29-9-2018 | Space Recce
Singapore investors previously may or may not put in enough weightage to Freehold or Leasehold when committing to real estate investment. With the news of which the residential plot of land reaching the end of lease and the hotly debate leasehold HDB might not be en bloc, more investors have put more emphasis to land tenure (Freehold or Leasehold). Should investors consider Freehold property can be pass down for the long term future? Or just purchase a leasehold property with higher rental yield which might erode in value in 30-40 years time?
First of all, investors have to recognise that business end-users and home owners are different.
The business owner who use the commercial space will first determine if the location is viable for their business and immediate future expansion. Next, is the price make business sense. Hence there will still be substantial buyers in the market for a balance 10-15 years shop in prime area. The same cannot be said for residential property. I wonder how many buyer will consider a condo with balance lease of 10 years.
At the first glance, the rental yield for a leasehold commercial property appears to beat their freehold counterpart hands down. The rental yield is calculate by taking the average yearly rent divided by the price acquire the property.
However, there are 2 aspects of return to every property investment. They are rental yield and return on capital.
Rental yield indicates how efficiently the capital is being utilized. Hence the leasehold property at a similar specification at the same location does indeed outperform freehold property.
The Capital Appreciation is the increase of price or value of the commercial property. As leasehold property has a limited lifespan, it is theoretically value will be reduce when the balance lease reached 40 years. Conversely, freehold commercial property eventually create more value and provide something as a legacy for the children eventually.
Freehold properties are more likely to be put up for en-bloc sales which fetch better price compared to Leasehold counterpart. This is due to freehold developments do not need to pay development premium (DP) top up the tenure back to 99-years.
Freehold properties also have an advantage to get financing. Banks make a distinction between Freehold and Leasehold and are more likely to approve a loan that is secured by the former. The banks will probably not hesitate to make loan on a newer property that still has 80+ years to run on its 99-year lease. Banks generally reluctant to extend loan or restrict the duration of the loan if the property being mortgaged has a short remaining tenure.
It is not all rosy for freehold properties. As highlighted earlier, the rental yield for Freehold property is lower. During economic downturn, the rental of a freehold commercial lot might not sufficient to cover the mortgage. For investor, it will make more financial sense to invest in a leasehold property which the rental is sufficient to cover the mortgage.
A leasehold property is less expensive compared to freehold property. This mean less initial capital outlay for a leasehold property which will not put less financial strain to investors.
In real estate assets, location is always a critical factor. For commercial properties, it is important to consider if the location is in is one in which business end user will want to operate their business. This will impact the rentability and also getting future buyers to encash the investment.
It is noted that many people are still attracted to Freehold properties even with the relatively lower rental and higher purchase quantum. For freehold properties, investors may believe it is not only as an investment opportunity but also an asset to be passed down to the next generation.
In conclusion, investor should understand that each type of land tenure (freehold or leasehold) has its own advantages and drawbacks. The focus should not on the argument of superiority over Freehold or Leasehold only.
Instead, focus should be on what is prioritise for the investment - immediate cash flow, stable income or ownership. Simultaneously, it is important to understand the selling point of the said commercial property, ie potential changes in government policies, which business/trade will be interested in the said property, specification compared to nearby similar property, land zonings, opening of new MRT stations, frontage and other non-tenure factors.
Start by having a conversation with us to know the best commercial property investment so that you can create more value for yourself as a whole