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Freehold or Leasehold Property?

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One of the most often raised questions among property investors is whether to purchase a leasehold or freehold property in Singapore. While many would argue that freehold is definitely better than leasehold because of the perceived perpetual ownership, this argument may not hold water in Singapore due to the Land Acquisition Act.

In this article, I would share my views on freehold property in Singapore. Once again, I am putting a disclaimer that this article is not meant to be a form of financial nor legal advice. The content is produced to the best of my knowledge and research. If there are any factual errors, please feel free to let me know. I would be happy to amend my article.

Leasehold property

Generally, 99 years old leasehold property must be returned to the government upon expiry of lease. In March 2017, Minister for National Development, Lawrence Wong, highlighted specifically that all leasehold private and public housing will be returned to the state upon expiry. Due to land scarcity, the government needs to recover land to meet changing social needs.

Effectively, this means that home-owners will receive no compensation when the lease of their properties expired. He made this warning because there are many Singaporeans buying old HDB flats at sky-high prices with the expectation of Selective En-Bloc Redevelopment Scheme (Sers). The government stance is that not all HDB flats would be eligible for Sers and buyers should not assume that all old HDB flats would be eligible for Sers.

Freehold property

On hindsight, Minister Wong was forced to make the above statements probably because of the case of Geylang Lorong 3. Some of the residents face the grim reality of returning the land to the government when the lease of their 60-year old property end in 2020. Under normal circumstances, the residents could have opted for collective sale to developers but with only three years of lease remaining, the residents have missed the opportunity.

Nonetheless, according to Singapore Land Authority (SLA) policy, it is possible to apply for lease extension. The government will “consider extension of leases on a case-by-case basis where they are in line with planning intention and help to further specific economic and social objectives”. Do not assume that lease renewal would be approved by default because the applications are always reviewed on case-by-case basis. Generally, applications for lease extensions will be considered only if the application is submitted no earlier than after half of the lease period has expired, and no later than 3 years before the expiry of the lease. Again, residents of Geylang Lorong 3 had missed this deadline to salvage their situation.

Freehold property

Up to this point, readers must be swayed by the notion that owning a freehold property would avoid the situation faced by Geylang Lorong 3 residents. Technically, it may appear to be so. But in the real world, Singapore government has various legal provisions to acquire a land, regardless whether its freehold or leasehold, for development purposes. In today’s context, this possibility is very high due to various urban development plans for mega infrastructure projects such as the Kuala Lumpur-Singapore High Speed Rail, Changi Airport Terminal 5 and new MRT lines.

And do not rejoice when your freehold property is gazetted for compulsory acquisition by the government. This is because there is often a huge gap between the expected compensation and the pay-out from the government.  The 1998 court case of Ng Boo Tan was an interesting case and highlighted the power of Land Acquisition Act.

Ng Boo Tan’s freehold property in Paya Lebar was gazetted by government for compulsory acquisition and was offered $285,000. The offer was rejected because she deemed the offer below market value and demanded $800,000 compensation. However, she did not get what she asked for and instead, the court awarded her a slightly higher amount of only $310,000. The Court of Appeal ruled that the amount was based on three recent comparable transactions in which the buyers seemingly were aware that there was a road line that could affect their properties.

Land Acquisition Act

Since the 1998 court case, the government reviewed the Land Acquisition Act and decided to revise the law in 2007. It was deemed that since 1966, there had been no major amendments to this rule and the government felt that it was time to update the policy. Arising from this, there were two major changes.

Firstly, compensation will be based on the market value as at the date of the acquisition of the land.

Secondly, the statutory compensation will not be limited to the existing use or development baseline of the land, whichever is the lower. Instead, the compensation will be based on the market value which a bona fide purchaser would reasonably be willing to pay for the land. This means the compensation can take into account, inter alia, the land’s permitted use and the potential value that is realisable under the Master Plan, subject to the prevailing planning requirements, and other factors such as location, tenure, restrictive covenants in the title and site conditions. In other words, this will be no different from how that land would have been valued had it been sold in the open market.

