I bought a leasehold property. Should it matter?

As leasehold properties are becoming more commonly available, it would be wise for purchasers to know what that means to owners in the long term. For many people, especially owner-occupiers, they may not mind the common leasehold tenure of 99 years as it seems like a long time away. How many people live for 100 years anyway?

So first things first — should land tenure be a deciding factor when purchasing a property?

Nawawi Tie Leung Real Estate Consultants Sdn Bhd managing director Eddy Wong says land tenure is a major consideration when purchasing a property, but there are also many other important factors to consider such as pricing, location and access to amenities.

“If you are an investor, for instance, who is buying a property for investment vis-à-vis buying for your own stay, you may sometimes prefer to buy a leasehold property because the rental yield of leasehold properties is generally higher,” he tells TheEdgeProperty.com.

Here are some pros and cons of purchasing a leasehold property:

Pros:

1. Cheaper house prices!

Assuming two properties are exactly identical where one is freehold and the other is leasehold, then the price of the leasehold property would be lower simply because the market prefers freehold properties.

“I would say it would vary anywhere between 10% and 20% if both are brand-new properties with full lease. As the lease gets shorter, the gap widens up,” says Wong.

2. Higher rental yields

Assuming that a leasehold property is cheaper than a freehold one, the lower entry cost could mean higher rental yields although one also has to take into consideration other factors such as maintenance cost and the location.

Cons:

1. Property loses value as lease shortens

One disadvantage of owning a leasehold property is that its value starts to depreciate as it gets closer to the expiry of the lease.

2. Tougher financing options

In fact, banks will usually stipulate a certain minimum number of years remaining on the lease before they are willing to accept the property as collateral for financing purposes, meaning that as the property gets older the likelihood of being able to secure financing on the property diminishes.

3. Transfer needs state consent

The other often cited disadvantage is that the transfer of leasehold properties requires state consent. In other words: bureaucracy.

Renewing the lease

The tenures of all leasehold land are renewable, unless the land is needed by the state government for public usage such as for building schools, hospitals, roads and public transport like the mass rapid transit and light rail transit.

Wong says that usually a homeowner would file their applications to renew the lease of a leasehold property when there is a major change of circumstances such as when the owner has to sell the property. The owner would then try to renew the lease in order to get a better price with a new or extended lease.

“As the lease premium is pegged to the valuation of the land, it may be advantageous to renew the lease in a down market, provided that you do have the extra cash available to pay for the renewal premium,” he says.

According to Section 103 of the National Land Code 1965, the tenant of a leasehold property has to care for the land as defined by the land legislation and may be responsible for property development and maintenance. If the state deems the tenant unfit to govern the land, the security of the tenure may be compromised. The state can then forfeit the lease for non-performance.

For strata property owners, they would need to do it collectively with other owners as well as the Management Corporation of the development as there is common property involved, adds Wong.

This story first appeared in TheEdgeProperty.com pullout on Aug 11, 2017. Download TheEdgeProperty.com pullout here for free.