The leasehold fallacy

16/11/2002 The Star  By Previndran Singhe

ON PROPERTY
 

The debate on freehold versus leasehold will continue passionately among house buyers. Purchasers are constantly grappling with the choice of buying a home in a choice location for a fixed tenure or opting for another which they can own for as long as they deem fit. Of course, the main choice dictator here like always, would be pricing. But what are the properties that hold a buyer’s fancy regardless of its finite nature?

THE land laws of Malaysia are governed by the National Land Code, 1965 (Act 56 of 1965). Section 40 of the National Land Code, 1965 states that all state land belongs to the state authority.

When state land is disposed off by the state authority to an individual in perpetuity for an indefinite period, this land is now granted as freehold title.

When the state land is disposed of by the state authority to an individual for a term of years, by virtual of law, not exceeding 99 years, this land is now granted as leasehold title. Upon expiry of the period of the lease, the land should be reverted to the state authority.

Theoretically, when we compare a leasehold title with land tenure for a fixed term of years (within 3 to 99 years) the land under a freehold title would definitely have better market value and more demand, apart from its locality.

The price of land held under leasehold title will be affected seriously when its lease term is going to expire. With reference to the chart, assuming an apartment receives a net rental of RM1,000 per month and if we were to capitalise it at 8 per cent over the period of tenure, the value drops as the tenure decreases, with the major changing point being the tenure having 40 years left.

Let’s take for example, properties in Section 1 in Petaling Jaya. The properties in average have about 20 years to 30 years left in the lease and residential land values are averaging at RM28-RM30 per sq feet (psf). Though the prices are about similar to what it was 10 to 15 years ago, it takes longer to find buyers, with the market being very limited to existing residents.

In contrast, let’s look at Section 5 in Petaling Jaya, where property has a longer lease tenure left of 55 to 70 years , and have seen considerable appreciation of about 30 – 40 per cent in the last 10 to 15 years, even though the lease tenures have been reducing. This appreciation is comparable to those of freehold nature.

Notwithstanding the above, in the Klang Valley property market, the location, and for the newer developments, the concept is still seen as more important.

We have listed some of the locations and developments that defy the perceived risk associated with leasehold properties and are runaway success, with potential investors placing importance in location, concept, developer and of course potential for growth. (Values are provided by Zerin Properties in collaboration with K.S. Dhillon Property Consultants)

Tropicana Golf and Country Resort. Located by the New Klang Valley Expressway (NKVE) and now becoming more accessible with the Kota Damansara infrastructure coming up, Tropicana has really matured into a successful and popular choice for the elite to build their dream home.

The concept of living within a secure and gated golf resort with club facilities and being so very accessible to the urban areas and the highways has made Tropicana a winner. Bungalow land has reached a high of RM110-RM130 psf, while some semi-detached houses have reached RM1.1 million.

Petaling Jaya, especially Section 5, 6, 7,9,11,12, 14, 16, 17. The location is the main seller for these choice locations in Petaling Jaya. Being an older location in the Klang Valley, a lot of the neighbourhoods are really nice and mature with some really quaint houses offering tremendous potential. Moreover, amenities are a plenty in these locations making them even more attractive to potential purchasers. The prices for land vary from RM70 to RM90 psf for 55 to 70 years unexpired on the lease. Double-storey terrace houses in Section 17 go for about RM300,000 to RM330,000.

Please note, however, in Section 17 and Section 5, there are pockets of freehold properties. One must also be aware that there are some micro-locations within the above locations that may fetch higher values.

Desa Seputeh. Leasehold or not, this Seputeh location is doing well with its close proximity to amenities and all the highways and byways. The pricing range is around RM400,000 to RM450,000 for a basic house, which is very good, compared to freehold properties in Bandar Utama.

Taman Bukit Desa. There are some pockets of leasehold double-storey terraces here and prices are as healthy as Desa Seputeh. Again, its proximity to amenities and also its easy access to all parts of the Klang Valley make it a very attractive alternative.

Taman Titiwangsa. A gem of a location, situated just at the periphery of Kuala Lumpur city proper with close proximity to a beautiful park and also a golf course.

Vacant bungalow land here go for about RM80 psf for properties that have unexpired term of about 70 to 80 years. In comparison freehold land at Country Heights is going for RM45-RM55 psf and at Gita Bayu, for about RM60-RM70 psf.

Bandar Sunway. As the adage goes, a good developer and concept do make a difference. This township was created from a wasteland to what it is today, a true lifestyle location. Though traffic is always an issue here, it’s still very hot with basic double-storey terrace houses reaching a high of RM330,000 in PJS 9. These figures are comparable to freehold properties in Sri Damansara.

Sunway Damansara. A relatively new development in the PJ Utara locality. It is strategically located on the northern side of Damansara Indah Resort Homes and Tropicana Golf And Country Resort, with direct access to the NKVE and Lebuhraya Damansara-Puchong .

The double-storey terrace houses are still selling at RM400,000 – RM450,000 with the semi-detach touching a high of RM950,000. Again, a good developer with a good concept and a hot location for the future make the difference.

In short, tenure is indeed important in choosing a property. However, it is not the only determinant and it will have to be seen holistically with the location, reputation of the developer, concept and potential for growth of that locality to ensure that your property investment is truly an appreciating asset.