Understanding Leasehold Properties in Singapore: Challenges, Options, and Tips for Buyers

Posted on :

Singapore, known for its limited land space, predominantly features leasehold properties. The three main types of property tenure in Singapore are:

  • Freehold: Properties that are owned indefinitely. These are often more expensive and considered more desirable due to their perpetual ownership.
  • 99-Year Leasehold: Properties leased for 99 years, after which ownership reverts to the state. These are the most common type of tenure for residential properties in Singapore.
  • 999-Year Leasehold: Properties leased for 999 years, essentially close to freehold, providing a very long period of ownership.

Leasehold properties are common in Singapore due to the government’s land use policies, which aim to optimize land utilization and accommodate the nation’s housing needs. However, leasehold properties come with their own set of challenges and considerations.

 

Challenges Leasehold Property Owners Face

Owners of leasehold properties encounter several unique challenges:

  • Depreciating Value: As the lease period decreases, the property’s value tends to depreciate. For instance, a property with 70 years left on its lease might be less attractive than one with 90 years remaining. Buyers and investors are often wary of properties with shorter leases due to potential difficulties in resale and lower financing availability.
  • Financing Difficulties: Banks and financial institutions may be hesitant to provide loans for properties with shorter remaining lease periods. For example, some banks may only offer full financing for properties with more than 60 years left on the lease. Properties with less than 30 years remaining might only qualify for partial loans or none at all.
  • Limited Appreciation Potential: Compared to freehold properties, leasehold properties may have limited potential for capital appreciation. This is particularly true for properties with less than 50 years remaining on the lease, as their value may decrease significantly over time.
  • Maintenance and Upkeep Costs: As leasehold properties age, the cost of maintenance and upkeep can increase. Owners may need to spend more on repairs and renovations to keep the property in good condition, which can impact overall returns on investment.

 

Options Available for Leasehold Property Owners

Leasehold property owners have a few options to consider:

  • Lease Renewal: Owners can apply to renew their lease, although this can be costly and approval is not guaranteed. For example, in 2019, owners of some leasehold properties in Geylang successfully renewed their leases, but the costs involved were substantial, and not all applications were approved.
  • En Bloc Sale: In some cases, owners can collectively sell their property to developers, who may then redevelop the land. The recent en bloc sale of the Pacific Mansion in River Valley, which was sold for $980 million, is a good example of this option. Owners benefited from a substantial payout, and the land will be redeveloped into a new residential project.
  • Renting Out: Owners can rent out their property to generate income while waiting for the right time to sell. This is a common strategy for owners of properties with shorter leases, as it provides a steady income stream and keeps the property occupied.
  • Selling Before Lease Expires: Some owners may choose to sell their property before the lease period becomes too short. Selling a leasehold property with 70 years left, for example, may attract more buyers and fetch a better price than waiting until the lease period is significantly shorter.

 

Tips for Investors/Homeowners When Purchasing a Leasehold Property

When considering a leasehold property, here are some useful tips:

  • Research Lease Terms: Understand the remaining lease period and the terms of renewal. Properties with longer remaining leases generally offer more security and financing options. For example, a property with 85 years left on its lease is likely to be more attractive and easier to finance than one with 35 years remaining.
  • Assess Location and Development Plans: Properties in well-located areas or those with future development plans may offer better value retention. For instance, properties near upcoming MRT stations or new commercial developments may see better appreciation potential. The government’s plans for the Greater Southern Waterfront is an example of an area where leasehold properties might benefit from future developments.
  • Evaluate Financing Options: Ensure you have access to financing options that suit your needs and the property’s lease term. Speak to multiple banks and financial institutions to compare loan packages and interest rates. It’s crucial to understand how the remaining lease period affects your financing options.
  • Consider Exit Strategy: Plan your exit strategy, whether it involves selling, renewing the lease, or renting out the property. For example, if you plan to sell the property in 10 years, consider how the lease period will impact its value and marketability at that time. Having a clear exit strategy helps in making informed decisions and maximizing returns on investment.
  • Inspect Property Condition: Older leasehold properties may require more maintenance and repairs. Conduct a thorough inspection to assess the condition of the property and factor in potential renovation costs. This is especially important for properties with shorter leases, as you may need to invest in upkeep to maintain its value.

 

By understanding the nuances of leasehold properties, potential buyers and current owners can make informed decisions that align with their financial goals and long-term plans. While leasehold properties present unique challenges, they also offer opportunities for strategic investments, especially in a dynamic market like Singapore’s.