Freehold vs Leasehold

When buying properties, one of the commonest things we hear from others is that freehold properties are more worthwhile investments than leasehold ones. Some even insist on buying only freehold properties. And developers often reinforce this idea by flaunting the freehold status of their projects in advertisements. Is the glowing reputation of freehold land tenure justified, or just overhyped? How true is this prevalent perception?

Here we will try to unravel the nagging concerns and anxieties regarding leasehold status many buyers grapple with when making purchase decisions. Also, if you happen to be a leasehold property seller, isn’t it good to know some redeeming virtues of leasehold properties to defend against the onslaught of negative comments from fierce bargainers?

Definitions of freehold and leasehold

First, let’s get the definitions right. Freehold land is land disposed off by the State Authority to private individual or entity in perpetuity and is owned permanently without time limit. Leasehold land, on the other hand, is land alienated by the State Authority to private individual or entity for 30, 60, 99 or even 999 years (in East Malaysia). Upon expiry of the leasehold period, “ownership” of the land automatically reverts back to the State Authority, unless the lease is successfully renewed.

There are differences in the rights, interests and restrictions on these two types of land tenure. Hence, the ensuing advantages and disadvantages in the acquisition, possession and disposal of either one. Here we will demystify these often confusing facts.

Advantages of freehold properties

The most obvious advantage of a freehold property is its perpetual ownership that can be freely transferred to others with fewer and less limitations by the State Authority. Having said that, freehold properties are still subject to environmental and town planning controls.

Due to its permanent nature of ownership and easier transferability of title, freehold land retains its value very well and appreciates more in value over the long period. There is also no premium to be paid to the State Authority for lease renewal at the end of the lease, such as in leasehold properties. For these reasons, banks are more willing to offer financing and with higher margins of up to 90% to purchasers of freehold properties.

Freehold properties have practically no disadvantages other than the higher acquisition cost compared to identical leasehold properties.

Disadvantages of leasehold properties

State Authority’s consent must be obtained to transfer the title of leasehold properties, and the process can take six months to a year. It can drag on longer and even be rejected if it involves the transfer of title from bumiputra to non-bumiputra.

Leasehold vacant land may be restricted by lease conditions such as the requirements to start and maintain crop cultivation or property development in a certain manner and within certain timeframes.

After an initial period of about thirty years the appreciation in value of leasehold properties may begin to slow down due to the shortening of the remaining leasehold period. It may even depreciate in value towards the end of the lease – for example the older leasehold properties in Petaling Jaya.

When the remaining lease is down to less than sixty years, banks commonly reduce the margins of finance for purchase of such properties, and may refuse to finance them at all when the remaining lease is less than thirty years.

Also, towards the end of the lease, owners have to apply to the State Authority and upon approval are required to pay substantial amounts of premium in cash for renewal of the lease. This prohibitive amount of cash outlay can be a pain in the tooth for leasehold property owners.

 Advantages of leasehold properties

Despite the various disadvantages of leasehold properties, there are still some attractive redeeming virtues – top of which is the price. Compared to identical freehold properties, leasehold properties are generally about twenty percent cheaper. Leasehold property developers are also usually more generous in adding extra benefits, features and freebies to attract potential buyers. 

Also, if leasehold properties are in strategic locations, the capital appreciation may outpace that of comparable freehold properties in the vicinity. We see this phenomenon played out excellently in Bandar Sunway, Tropicana and Seputeh. And if leasehold properties are developed with a unique lifestyle concept, such as in Desa ParkCity, the appreciation in value can be mind-boggling!

With the current scarcity and diminishing availability of freehold land, due to the State Authority no longer alienating freehold land, more of the contemporary and stylish developments are taking place on leasehold land. Hence, there may be more fascinating choices available on leasehold land.

Conclusion

The myth that freehold properties guarantee security and permanence of ownership is not entirely true. Under the Land Acquisition Act 1960 all properties, be it freehold or leasehold, are subject to forced acquisition by the State Authority for public purpose, such as construction of roads or a public school. Owners of the acquired properties are entitled to compensation but are not able to resist the compulsory acquisition.

Moreover, freehold or leasehold land tenure is only one of the many factors affecting property value. There are other equally if not more important factors such as location and accessibility, amenities and facilities, property features, built quality, pricing etc that have to be taken into account.

One must also consider the purpose of property purchase. For own occupation, the suitability, convenience and enjoyment of the property seem to be more important and practical considerations, compared to the status of land tenure. After all, a 99-year leasehold is likely to outlive most owners. And how many would like to live in a 100 year-old obsolete house?

Buying leasehold properties for investment, on the other hand, may pose a more challenging situation. Leasehold properties are indeed more difficult in transferring the titles, harder to obtain sufficient financing and the value appreciation may go downhill after the initial 30 years.

In conclusion, all things being equal, freehold properties are certainly more worthwhile to own compared to leasehold ones. Unless, of course, there are other redeeming factors that the purchaser alone can decide if such purchase is justified.

Contributed by: Aaron Lee

For further details, please email aaronlee@hartamas.com.