Do leasehold or freehold landed properties appreciate better?

May 1, 2021

The leasehold versus freehold debate is an old one; and by now you’ve probably heard both sides. One of the common complaints, however, is that the analysis of freehold versus leasehold tends to involve condos or other non-landed properties. In this article, I will examine the issues of appreciation as they apply to landed homes:

Leasehold versus freehold landed over the past five years

As of March 2021, the average price of a leasehold property in Singapore is $2,858,391. This is around an 87 per cent increase from the same time in 2016, when the average was just $1,530,000.

At the same time, the average price of a freehold landed property is now $4,732,524. This is almost double the average from five years ago, when prices averaged $2,358,000.

Overall, the price gap between freehold and leasehold landed homes was around 35.1 per cent in 2016. As of March this year, the gap has widened by 65.5 per cent.

Next, we can compare the rates of appreciation by region

If we look at the Core Central Region (CCR), we can see that freehold landed has also outperformed its leasehold counterparts; though by a smaller margin than the island-wide average:

Leasehold landed properties in the CCR averaged $2,844,000, but have since risen by around 20 per cent to $3,413,360. Freehold counterparts have risen from $6,301,990 to $8,534,553, or around 35.4 per cent.

The RCR

There was no data on leasehold landed transactions until the last half of 2016 here. This is the only region where leasehold landed has outperformed freehold counterparts.

Leasehold landed homes in the Rest of Central Region (RCR) appreciated from $3,077,800 to around $5,607,857, an 82.2 per cent increase. Freehold counterparts have risen by a more modest $2,358,000 to $3,803,324, an increase of around 61 per cent.

If you’re wondering why the average price of a leasehold landed property here is higher than freehold, it’s because District 4 is part of the RCR. This district includes Sentosa Cove, which is where you’ll find the most expensive leasehold bungalows in Singapore.

Sentosa Cove also contributes a lot to the price volatility that you see, as transaction volumes are low, and individual units can be bought at sold at unusual highs or lows. Million-dollar profits and losses are not uncommon here.

The OCR

There was no data on freehold landed transactions until the last half of 2016 here. Leasehold properties in the Outside of Central Region (OCR) averaged $1,530,000 in 2016, rising by 28.3 per cent to $1,963,229 today.

Freehold counterparts rose from an average of $2,966,938 to $4,291,676 today, an increase of about 44.6 per cent.

In general, we can see a sustained interest in freehold properties over the past five years

There are three main reasons for this:

  • Landed properties are often preferred for legacy reasons
  • Rental is less of a factor
  • The leasehold landed market is more impacted by foreigners

1. Landed properties are often preferred for legacy reasons

Most people who buy landed properties intend for it to be a legacy. That is, they want it to be something to leave for their children, or they foresee the extended family living in the same bungalow. As such, the idea of lease decay is unpalatable – a 99-year lease makes the property viable for two or three generations at most.

Those who buy for legacy reasons tend to be willing to pay more; sometimes much higher than what we’d consider “reasonable market value”. This is because they’re not interested in resale.

These buyers are not aiming to make a profit after 15 years, 20 years, etc. They intend to live out all their years in the property, and then pass it on to the children, possibly grandchildren, etc. So if they spot a location that they feel is ideal, they’re often willing to pay at the higher end of the price range.

I feel it’s this, more than any other reason, that has made freehold landed homes maintain and increase prices over the years.

2. Rental is less of a factor

When it comes to condos, the relationship between freehold and leasehold is almost inverted. One could make a strong argument that a leasehold condo is in fact a better investment, if rental is brought into the picture.

This is because a freehold condo always costs more than a leasehold counterpart; but if they’re in the same location, freehold status doesn’t translate to higher rental income (your tenant does not care if your condo is freehold or leasehold). As such, the lower price point of leasehold condos often translates to superior rental yields.

When it comes to landed homes however, you rarely hear this argument being brought up. This is because few people buy landed properties to generate rental income* – they are almost always bought and held for appreciation, or for legacy reasons (see above).

As such, there is less of a drawback to premium freehold prices.

*Landed properties can be a bigger challenge to rent out. Only the most affluent can afford to rent a whole landed property, whereas many can afford to rent a one or two-bedder condo unit. Also, landed enclaves tend to be far from MRT stations or malls; the exclusivity and privacy are the main highlights. But this also means they’re only viable for tenants who drive.

3. The leasehold market is more impacted by foreigners

The ups and downs of foreign investment, and the Additional Buyers Stamp Duty (ABSD), affect the leasehold landed market more. Sentosa Cove is the prime indicator; you can see how it disrupts RCR prices above.

This is because foreigners cannot buy freehold landed properties on the mainland, barring special permission. They’re mostly confined to the leasehold landed homes on Sentosa Cove. As such, the introduction of cooling measures such as the ABSD – which raised stamp duties to 20 per cent for foreigners – more seriously impacted the leasehold landed market.

Of late, the combination of higher stamp duties, as well as a weaker global economy, could pose a risk to the leasehold landed segment.

The wider picture aside, landed homes are highly individual assets

Landed home

It’s possible for a landed home that’s just across the street to fetch million-dollar gains, while the one a few blocks down takes a million-dollar loss. Unlike condo developments where many units share the same generic features and location, landed homes are more unique.

Each has its own architectural features, unique lay-out, facing, etc. Some have driveways while others don’t, some have pools where others have backyards, some have BBQ pits on the roof, etc. All these differences can exist between landed homes that are just metres apart, along the same street.

As such, it’s best to focus on each unit specifically, when working out whether it’s a good buy. Do contact me if you need to scrutinise a property, and I’ll be glad to help you out. You can also follow me on RonChong Properties.sg for more updates on the Singapore private property scene.

 

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