It’s the age-old debate about private property investment; Heritable building right vs. freehand.
What are the main differences and is one really better than the other? In Prime Time’s Powering Your Property segment, Rachel Kelly and Shezad Haque spoke to Nicholas Mak, Head of Research and Consultancy at ERA Realty to find out more.
Rachel Kelly: Why Are Some Properties Leased While Others Are Owned? [what differentiates them]?
Nicholas Mak: First we have to define what is property – what do you actually own when you buy a property? The answer is that you are buying a bundle of rights – the rights to use the property for specific purposes.
If you own real estate, your rights generally remain forever. So that you can sell the rights [of the property] to the next person, and it could go on for generations.
If you have a heritable building right for residential or commercial purposes, the lease is around 99 years. And that means that the bundle of rights would only be valid for the duration of the lease.
There are properties with even shorter leases, such as industrial properties with leases of 60 years, 30 years or even 20 years. On the other side of the spectrum are some residential properties with 999 or even 9999 year leases.
The longest I’ve seen is a one-year lease, less than a million years!
RK: What would be the difference between a leasehold that is a year shorter than a million years and a real estate?
NM: In terms of assessment, there is actually not much difference between the two. A plot of land (leased for more than a thousand years) is usually valued in the same way as real estate.
The concept of the long lease stems from British property law. You will find that most properties with a 999 year lease all started around 1852-1856.
Now you usually notice shorter heritable building rights [99 years or less], and as an owner, it is good to note the expiration date of the lease.
Shezad Haque: What should property buyers consider when buying a rental or condominium?
NM: While the ownership structure of a leasehold or property is important, the location, size and price of the property are more important.
You need to ask yourself whether the property suits your needs and financial standing before you grapple with the choice between leasehold or condominium.
This is because the consideration of choosing between the two typically comes into play when selecting older properties, especially those that are more than 30 years old.
Because the 99-year lease would have been shortened a good bit and you would then have about 60 years or less left. This may affect some, especially younger, buyers who are using their CPF [for housing loans].
While this is not a problem for condominiums, buying an older property has its own considerations. For example, you need to factor in maintenance [cost] the property and whether there are any visible signs of wear and tear [impacts overall costs].
SH: In your opinion, is there a connection between the location and heritable building rights?
NM: Yes, because condominiums cannot be found in all parts of Singapore. Usually they are in the elderly and [less ideal] Parts of Singapore and in the best districts.
But in places where government land has been purchased, like Punggol, Choa Chu Kang, Woodlands, and Jurong, you will hardly find condos as the government owns the lease titles and it is their policy to only sell leasehold properties.
RK: Talk to us about the effects of property and heritable building rights on prices. Is the popular opinion true that condominiums are more expensive than leasehold properties?
NM: Yes, that’s right. With a condominium, you essentially own the rights to that property forever. If you compare a resale property with a 99-year lease to a condo, on an equal basis, you can expect the condo to cost between 25 and 35 percent more expensive.
SH: How will en bloc developments affect the owners of land and building rights differently?
NM: When a developer buys a condominium through a block or bulk sale, they are not so much interested in the building as they are in the property, as they are going to demolish the building in order to renovate it.
So if it’s a condominium, they may have to pay a development fee to increase the buildable area. However, you do not need to top up the lease as it is owned for an indefinite period.
However, if they were to buy an aging lease for 99 years, they would have to pay the government a top-up lease premium to extend the lease and roll it back to 99 years – on top of standard development fees.
As a result, owners planning to sell a 99 year long leasehold property (with very few years remaining) through an en bloc sale may not get as much cash as condo owners.
Listen to the full podcast on Awedio: SPH’s Free Digital Audio Streaming Service to find out the rental value of property and building rights and what happens to a lease after 99 years if that’s the specified term.
Download the podcast.
This article was first published in Money FM 893.
