The Difference Between Freehold and Leasehold

Image result for freehold vs leasehold malaysiaFreehold or leasehold? This is almost the first question when one decides to buy or invest into property whether it is from the developer or from the sub-sale market. Hence, the developers tend to highlight the freehold tenure to attract the public’s attention. Does it really matter? 

EXTENSION OF LEASE

The ownership of the leasehold property will be revert back to the state government upon the expiry of the lease. Thus, the owners of the leasehold property will have to make an application to the relevant state government authorities for an extension or renewal of the lease before its expiry of which subject to their approval. Once the approval is granted, the owner will be required to pay a certain amount of premium for the extended tenure.

Nevertheless, the Land Acquisition Act 1960 empowers the state government to acquire the usage of the land notwithstanding that it is the freehold land. Generally, the mandatory acquisition of land only took place in the event the land is needed for the national development purposes and it can only be done with reasonable compensation to the owner.

TRANSACTION OF THE PROPERTY

The transaction of the freehold property is often easier and straight forward than the leasehold property as the sale and purchase transaction of the leasehold property would most probably require the consent from the state authority which usually took a few months time to process depends on the state authority. To the contrary, for the freehold property without any restriction (where consent of the state authority is not required), the transaction of the property will takes 3+1 months to complete which is the standard time-frame as stated in a Sale and Purchase Agreement for a sub-sale purchase. Sometimes, in certain locations, even though the land is termed as “freehold land”, any dealings on such land still require the consent from the local authority.

PRICE AND VALUE

Generally, the values of the freehold and leasehold property will go up at a similar rate in the first 20 to 30 years. Nevertheless, freehold property would have the advantage in terms of appreciation of value if compare to the leasehold property in the long run. The reason behind this is that the value of the leasehold property tends to depreciate over the years when their lease period is coming to an end. The fact that the complications arise in the process of obtaining extension or renewal of the lease from the state authority reduces the marketability of the leasehold property. Not many potential buyers willing to bear the risk of the rejection of the said extension application while they still have other choices in the property market.

The difficulties in getting the loan approval from the financial institution might also be one of the factors that demotivates the potential buyers. The financial institutions are more reluctant in approving the loan for the leasehold property with the lease tenure less than 60 years. Even they do approve the loan, the margin of financing might not as favorable as those approved for the freehold properties.

Having said the above, the leasehold property still has their own exclusive advantage as the leasehold properties are generally located at the strategic area if compared to the freehold properties which predominately based at more undesired location. Therefore, the leasehold property still has better bargaining power against the freehold property in terms of the location.

OBJECTIVE OF THE PURCHASE

Given the fact that the government will be able to take back either leasehold or freehold land in order to develop or redevelop for the public purposes or economic development, this made both freehold and leasehold equal. Potential buyers shall consider the main purpose of their purchase. If it is for the investment purposes, buyers can discount the tenure of the leasehold property and gaining the maximum passive income from rents thanks to the better location of the leasehold property.

On the other hand, since the youngsters nowadays are keen in moving out from their parents to live and work independently, the parents shall have no burden in passing down the house to the next generation. Due to the limited availability of the freehold property and the increasing standard of living, the quality and brand name of the Developers also play an important role when it comes to the property purchase rather than the tenure itself. In short, as long as the purchase of the property serves the main purpose of the buyers, the type of ownership of the property is of minimal concern. Given the fact of changes today, you could easily outlived the property for the purpose that you initially bought it for.

source:Property Hunter

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