Is freehold always better than leasehold?

By Feily Sofian / EdgeProp | September 10, 2017 1:25 PM SGT
Many have debated whether freehold properties are better than leasehold ones, especially in terms of capital appreciation. The answer may simply lie in the entry price. Owing to their perpetual legal lifespan, freehold properties command a price premium over comparable leasehold properties. The question is what premium would be considered reasonable.
Based on the Singapore Land Authority’s leasehold table, freehold properties command premiums of around 4% to 10% over leasehold properties that have remaining leases of between 80 and 99 years. Actual transactions, however, suggest that paying premiums of up to 20% over comparable leasehold properties is reasonable.
Southaven I and Southaven II offer some clues. The projects are located next to each other on Hindhede Walk and were completed two years apart. However, Southaven I is on a 99-year leasehold site while Southaven II is on a 999-year leasehold site. This study shall treat 999- year leasehold as freehold. The price gap between Southaven I and II was 8% in 1995, the earliest date when official data became available. That year, 39 units at Southaven I sold for $634 psf and 83 units at Southaven II sold for $688 psf. The price gap widened to 20% by 2012 (see Chart 1a). As a result, prices appreciated around 27% at Southaven I to $804 psf and 40% at Southaven II to $962 psf during that period. Although the price gap fluctuated over time and hit 34% in 2005, the median stood at 20% between 1995 and 2012.
In Toa Payoh, the freehold Trellis Towers commanded an initial price premium of 19% in 1996 over the 99-year leasehold Oleander Towers. The price gap widened to as high as 44% in 2002 although it narrowed again to 23% in 2017, with a median price gap of 31% between 1996 and 2017. Prices appreciated 35% at Oleander Towers and 40% at Trellis Towers in that period (see Chart 1b).
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Anecdotal evidence suggests that when the premium exceeds 30%, the capital appreciation for freehold properties could fall behind that for comparable leasehold properties. In 2006, freehold One Jervois commanded an initial price premium of...