Property buyers, mind that lease

When investing in private property, I hold the notion that freehold is best and 99-year leasehold is to be avoided, but this view has been tested in recent years.

Values for many leasehold properties are holding up well and some are even outstripping that of similar freehold developments, so the old certainties do not always apply.

Freehold is not a universal concept either. Residential land in China is typically sold with tenure of 70 years and only 50 years in some cases in Hong Kong.

Australian property is mostly freehold while in Britain, it can vary from freehold to leasehold.

Having a longer tenure means freehold commands a premium to leasehold. On that score, since rents would not differ that much, the higher yields for a leasehold property are one factor in its favour.

But leasehold properties here have also kept their value well in recent years.

For example, the leasehold project The Sail sells for around $2,000 per sq ft (psf). Recent transactions at Caribbean at Keppel Bay show that units were going at around $1,500 psf, with some going for even higher prices like $1,800 psf.

Contrast that to the more than 900-year leasehold properties in the prime River Valley area where transactions for Valley Park and Aspen Heights hover around the $1,500 psf range too.

Of course, no two projects are alike. The latter two I cited are older but they are large plots of land, offering a range of facilities for residents. They are even candidates for collective sales, something that should help to prop up their value.

In recent years, it has been proximity to MRT stations that gives a fillip to values, even if they are leasehold projects.

Last week, the Government launched a residential site for sale where developers have an option to bid for a 30-, 45- or 60-year lease period. The site offers the option of building retirement housing.

However, as home buyers are familiar only with tenures that are 99 years, freehold or 999 years leasehold, there would be less clarity about the pricing of projects with other lease periods.

Applying straight line depreciation, the value of land erodes by about 1 per cent a year for a 99-year leasehold site and 1.7 per cent a year for a 60-year lease.

After 20 years, the difference is starker. The land value would have depreciated by 20 per cent for the 99-year site and 34 per cent for the 60-year site.

In any case, with a project's pricing subject to many factors such as location and design, it is not clear if that full difference will eventually be reflected in the selling price. All it takes is for developers to price their projects just a tad lower and property agents to trumpet the attractive yield before investors may jump on the bandwagon.

Source: The Straits Times – 9 September 2012