Freehold vs Leasehold – The Differences

Buying a property? Is it freehold or leasehold? Does it matter?

The main difference between the two tenures is ownership of the land. When it is the former, you will own the land while in the latter situation, ownership is accorded by the government for terms of 30, 60 or 99 years.

Whichever the tenure, you are free to develop the land as desired.

“Of course, it will be subject to planning control and public rights. Whatever you build should not pose a danger to your neighbours,” says PL Lee, managing director of First Pacific Valuers Property Consultants Sdn Bhd.

Clement Ong, principal of Megaharta Real Estate Sdn Bhd, says nine out of 16 property developments launched in the Klang Valley in August were freehold.

“Freehold properties mostly come from developers who are also plantations owners, such as Sime Darby, IOI Properties and Kuala Lumpur Kepong. The state governments had alienated freehold land to the developers for plantation purposes. The land was then converted into residential and non-residential property developments. Other developers who have obtained new alienation from the state governments are likely to receive leasehold land,” he explains.

“When alienating land as freehold or leasehold, state governments consider factors such as the [property] demand in the area and the growth rate of the state,” says A Subramaniam, executive director of PA International Property Consultants Sdn Bhd. New leasehold land in Bukit Jalil, Seri Kembangan and Selayang used to be designated as forest reserves, he says.

While some people do not care about the tenure of the property, others find it important, especially when it comes to renewing leasehold titles. Leasehold properties in certain parts of the Klang Valley, such as PJ Old Town (Selangor), Sungai Besi (Kuala Lumpur), Setapak (Kuala Lumpur) and Jalan Chan Sow Lin (Kuala Lumpur), have 50 or fewer years on their leases.

The owners are concerned that the land tenure may affect the future sale of their properties. Last December, Deputy Prime Minister Tan Sri Muhyiddin Yassin announced that all state governments may approve applications for renewal or extension of leasehold land for a period not exceeding 99 years, unless the land is required for public purposes.

Ong adds that not all titles require the state’s consent. “Not all transfers of leasehold properties need the state authority’s consent, such as those in Batu Caves. Conversely, there are freehold properties that need the consent. Thus, it is important for potential buyers to look at the title of the property.”

Examples of freehold properties with restrictions are the semi-detached houses in Kelana Jaya, says Lee. “These were previously leasehold properties but were changed to freehold. However, the restrictions still apply.”

Transacting property with restrictions

For leasehold and freehold properties with restrictions, any transaction requires the consent of the state government. Thus, the transaction period for secondary leasehold properties is generally longer than that of their restriction-free counterparts.

“Generally, the sale of freehold properties will take three plus one (3+1) months to complete, as stated in the usual sale and purchase agreement,” says Lee.

“However, for leasehold properties, the 3+1 months will only start after consent of the state authorities has been obtained. Getting consent can take about six months to a year. This means that buyers should not plan to move into their leasehold properties in four months’ time. The paperwork to transfer ownership can take as long as a year. It may take longer for leasehold properties in Selangor and Kuala Lumpur because the state offices are overloaded [with consent requests]. A leasehold property bought on the primary market [from a developer] usually doesn’t take such a long time.”

Lee adds that the speed in obtaining consent from the state authority is also determined by the information provided by the seller. “Sometimes, sellers will delay providing such information in anticipation of higher property prices, which they will demand from the buyers. This is a risk that buyers face,” he says.

Property consultants note that it takes more time and effort to transfer a leasehold property from a bumiputera owner to a non-bumiputera buyer. This is probably because the authorities try to maintain a balance between races living in a particular location. “If the state authority rejects the application for transfer, the seller can appeal. Common reasons that are given by the seller [for selling] are health issues and old age,” says Lee.

Purpose of the purchase

Generally, freehold properties are preferred as their values are usually more stable and tend to appreciate in the long term.

“The values of freehold and 99-year leasehold properties go up at a similar rate in the first 20 to 30 years. Sometimes, leasehold properties gain more value than freehold properties during the initial years. But, beyond 30 years, the values of leasehold properties face friction (stagnate, only to depreciate) until the expiry of the lease. On the other hand, values of freehold properties are more stable,” explains Lee.

There is also the possibility of redevelopment of old freehold properties. “Apartments and condominiums will eventually deteriorate. Developers prefer to buy such properties [for development] if the land is designated as freehold. In such cases, owners will receive fair compensation,” says Lee, who thinks that Desa Kudalari, an old freehold condominium in the Kuala Lumpur city centre, is a likely target for redevelopment.

He also finds that financial institutions will not finance those who want to acquire leasehold properties with less than 50 years remaining on the lease.

“Think twice if you face a property with a lease that has 60 years to go. The financial institution may give you a loan now but if you decide to sell the property in 10 years, the next buyer could face difficulty in obtaining a loan. It will not be easy for you to sell.”

However, you are not home free if you hold freehold property as the government may revoke your ownership.

“The government can still take back freehold land under the Land Acquisition Act 1960, to be developed for public purposes [such as an MRT project] or economic development. The term ‘economic development’ is a grey area and the government has the discretion to take over any private property [at any time],” says Ong.

If such an acquisition occurs, property owners will be paid the market value of the property.

The National Land Code 1965 also allows for ownership to be made void if you fail to pay annual quit rents or comply with all the express and implied conditions surrounding the land. “If this occurs, the government has the right to seal the property and auction it off. However, this is rarely done,” says Lee.

If you are interested in rental income, the tenure of the property might not be of significance. “These investors are more concerned with location, and the demand and supply of rental units,” says Ong.

Lee adds that the quality and brand of developers is another factor that carries more weight among property investors than the land tenure.

Source: The Edge Malaysia Written by Celine Tan