On paper, freehold property always sounds better than a leasehold one but you should first take a look at the pros and cons of each before deciding which Land Title is the best fit for you.
You will often see developers advertising the attractiveness of their new launch projects depicting ‘FREEHOLD’ in big bold letters on billboards and outdoor banners. Admittedly, freehold properties are snapped up much faster compared to leasehold properties. To those who are unfamiliar with freehold and leasehold, the core difference between the two land titles lies in whether you own the land your house is built upon or not.
By definition, you have full ownership of freehold properties with no control from the government. On the other hand, a property on leasehold titled land is owned by the government and belongs to the owner only for the next 30, 60, 99 or 999 years. Upon the expiry of the leasehold duration, the land will revert to the State authority unless it has been renewed beforehand.
How to check whether a property is freehold or leasehold?
When you purchase a piece of property or land, you will receive a Land Title certificate as proof of your purchase. The certificate is issued by the Malaysian government via the Land Registry office. The Land Title, known as ‘geran’ in Malay contains information on the land/property, including whether it’s freehold or leasehold.
To obtain a copy of your Land Title, log onto the Land Registry website and search for the property – the details will clarify whether you hold a freehold or leasehold property. If you buy a leasehold property, it would usually come with a lease document. Alternatively, you can ask your solicitor or mortgage lender who would have information on the Land Title type.
What is the meaning of freehold?
Act 56 of the Malaysia National Land Code, 1965 clearly states that all State lands are owned by the State authority. However, when land is disposed of by the authority to an individual for an infinite period, it will then be a freehold title.
This is usually the case when you buy a freehold bungalow, private home or condominium on a certain piece of land. If the developer buys a freehold land, it would have the ownership in the form of a Master Title. The developer can then use it to build landed houses and transfer the properties to the buyers upon the completion of the sale.
However, if the property/development is a condominium or high rise strata building, the buyer of a condo unit will only have ownership of a portion of the residential development which will be distributed to the buyer in the form of Strata Title. The developer will retain ownership of the land.
What are the benefits of buying a freehold property?
- The buyer owns the land the property is built on.
- The buyer has ultimate freedom on what he wants to do to the freehold property in terms of land usage and structural changes. However, any renovation or modification is subject to environmental and town planning controllers.
- The owner can subdivide or allocate the land at will although this may be subject to town planning controls.
- The owner can get a good resale price for the property in the future. If the property is situated in a strategic location, capital appreciation will increase steadily over the years in a normal economic environment. Unlike leasehold properties, its value will not diminish depending on the number of years passed since the property has been purchased.
- The buyer can sell the property faster as there are fewer stringent limitations on transferring the land. The sale of a freehold property will generally take 3+1 months to complete, as stated in the usual Sales and Purchase Agreement (SPA).
What are the cons of buying a freehold property?
- They are comparatively more expensive than leasehold properties.
- The rental yield of freehold properties is lower due to the higher entry point.
- Freehold owners might not enjoy extensive facilities compared to what is provided in their leasehold counterparts.
- The owner is responsible for all the repairs, renovation and maintenance needed for the property.
- If a freehold title is converted from a leasehold title, it will be subject to the State government’s approval if the buyer wants to transfer the ownership. These are called restricted freehold properties. Hence, the owner must check the deed carefully to ensure whether there are any restrictions on the transfer of title.
- Not all freehold properties have complete ownership. Under the Land Acquisition Act 1960, the State can take back a freehold land if it comes in the way of public purposes such as building MRTs or economic development. In such cases, the owner will be compensated based on the land’s current market price which is evaluated by valuers appointed by the government.
What is the meaning of leasehold?
When the State disposes of a piece of land to an individual for a certain period of time not exceeding 999 years, the land is said to have leasehold title. Once the leasehold period expires, the land goes back to the State authority. If the owner wants to retain the land, he will have to apply for a leasehold extension before the lease expires. If the renewal is granted, he can extend his lease in exchange for a premium payable based on the market value of the land.
Leasehold properties have 30, 60, 99 to a maximum of 999 years of tenure. Unlike freehold title, leasehold title owners need to abide by stricter rules and regulations. The usage and type of activities allowed on the land are restricted by the rules stated on the leasehold title.
The buyer will be responsible for the maintenance and development of the land as per land legislation. If the State authority sees that the buyer is unfit to take care of the land, the lease can be forfeited for non-performance.
What are the benefits of buying a leasehold property?
- Leasehold properties cost lower than a similar freehold one, typically by 20%.
