This question will very likely cross your mind if you’re planning to buy a non- landed private residential property in Singapore. It’s the age-old freehold versus leasehold debate.

As with almost everything else in life, there’s no single answer to this question. It simply rests on the individual; taking into account his financial means and intentions.

So, to answer that question, ask yourself these questions:

• What is the purpose of the purchase?
• Is it for own-stay or as an investment to collect rent?
• How far are you looking ahead?
• Are you thinking of your own personal needs in the present or are you planning to leave a legacy for your future generations?
• Are you thinking of preserving your wealth i.e. selling off the condo at a good price during your golden years and using the funds for other aspects of life?
• Do you want more freedom to make alterations to your spaces?
• Do you mind taking responsibility of the maintenance of the premises or do you prefer to just pay a monthly maintenance fee and let others take care of things?

 

Think carefully before you decide

 

While you ponder on these, let’s understand more about condos in Singapore.

 

The 3 types of condo leases in Singapore and what each means

• Freehold
• 999-year leasehold
• 99-year leasehold

These are the 3 types of condo leases we have here in Singapore.

 

Before choosing, understand what each means first

 

Freehold

Freehold leases are the type where you own the property forever. Technically speaking, that is. There are exceptions to this and we’ll talk about that in a bit.

For freehold condos, you own both the unit and the land it is built on. On the other hand, in the case of leasehold condos, you own only the unit. The land belongs to the state.

As a freehold condo owner, you will find it easier to transfer your title to someone else. You can also use money from your CPF ordinary account to pay for your purchase no matter how old the unit is. CPF imposes restrictions only on 99-year leasehold properties (more on that later).

 

999-year leasehold

From a practical perspective, there is essentially no difference between a freehold and a 999-year leasehold property, because nobody survives pass a century! But, it is true that once the 999-year lease expires, the property (land and building) goes back to the state for redevelopment.

 

99-year leasehold

This type of lease is most common in Singapore. After all, we have limited land and the government wants to ensure that property prices do not escalate beyond control in the case of multiple re-sales, which is possible with a timeless lease (freehold) property.

Just like all HDB dwellings in Singapore (which are 99-year leasehold properties), your 99-year leasehold condo will be acquired by the state once the lease runs out.

Certainly, when people think of this, they will prefer to put their hard-earned money on a freehold property than a 99-year leasehold. But, in reality, there are also pros and cons (and misconceptions) about freehold condos, which we will now discuss.

 

The upside (and misconception) of owning a freehold condo in Singapore

 

“The freehold condo is mine forever, right?”

The answer: Not necessarily

In theory, yes, freehold means indefinite ownership i.e. there’s no expiring lease. But, in life, there are always exceptions to the rules. And this holds true for freehold condos too.

Here are two key exceptions.

No. 1: the government may acquire your land for state development, such as to build an MRT or major transport hub or military base. This is provided for under the Land Acquisition Act (LAA). Of course, you will be compensated according to the market value of your property, but this means you will have to find new dwellings too. Hence, it’s not yours forever.

No. 2: another developer may be eyeing your development, and if 80% of the other owners agree to sell, it may be put up on en bloc sales. In this case, you have no choice but to sell your unit too. Again, you don’t necessarily get to own your freehold condo forever.

 

Forever may not be forever!

 

But barring these two exceptions, compared to a 99-year leasehold condo, you do enjoy perpetual ownership of your freehold property and can look forward to leaving this great financial asset behind to your future generations.

 

“My freehold condo has higher value than a 99-year leasehold, right?”

The answer: Not necessarily

It depends if you’re comparing an apple to an apple or an apple to an orange.

If it’s the former, which means your freehold condo and another 99-year leasehold condo are located in the same area, are built at the same time, have the same facilities, and are similar in design, then – yes – your condo will most likely have a 15 – 20% edge in terms of value.

However, if it’s the latter, which could mean your freehold condo is located in the outskirts and is far less attractive in terms of design and facilities, then a swanky 99-year leasehold in the CBD could easily beat it in value.

Remember: on property matters, location is paramount. So, when it comes to value, it depends more where the properties are sited rather than their lease tenures.

Having said all that, it is still true to say that freehold condos have higher potential for capital appreciation compared to a 99-year leasehold condo, which will more likely depreciate in value as the decades go by.

Owing to the fact that they don’t have expiring leases, freehold condos can still fetch good prices decades down the road. Because of this though, you have to pay a premium for one now. So, ask yourself, is it worth it? To pay so much more today to enjoy a higher resale value when you’re much, much older? Are you sacrificing too much of your current lifestyle for future gain?

 

Is the freehold worth the money you’re committing today?

 

“No matter how old my freehold condo is, I can take out my CPF to pay for it, right?”

The answer: Yes

For freehold property, CPF does not impose any limitations. So long as you have enough funds in your ordinary account, you can use your CPF monies to pay for your down payment and/or bank loans. If you’re buying a resale freehold condo, you need not worry about its age.

However, if you’re buying a 99-year leasehold condo, bear in mind that if there’s only 40 years left on its lease, banks will limit the amount of funds they extend to you. If there were 30 years or less left on its lease, CPF wouldn’t allow you to use your CPF savings towards funding your purchase.

Now that we’ve discussed the upside of freehold condo ownership, let’s look at the downside.

 

The downside of owning a freehold condo in Singapore

 

“If I rent out my freehold condo, I can earn more in rental income, right?”

The answer: No

Tenants only want a roof over their heads. They don’t care if it’s freehold or leasehold. Why should they? It’s not theirs.

So if you plan to invest in a freehold condo to collect rent, then a leasehold property would be a better option for you.

 

So you want to be a landlord?

 

The reason can be simply explained through the following formula.