03/10/2023
I've invested in a leasehold property. Does it carry any significance?
As leasehold properties become more common, it's important for buyers to understand the implications for long-term ownership. For many, particularly those planning to live in the property themselves, the standard leasehold tenure of 99 years might not seem concerning, given that very few people live for a century.
So, the question arises: should land tenure be a decisive factor when purchasing real estate?
Eddy Wong, the managing director of Nawawi Tie Leung Real Estate Consultants Sdn Bhd, believes that land tenure is a crucial consideration when buying property, but it's not the only factor to weigh. Pricing, location, and access to amenities also play significant roles, especially for investors. Wong explains that investors might favor leasehold properties because they generally offer higher rental yields.
Here are some pros and cons of purchasing a leasehold property:
Pros:
Lower House Prices: Assuming two identical properties, one freehold and the other leasehold, the leasehold property is typically priced lower because the market values freehold properties more. Wong suggests the price difference can range from 10% to 20%, with the gap widening as the lease term shortens.
Higher Rental Yields: Lower entry costs for leasehold properties can lead to higher rental yields, although factors like maintenance costs and location must also be considered.
Cons:
Depreciating Value: The value of a leasehold property starts to decline as the lease approaches expiration.
Limited Financing Options: Banks often require a minimum number of years remaining on the lease before using the property as collateral for financing. As the property ages, securing financing becomes more challenging.
State Consent for Transfers: Transferring leasehold properties usually involves obtaining state consent, which can be a bureaucratic process.
Lease Renewal:
All leasehold land tenures are renewable unless needed by the state government for public purposes, such as schools, hospitals, or infrastructure projects. Homeowners typically apply for lease renewal during significant changes, such as when selling the property, in order to secure a better price with a new or extended lease.
Wong advises that renewing the lease during a downturn in the property market can be advantageous, provided the necessary funds are available to pay the renewal premium. According to Section 103 of the National Land Code 1965, leasehold property tenants are responsible for land care and property development and maintenance as defined by land legislation. Failure to meet these responsibilities could jeopardize the security of the tenure, leading to lease forfeiture by the state.
For strata property owners, lease renewal is typically done collectively with other owners and the Management Corporation of the development, as it involves common property.
