Freehold better? Think again
We know from previous columns that investors look for real estate opportunities in the Urban Redevelopment Authority (URA) Master Plan and near MRT stations.
I call these phenomena the Urban Planning and MRT rules for investing in Singapore property.
Once you have used these rules to identify areas that have a good chance to appreciate in value, your next task is to choose a condominium in that location.
Each building has a land tenure that governs the length of ownership for that parcel of land. The land tenure will impact the price that you pay, your rental yield, and how much you can sell it for in the future.
For investment purposes, there are generally two types of tenures in Singapore: 99-year leasehold and freehold.
A 99-year leasehold entitles the owner to hold that land for 99 years while a freehold has no limit.
For example, if an owner sells a 99-year leasehold after 10 years, the new owner has 89 years remaining on the lease.
In contrast, the buyer of a freehold can use the land indefinitely. Freehold sounds like the better deal, right?
Not so fast.
Periodically, SRX (Singapore Real Estate Exchange) Property monitors the performance of freehold versus 99-year leasehold condominiums.
In study after study, we find similar results: As you would expect, buyers pay more for the right to the freehold land tenure. But 99-year leasehold condominiums consistently outperform in terms of rental yield.
Here are the details.
During July and August, buyers paid 16.5 per cent more to buy a freehold home in Districts 9, 10, and 11 of the Core Central Region.
In Districts 20, 26, and 27 of Outside Central Region, buyers paid a premium of 44.5 per cent to own a freehold instead of a 99-year leasehold.
BETTER GROSS RENTAL
Yet, for the same time period, 99-year leasehold homes earned better gross rental yields. Gross rental yield is the total rent divided by the cost of the property.
The higher the yield, the more rental income your property can generate as a percentage of what you paid for it, making it a better investment.
In the case of the Core Central Region, landlords of 99-year leasehold units earned 25.8 per cent more in gross rental yield than that of freehold landlords.
It makes sense that 99-year leasehold would outperform in terms of gross rental yield. Tenure has little to no impact on rents.
Therefore, for similar homes with different tenures, freehold landlords must rent out their units for the same price as that of 99-year leasehold owners.
But the cost of freehold property is much more expensive than that of 99-year leasehold, making freehold homes a less attractive investment when it comes to renting.
In terms of 10-year capital appreciation, 99-year leasehold owners came out ahead in the Core Central Region, with prices appreciating 12.1 per cent on average each year, compared to 10.9 per cent for freehold owners.
In the Outside Central Region, freehold owners did better.
This data allows us to establish the Land Tenure Rule for investing in condominiums. The rule states that, in general, freehold condominiums are more expensive than 99-year leasehold condominiums and they tend to underperform in gross rental yield.
When it comes to capital appreciation, it is a mixed bag. This means that it may not be worth paying a large premium for a freehold condominium if you do not plan to live in the home for a long period of time. The rule also suggests that if you are a landlord, go for 99-year leasehold.
Sam Baker is CEO and co-founder of Singapore Real Estate Exchange (SRX), a digital information platform that provides the Singapore property market with pricing information, comprehensive listings, and mobile applications to buy, sell or rent property.
As you would expect, buyers pay more for the right to the freehold land tenure. But 99-year leasehold condominiums consistently outperform in terms of rental yield.
"As you would expect, buyers pay more for the right to the freehold land tenure. But 99-year leasehold condominiums consistently outperform in terms of rental yield."
How much buyers paid for a freehold versus 99-year condo in last two months
District 20, 26, 27
(Outside Central Region: Bishan, Ang Mo Kio,
Upper Thomson, Yishun, Sembawang)
District 9, 10, 11
(Core Central Region: Orchard,
Bukit Timah, Holland, Novena)
Source: srx.com.sg, URA