One of the major differences between properties is whether they have freehold or leasehold titles. Before buying a property, that is one of the first things an investor or buyer would look out for.
Whether a property has a freehold or leasehold title would affect things like the property’s value, appreciation rate and ease of future transactions should the property change hands in the future.
The General Difference
As their names suggests, the main difference between the two lies in the fact that one has a time limit to the title, much like a lease while the other doesn’t.
Freehold: Under the Land Acquisition Act of 1960, the state can take back freehold land for public purposes such as LRT projects or for economic development. Otherwise, the land is deemed to have been set aside by the state and disposed indefinitely to an individual or entity (can be a company).
Leasehold: Leasehold property, on the other hand, are being built on land that have been leased from the state (typically for 99 years) although the number of years on the lease could range from 30 to 999 years. When the lease expires, property owners would have to apply for an extension of the lease from the state to be approved at the state’s discretion.
Although the state would usually approve such extensions if there isn’t a compelling reason not to do so, the process can be a long and arduous one and can cost a significant amount. Furthermore, no one knows what could happen 50 or 99 years down the road.
Restrictions On Use
Sometimes, leasehold properties also come with restrictions on the use of the property. This might pose a problem if future owners of the land or property would like to convert the property for another use. If the restrictions are ignored or violated, the state could also forfeit the lease and take back the property.
Effects On Property Value
Because of the uncertainty and lease limitations surrounding leasehold properties, they tend to be cheaper than freehold properties.
However, new leasehold properties today tend to maintain a similar price to freehold properties but try to make up for it by providing more facilities and public amenities. If the leasehold property is a new one with 99 years left on the lease, the effects on its price would also not be as big.
Long Term Effects On Value Appreciation
However, the long term effects of a leasehold title on the value of the property and its appreciation rate can be severe once the property nears the end of the lease term.
For the first 3 decades or so of a leasehold property, property prices tend to not differ too much from freehold ones and can even appreciate along with market rates. However, as the property nears the end of its lease (typically when the property has used up close to half of its lease period of more) the price of the property would start to stagnate and depreciate until the lease expires.
Time Taken For Property To Change Hands
Due to the need to request the approval of the state before leasehold properties can change hands in a sale or a purchase if the property is bought from the secondary market, selling or buying a leasehold property a few years down the road can take a much longer time than a freehold property. The entire process could take up to six months to more than a year.
Effects On Financing
As the time remaining on the lease runs down, it could also be increasingly difficult for new buyers of leasehold properties to get a loan on the property. This is because banks typically prefer to finance the purchase of properties with at least 75 years left on their lease.
This happens because banks would need the property as a collateral in case the owner could not repay the loan, which would typically take at least 30-35 years. Banks do not want to be stuck in a situation where they would have to foreclose a property with less than 50 years left on its lease by which time its value could have depreciated to less than that of the amount of the loan.
It is a risk that they would rather not take.
Read Also: What Can Banks Do If You Don’t Pay Up?
Which Should You Choose?
Hence, given a choice, it would definitely be better to purchase a property with a freehold title.
However, if you plan to purchase the property for your personal consumption and don’t intend for it to last more than one or at most, two generations, then buying a leasehold property at a good price might not be such a bad idea.
If you are buying the property to collect rent and intend to sell it off within the first 10 to 20 years, buying a leasehold property at a good location at a right price might also not be a bad idea since leasehold property values tend to not differ too much in their first two decades with more than 75 years remaining on their leases.
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DollarsAndSense Malaysia is a website that aims to help people make better financial decisions, one interesting, bite-sized article at a time. Like us on Facebook to stay in touch with our latest articles.