Should I Buy a Leasehold Property or Insist on Freehold?
This is truly a million-dollar question, as property investment often involves a significant financial commitment. To make an informed decision, it is essential to first understand the differences between leasehold and freehold tenure, along with their long-term monetary and non-monetary implications.
Leasehold: Ownership of the property is granted for a fixed term, as stipulated in the title deed. The interest in the property diminishes over time unless the lease is renewed.
Freehold: Ownership is perpetual, giving the holder the right to occupy the property indefinitely.
By examining the title deed, one can identify the tenure type:
Leasehold titles: “Pajakan Negeri” (State Lease) or “Pajakan Mukim” (Mukim Lease).
Freehold titles: “Geran” or “Geran Mukim”.
Qualified titles: “Hakmilik Sementara (Daftar)” or “Hakmilik Sementara (Mukim)” may represent either leasehold or freehold. The tenure is clarified under “Taraf Pegangan” as either “Selama-lamanya” (freehold, in perpetuity) or “Pajakan” (leasehold), with the expiry date specified.
Types of title are tabulated below:
The availability of freehold land for development has been declining. This is due to the amendment of Section 76 of the National Land Code, which generally restricts State Authorities from alienating land in perpetuity (effective March 25, 1985). Exceptions are made only for the Federal Government, public authorities, public purposes, or in special circumstances deemed appropriate by the State to alienate a freehold title.
Nevertheless, freehold projects are still being launched today because many are developed on freehold land alienated before the 1985 amendment.
According to Sub-section 76(a) of the National Land Code, alienation of state land is limited to terms not exceeding 99 years. Common leasehold terms include 30, 60, and 99 years in Peninsular Malaysia. In East Malaysia, leases of 999 years are common, which are practically equivalent to freehold.
For leasehold properties, it is crucial to check the title deed for the remaining years. While most titles start with 99 years, the value decreases as the term shortens. Renewal is possible through application to the State Authority, but it is subject to the payment of a premium.
A leasehold title grants ownership rights for a fixed period, meaning the remaining term of ownership decreases over time unless the lease is extended. As the tenure shortens, the property’s value theoretically depreciates, unless market appreciation is strong enough to offset the loss in value from the diminishing lease period.
As a general rule of thumb, ceteris paribus, valuers often estimate that a leasehold property with a full 99-year term is worth about 10% less than a comparable freehold property. In other words, you may purchase a 99-year leasehold property at roughly a 10% discount compared to its freehold equivalent, assuming all other factors remain constant. To determine values for properties with varying lease terms, valuers typically apply the capitalisation formula, which converts a property’s net income into its capital value. However, it is important to note that different valuers may use different assumptions (e.g., yield rates, sinking fund provisions), which can result in differing opinions of value. In summary, while leasehold properties may offer an initial price advantage, their value generally depreciates over time compared to freehold properties. The table below presents a comparison of the estimated values of a freehold property versus a leasehold property at different stages of the remaining lease.
A leasehold property with a short remaining tenure (e.g., 40 years left) is often less attractive to financial institutions for loan financing. This is because the property serves as collateral, and a shorter lease makes it less secure, both in terms of declining market value and the reduced interest it would generate from potential bidders in the event of auction due to loan default. As a result, many banks set a minimum unexpired lease requirement before approving financing.
Similarly, a short-lease property tends to attract fewer prospective buyers in the open market. Apart from financing difficulties, buyers are also wary of the potential premium cost required for lease renewal.
For those intending to pass down property to the next generation, freehold or long-lease properties are generally preferred, as they provide greater peace of mind and long-term security for the inheritors.
Since leasehold properties are bound by a fixed term, they may limit the owner’s long-term planning for the land. For example, while the typical lifespan of a building can be around 60 years, a land with a remaining lease shorter than that (say 30 years) becomes less viable. In such cases, the owner may bear the full cost of constructing a building but be unable to enjoy its full economic life if the lease expires without renewal. Unless the lease is extended to a full term, short-lease land is generally not feasible for development, as buyers are unlikely to be attracted to units built on land with limited tenure.
Under the Land Acquisition Act 1960, the First Schedule specifies that “… regard shall not be had to the likelihood of a subsequent alienation to the person or body who is the proprietor thereof immediately before the expiry of the lease.” This means that when determining market value or compensation for an acquired leasehold property, only the unexpired term of the lease is considered, the possibility of renewal is excluded. That said, many buyers of leasehold properties still assume that the price they pay reflects a high probability of lease renewal, even though such renewal is not guaranteed in valuation for compulsory acquisition.
More often than not, leasehold titles are issued with a “Restrictions in Interest” (Sekatan Kepentingan) as stated in the title deed. This restriction is imposed by the State Authority and limits dealings such as transfer, charge, or lease of the property. In practice, this means that any sale or transfer of ownership requires prior approval from the State Authority (commonly referred to as State Consent). Obtaining this consent may take several months, which can be a disadvantage compared to titles without such restrictions. Although freehold titles may also be subject to restrictions, such cases are relatively rare.
There is, however, a provision under the respective state land rules for extension of lease before the expiry of the existing term. For example, under the Selangor Land Rules 2003, the premium payable for the re-alienation of residential land is calculated using the formula:
Premium = ¼ × 1/100 × value of the land × (term of new lease minus balance of existing lease). To illustrate, you may refer to the below computation.
If you own a 2-acre residential land with only 10 years of lease remaining, the payable premium could amount to several million Ringgit. Property owners may also check with the respective State Authority on whether rebates or concessions are available in relation to the chargeable premium.
As property values have risen significantly over the past decades, the chargeable premium for lease renewal can often become unaffordable. Many property owners who inherited such properties may be “asset-rich but cash-poor.” In other words, while they own high-value assets, they may lack the liquidity to pay the premium, which could run into millions of Ringgit for prime properties. If bank financing is not a feasible option (perhaps due to limited income capacity to service the loan), the only practical solution may be to dispose of the property or enter into a joint venture with a property developer for the development of the land.
From the above points, it is clear that leasehold properties come with various disadvantages compared to freehold ones. Yet, leasehold transactions still make up a large proportion of the property market. Some of the reasons include:
1.Location and property type – Buyers may place heavier emphasis on location, property type, concept, or design when making purchasing decisions, especially for residential units.
2.Lease duration – To many, a 99-year lease is considered sufficiently long and therefore acceptable.
3.Lower pricing – Developers typically price leasehold properties lower than comparable freehold ones. The savings can be significant for buyers.
4.Added incentives – To make leasehold units more attractive, developers often offer larger built-up areas, better quality finishes, modern fittings, and even bigger land areas.
5.Land scarcity – In many locality, freehold land is scarce, especially where most newly alienated lands from the State are leasehold.
6.Renewal option – Leasehold titles are likely renewable prior to expiry, subject to the payment of premium, giving owners a measure of long-term security.
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