Understanding Freehold and Leasehold Properties in Singapore
Leasehold values of land / property as a percentage of its Freehold value
Land leases are classified either as freehold or leasehold. Owner of freehold property have a perpetual, non-expiring right of ownership of the property whereas leasehold titles give the purchaser the temporary right of ownership. With some exceptions, residential leasehold titles usually run for 99 years, and industrial leases run for either 60 or 30 years. Upon the expiry of the lease term, the ownership of the land returns to the state. Notwithstanding the land is of freehold or leasehold titles, it can be acquired compulsorily by the government for public purposes such as to facilitate for MRT track, highway, or park under the Land Acquisition Act.
A vibrant secondary market exists for the sale and resale of leasehold and freehold land and properties. Thus, it is imperative that the Government, and the property players such as real estate developers, property buyers and sellers to have a common reference to the value of the remaining lease on a piece of a leasehold land. This allows the Government to calculate the land premium (or fee payable) for the alienation of state land, for changes in land use or intensity, or extension of land leases.
Graph of leasehold values of land as a percentage of its freehold value, based on SLA’s Leasehold Table (“Bala’s Table”). Image credit: Juan Velasco, Centre of Liveable Cities
Let me introduce to you a Leasehold Table that was first adopted by the Land Office when Singapore was still a British colony. The Singapore Land Authority (SLA) refers to a discounted value tables showing the value of a parcel of land with different lease terms remaining, as a percentage of its value assuming it were freehold. It is widely believed that the table was prepared by a Land Office employee by the name of Bala, thus Bala’s Table. SLA published this Table on 31 July 2000 to provide the public access to the table, and greater certainty to landowners and industry players, who could now calculate the premium they would have to pay beforehand. They could refer to the Development Charge (DC) Table rates payable for the change of use or increase in intensity of land, and adjusting the DC rate according to the residual tenure of the land as a percentage of freehold value shown in the Table.
Generally, the value of a piece of land varies with its lease tenure. The land value is higher if the remaining lease is longer. However as you can see from the table, the value of land does not fall at a constant annual rate as its lease period falls from 99 years to eventually zero. When a person purchases a piece of land, he is actually paying for the right to use the land or the right to receive a stream of future rental income. Let’s say this person expects to receive S$100 per square foot (psf) per year from ownership of this land, he would hence receive a payment of S$100 psf every year for 99 years. However the S$100 today would not be worth the same in the future, say 30 years or 60 years or 99 years later. Thus, to get the present value of the land rent in one lump sum, the future rental payments of S$100 psf per year must be discounted at a rate close to the opportunity cost of the money. Researcher Kwek Sian Choo and Dionne Hoh of Centre for Liveable Cities studying this table suggests that it has used a discount rate of 3.5% to peg the leasehold values as a percentage of freehold value for leasehold term. On the reason 3.5% is used for the discount rate, we shall leave this topic for another article.
There has been numerous articles published online on whether freehold or leasehold properties will have greater future value. There is indeed no straightforward answer to this. The longer the leases of properties, the slower its value will depreciate in relative to freehold properties thus generally it is safe to purchase 99-year leasehold properties and hold them for the next, say 20 years. On the other hand, the shorter the leases of properties, the faster its value will depreciate relative to freehold properties so property buyers may want to avoid older properties (>20 years). Reason being is that moving forward the depreciation would be faster so any upside potential from will be very limited, if there is any. Property owners and buyers can invariably refer to this Leasehold Table when comparing properties with varying lease tenure to make an informed decision.