Is It Still Worth Buying A Freehold Property For Retirement?
A few years ago, I wrote an article, “FREEHOLD VS LEASEHOLD: Is It Always Worth Paying More For A Freehold Condo?”. Here, I am asking a related question, does it make a difference whether we are buying a freehold or leasehold condo for retirement?
Many Singaporeans would immediately answer yes, and some may even insist on only buying freehold properties if it’s for the long term. However, the property market has constantly shown that we cannot make assumptions, and in fact, one of the least provable statements is that “freehold condos perform better.”
As a matter of fact, historically, we have seen both leasehold and freehold condos enjoy capital appreciation.
Let’s take a more nuanced look before you decide to invest in one for retirement:
Why is it so hard to give a definite answer on whether freehold is better?
A common question is why we don’t just look at all the freehold prices, then look at all the leasehold prices, and see which one performed better overall. Well, this will never be accurate.
First, there are far more leasehold than freehold condos, which will distort the results (generally to the benefit of leasehold condos, as there’s so many more transactions.) In addition, all the freehold condos tend to cluster around prime neighbourhoods like Orchard, Tanglin, etc. On the other hand, leasehold condos tend to be found in newer or fringe neighbourhoods. This, again gives leasehold condos an unfair advantage, as they almost always have more room to appreciate.
On the other hand, you will find more leasehold condos that are conveniently located near MRT stations and amenities. So, if you want the added convenience, you will have more choices for leasehold condos than freehold condos. This added convenience does have a positive impact on capital appreciation.
Also, if you buy a condo in a very new area like Tengah, prices will be rock bottom, and there’s a lot of room for appreciation as the government will build schools, MRT stations, markets, etc. But if you buy in an already heavily-developed area, such as Anson Road or Orchard Road, how much more can the price increase? It’s already among the most expensive properties in Singapore. So this is why leasehold properties, as a whole, can show much more significant percentage gains than their freehold counterparts.
Even if prime region condos show good appreciation, we’re forced to ask if the appreciation is really due to their freehold status or just because they’re such a desirable place to live. Property prices move for many reasons; not all are related to lease status.
Case Study: Leedon 2 vs The Merasaga
These two condos are located in the prime Holland Road neighbourhood.
Leedon 2 is a 72-unit freehold condo built in 1996.
The Merasaga is a 114-unit 99-year leasehold condo built in 1995.
Even though The Merasaga is slightly older than Leedon 2, it has appreciated by 220% over the last ten years. In comparison, Leedon 2 has gained by 171%.
Why is that so? There are a few possible reasons:
- The Merasaga has a better layout
- The Merasaga has better landscape and facilities
- The Mersaga is quieter
- The Merasaga enjoys a better view
- The Merasaga commands better rents
So, as we can see, the lease status of the condos alone does not determine its value.
So how can we determine if a freehold property is really good for retirement?
We can start by understanding some general factors and eventually moving on to scrutinise the actual property.
The first factor is the likely lifespan of the property. An interesting point to note is that, regardless of whether a property is freehold or leasehold, it tends to last the same amount of time. This article has some research on how long most properties last before they go en-bloc; regardless of lease status, the general answer is between 19 and 24 years. It is rare for any condo to last more than 33 years.
This is significant to your retirement for two reasons:
First, you may want to buy a freehold unit because it’s “there forever,” and you have something to will to the children, or perhaps you feel you can charge rent for the rest of your life, and so can your family.
But the average lifespan of a condo shows this is improbable: even if you pay 15 to 20% more for a freehold condo, you may find that the condo goes en-bloc in 24 years; exactly the same as a leasehold counterpart nearby. And if that’s going to be the case, do you still want to pay the freehold premium?
Second, we need to consider that freehold status becomes more valuable with age. For example, when a leasehold property has only 60 years left, the value suffers as borrowers may not be able to get a full loan; this means they need more cash upfront. Buyers may even need to pay full cash for properties with 30 years or less on the lease.
In theory, freehold properties avoid this issue, as there is never any lease decay. This is part of the justification for the freehold premium. But again, consider how long the typical condo lasts: it would have to survive 39 years (dropping the lease to 60 years) before there’s an effect on the financing. As I have mentioned above, this is quite a rare age for condos.
If your condo goes en-bloc, or you sell it early on, you may find the lease decay has no effect, and that would mean paying for freehold status was a waste of money. You may as well have bought a cheaper leasehold unit and held it for the same amount of time.