Effectively, the 2007’s Land Acquisition Act would ensure that cases such as Ng Boo Tan could be prevented going forward. More importantly, the policy tone for the land acquisition is now more “friendly” as there is now more room for negotiation between the government and affected home-owners. In fact, in 2013, shop-owners and residents of Pearl Centre were given ex-gratia payments (on top of the statutory compensation based on market value assessed by valuers) to “mitigate the financial impacts of the acquisition exercise”.

Conclusion

Broadly speaking, a freehold property is typically priced at a premium of 10% when compared to a leasehold property. But is there a difference between the two types of properties? Of course there is. But from my point of view, I would not pay a premium to buy a freehold property if given a choice. This is because in a land scarce country like Singapore, you never really own a property.

Even for a freehold property, you may be forced to sell your property to the government under the Land Acquisition Act if your property happened to fall in an area slated for public development uses. So why should I pay a premium for freehold property? And do not even think that you had hit the jackpot when your freehold property is slated for compulsory acquisition. This is because there is often a gap between the compensation offered and the amount you expected. Welcome to Singapore.

Read my other articles on property:

  1. Negative HDB sales
  2. Wealth destruction from CPF Accrued Interest
  3. Devastating HDB Loan and CPF Accrued Interest
  4. CPF’s Home Protection Scheme (HPS)
  5. The Dark Side of CPF Housing Withdrawal Limit

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Updated: October 12, 2017 — 3:37 am

4 Comments

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  1. Singapore has 2 laws that it can use to compulsorily acquire your property:

    1) The more commonly known Land Acquisitions Act — that is used in the normal day-to-day redevelopment of the country.

    2) The Emergency Powers Act — that can acquire other assets such as vehicles, not just property. Used only when a state of emergency is in effect e.g. war, national catastrophe, pandemic, etc etc.

    For Geylang Lor 3, if they wanted to do enbloc, they should have done it at least 20 years ago (at least 1/3 of lease left). Because otherwise it will be very expensive for developers to top-up the lease & make it unattractive and/or result in low compensation for the owners. Not forgetting that the developer will have to pay extra to govt to increase the Gross Plot Ratio to build higher buildings.

    As for extending the lease, very doubtful for the Gaylang Lor 3 owners to succeed if govt had already planned for more intensive use & buildup for the area.

    Experienced property investors will prefer leasehold over freehold, all things being equal. Becoz rental income doesn’t depend on holding status. Investors may buy freehold for other unique factors e.g. low valuation, no leasehold in that area, unique in-demand location or characteristics, etc.

    Investors won’t normally hold investment properties for very long term, but will tend to sell or enbloc or redevelop during hot property market cycles. It’s just a cash cow for them. Just like how farmers view their lambs or cows — they’re not pets or poor animals, just walking assets to be milked & killed for maximum profits.

    They will go for freehold only if they intend to pass down to descendants, or to have very long-term family business control e.g. construct office / commercial building for continuous rental & business activities.

  2. Agree with you. Recent Merpati Rd is another good example. Some live there for ages and want to pass to next generation. But govt want to develop high rise condo or hdb. Rumour is 30 storey. They buy FH ppty cheap and likely will convert it to leasehold and sell to the public. Very clever hor. Thats why 5 households refused to shift and was served court order and eventually surrendered. I viewed one unit in 2009 GFC but decided not to buy. Else i would have lost money based on the compensation. In SG, govt always win because of the law in place.

  3. Hi Sinkie,

    Thanks for the sharing. Yes, indeed, leasehold is more popular for investors hoping to cash in on the en-bloc fever.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  4. Hi Henry,

    Blessing in disguise for you!
    Of course the government will always win in Singapore. They set the rules.
    For commoners like us, just make sure we know the rules and don’t lose wealth.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

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