It is hoped that the findings of this case study will provide real estate agents with valid arguments to correct customer’s wrong perception that freehold properties offers better investment value than 99-year leasehold properties.

The comparison is based on the latest available sale as well as rental prices at the respective projects. And basically the argument is this: “Even when buyers buy at today’s market price and rent out the property at today’s market rent, any 99-year leasehold properties in Singapore still offer a very healthy yield – provided the buyers know how to pick a sure winner”.

The workings are shown below:

The basic assumption in the workings of the investment yield is “80% leverage at an interest factor of $436 for every $100,000 borrowed”.

Note*

• Item [H] – the 20% outgoings comprise 10% in property tax, between 4% and 10% in maintenance fees, between 4% and 8% in agent’s commission. The outgoings could be higher for older properties due to higher costs in repairs.
  
  
• Item [K] in the above table assumes that the property owner does not leverage at all. The ‘net yield’ is the return on investment, after deducting all costs of property ownership, including property tax, maintenance fees, agent’s commission, assuming the property owner uses 100% of his own capital to pay for the property.
  
  
• Item [L] Equity dividend rate is the return on the amount of investor’s own money, after deducting the above costs of property ownership and the repayments of the housing loan in item [D].

It means that if the owners of units J and K do not leverage their investments, they will have a net yield of 3.72% and 3.89% respectively. But if they have leveraged their investment, the higher the leverage, the riskier the investment will become.

Freehold properties do not necessarily offer better investment value, as can be seen from the above comparison between Bullion Park and Orchid Park condominiums.

• Freehold ‘premium’ does not mean better financial incentives

The net yield of the three sample units at the Freehold Bullion Park condo is between 3.72% and 4.34% respectively. They are a shade lower than the net yield of between 3.97% and 4.5% produced by the three sample units at the nearby 99-leasehold Orchid Park condo.

It means that the additional premium of $120 to $150 psf the Bullion Park owners paid for the freehold status of their investment did not bring them any additional financial incentives, when compared with a leasehold property.

In other words, not only have the investors not maximising their own capital, but they have exposed themselves to higher investment risks by paying higher prices for the investment units. On practical terms, the tenants of both the two nearby condos use the same MRT station, travel the same bus route, and/or pay quite similar taxi fares everyday. The freehold status itself does not confer upon the tenants any added advantages. As such both the condos are attracting rents within the same narrow range $2.20 to $2.50 psf per month.

• Eng game – capital gain from collective sale

In fact, the freehold condo also does not enjoy any additional advantages over the leasehold condo project in the end-game, i.e. collective sale for redevelopment, because their respective investment value is quite similar (as they are attracting more or less similar rents).

On the contrary, when more Singaporeans become more investment savvy, the freehold condo may stand to lose out in collective sale windfall as developers may not be keen to pay beyond the project’s fundamental value – which comes from the rents it collects.

• Freehold tenure not a consideration for tenants

More specifically, the reasons that lead to negative yield of the Bullion Park condo (or for that matter, poor yield for all freehold condos in Singapore) are as follows:

1. For tenants in general, the tenure of the condo project is never a consideration at all.
   
   
2. Tenants will only pay a premium rents (high rents) if the property offers a lot more convenience, such as proximity to a MRT station, or beautiful sea view etc.
   
   
3. Everything being equal, tenants prefer new condos with modern fixtures to old condo with outdated and obsolete designs, regardless of its tenure.
   

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