But let’s put the property lifespan aside, and look at rental income
It may surprise you to learn that some very savvy property investors when picking a unit to rent out, will refuse to consider freehold. The reason is the higher price of freehold and the impact on rental yield.
Consider two condo units of the same age, quality, and location. The only difference is that one is a freehold, and the other is a leasehold.
The leasehold unit is $1.8 million and rents for around $54,000 per year.
The freehold unit is $2.1 million and rents for around $54,000 per year.
(Why are they the same? It’s because a tenant will never pay more for freehold status. Lease status has no benefit to them. All they care about is whether it’s a pleasant place to live, close to work, has an MRT nearby, etc.)
Gross rental yield is the annual income divided by the property price. So for the leasehold unit, the gross yield is 3% ($54,000 / $1.8 million x 100). But for the freehold unit, the gross yield is 2.57%.
Simply put, you’re probably making more money from renting the leasehold unit than the freehold one. So do consider if the extra $300,000 in price is better off in your retirement fund or some other investment.
But I am not buying to rent out, you may say. Granted, your purpose is for your own stay so you are not so much concerned about rental yield. But do consider two things:
- There is a correlation between property value and rental yield. If it comes to a point in time that you do decide or need to sell your property, the one with a higher rental yield is likely to fetch a higher price than one with a lower yield.
- As the property ages, the maintenance costs will go up. Owners will have to face the constant hassles of repairing leaking pipes, water seepage, spalling concretes, etc. More sinking funds will be needed for lift maintenance, facilities upgrades and structural repairs. Oftentimes, these repair costs can be very significant. After a while, frustrated owners might start to wonder if it is really worth hanging on to their ageing freehold condos.
Finally, we should consider that long-term changes to the area could trump your freehold value
There are certain factors that being freehold cannot overcome. Some examples of this are:
- Several new condos are built nearby, increasing competition for tenants or buyers, and some of the new condos even block the view of your property.
- Condo maintenance worsens toward later years; even if your condo is the only freehold one in the area, it still looks worse than its leasehold counterparts.
- Cooling measures or market conditions change at the time you sell. If you sell during a downturn or (touch wood!) at a loss, at least a leasehold option would mean losing less money.
Ultimately, a leasehold property commits less capital and has a lower risk profile.
A private property is a great retirement asset, but it may not be necessary to make it a freehold
It is true that some of the most prime regions, such as Tanglin, Cluny, Orchard, etc. have properties that are good retirement assets. However, it’s unlikely that the savvier investors are buying there just because the properties are freehold. They are buying there for long-term value due to the location.
From a personal finance perspective, it’s also worth considering that a cheaper (leasehold) property can be paid off sooner or with less interest over the years. It’s seldom worth pushing your loan tenure too close to retirement, just for the sake of having a freehold condo.
Simply put, find a well-located and well-priced condo for your retirement asset; whether or not its freehold is a secondary concern
The key parameters are:
- Affordability – Your monthly repayments should not be more than 30% of your monthly household income.
- Rental income and retirement targets – If your targeted retirement income is $4,000 a month, and the property can produce $4,000 a month, then does it really matter whether it’s leasehold or freehold?
- Targeted appreciation rates – Based on your retirement planning, you might target a certain rate of return (e.g., effective gains of 3% per annum when you sell). This must be the first priority. If you find that a freehold property that can do it, then go for that property. But if you find a leasehold property that can do it, don’t hesitate to go for that instead. Don’t be too hung up over lease status.
If you’re currently pondering a freehold (or leasehold!) condo for retirement, I can help you make specific comparisons. Do reach out to me for direct help, and I can advise you on whether the property meets your retirement objectives.
Danny Han has always been in the people’s business, having spent 23 years as a church pastor, five years as an insurance agent, and the last 16 years as a property consultant.
Danny has a genuine interest in people and firmly believes in personal integrity. While helping homeowners with their property needs, their interest always takes precedence over his personal gains. Hence, Danny has consistently earned his clients’ complete trust and loyalty. Many of them have become his personal friends.
Danny received his Diploma in Mechanical Engineering from Singapore Polytechnics and Bachelor of Science from Oklahoma Christian University of Science and Arts in Bible & Psychology.
Besides keeping abreast of the property market trend and constantly equipping himself to better serve his clients, Danny is a passionate foodie, a weekend cyclist, and an avid hiker.
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