- Such properties have higher rental yield since their entry point is lower.
- Developers of leasehold properties usually provide better facilities and more incentives to purchasers to stay competitive.
What are the cons of buying a leasehold property?
- Leasehold properties have a specific timeline (30, 60, 99, or 999 years) of ownership after which it is automatically reverted to the State authority unless the owner applies for an extension.
- Leasehold land usage is limited by land legislation as well as environmental and town planning controls. The owner may be free to renovate the house but stocking levels, cultivation, etc may be restricted by the lease conditions.
- The owner will have greater responsibility to care for a leasehold land or property as defined in the land legislation. The owner may have to be responsible for developing and maintaining improvements on the land. The title may be forfeited from him by the State authority for non-performance if he does not attend to his duties.
- The owner has to wait for the consent of the State or equivalent to sell the property. Only then will the transfer process start, usually taking 3+1 months. Overall, the whole process may take 6 months up to 1 year.
© Rifka Hayati | Getty Images
- If an individual owns a second-hand leasehold property, the transfer of ownership for sale may take more than a year in Selangor and Wilayah Persekutuan Kuala Lumpur due to high consent requests. However, if the property is bought from the primary market or the developer, it may not take as much time.
- Leasehold assets bear renewal costs for a lease extension /premium payable. Should the owner apply for an extension after the leasehold expiry, he would be subjected to hefty fees, which can amount to the current property price!
- The value of a leasehold property increases more than a freehold unit in the initial years. However, it decreases with time as the lease tenure becomes shorter, roughly after 20 to 30 years. The value is also affected by the uncertainty of whether the owner can get an extension on the lease or not. An advance lease extension can uplift the value of the property. Do bear in mind that the owner will have to fork out at least 20% of added cost for the lease extension.
- When approving home loans, banks prefer leasehold properties with 75 or more years on the lease. If the remaining years of the leasehold tenure is less than 50 years, the owner will find it difficult to secure financing for the property. The owner might have to settle for a much lower margin of financing too.
A Summary of Freehold vs Leasehold
|Ownership||Full control over the asset for an infinite period unless it is a restricted freehold property or comes in the way of public development.||Reverts to state authority once lease tenure is expired unless renewed for an extension.|
|Land Ownership||Property owner also owns the land the property is built on.||Property owner does not own the land.|
|Duty of care||As per common law and environmental protection acts.||Responsible for maintaining and developing the property. May also be required to engage in property planning.|
|Distribution of land||Can be subdivided or distributed subject to town planning control.||Needs consent of the State or equivalent.|
|Tenure security||Secure||The lease can be forfeited for non-performance if duty of care is not sufficiently met.|
|Transfer of properties||
|Cost||More expensive||The entry cost is generally 20% lower than its freehold equivalent.|
|Value of property||Greater capital appreciation over the long run.||More appreciation in the first 20-30 years but diminishes in value as the tenure becomes shorter.|
|Rental||Lower rental yield due to high entry point.||Higher rental yield due to low entry point and more facilities, USPs.|
|Margin of finance||Easier to secure bank financing and up to a maximum margin of 90%.||
|Extra facilities||Not available unless built by the owner himself.||Leasehold properties have extra incentives and facilities such as a gym, park, concierge, etc.|
Is it worth buying leasehold or freehold?
The debate on freehold vs leasehold is constant among many home buyers – is a freehold property worth the higher price tag or is a leasehold property actually okay? Do remember that buying a freehold or leasehold asset does not only depend only on its price or the ownership rights. You have to factor in multiple considerations before you make the final purchasing decision.
A freehold house in Wilayah Persekutuan Kuala Lumpur or Selangor is certainly more expensive. If you have a limited budget, you can look for leasehold properties in prime areas at a lower cost. Just focus on properties with maximum leasehold years to retain the property for a longer-term.
Another aspect to think about is how ready you are to be responsible for a property. A leasehold property may come with certain amenities/facilities that a freehold property does not provide. The rental for a leasehold property is also higher than freehold properties, making it a better choice for property investors.
On the other hand, freehold owners have more flexibility. You will not be subject to stringent rules when it comes to building work, subletting or doing any structural changes, unlike leasehold owners. Besides, it is easier to sell at greater value without any limitations on the timeband.
At the end of the day, regardless of the Land Title, you will want to settle for a house which best fits your wants and needs. The location, surrounding amenities, accessibility and your comfort will also weigh in on the decision. Nevertheless, if all pros and cons are stacked equally for a freehold and leasehold property, it is definitely better to opt for the former rather than the latter.
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