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Does Leasehold Properties Make Good Investments?

property Dear Azizi Ali,

I am getting confused with leasehold terms. I guess many people out there share the same feeling as mine.

If I’m not mistaken, leasehold usually comes with 99 years. Government leases the land to the developer and then from that day to planning, constructing and completion, it might just remain 90 years. Construction is just 3 years but there might be other delays such as the developer putting the project on hold for a better timing to develop. Please correct me if I am wrong here.

Okay, back to the situation above. Let’s say, the lease just remains 90 years. If I were to buy an apartment from another buyer at RM180,000 with loan tenure of 30 years, probably after 30 years, the apartment will be fully paid. Here, I am not sure whether the price of the apartment will appreciate or not due to the balance of 60 years’ lease. However, another doubt here is whether any buyer is willing to buy an apartment with lease that has 60 years left? And if I were to keep the house and pass on to the next generation, what will happen if the 99 years’ lease is due? Will the government take the land back, with compensation or no compensation, or extend another 99 years of lease?

Conclusion, do you think that it is a good investment since the leasehold property doesn’t appreciate much?

Regards,

Koay

Dear Koay,

Firstly, let me explain the difference between freehold and leasehold. A freehold property is one that is owned in perpetuity by the owner (on the condition that he pays the quit rent). A leasehold property is one that is leased by the state authority to the buyer for a fixed term (period not exceeding 99 years). Once the lease has expired, the land reverts to the state, which is obviously not a desirable state of event for the owner. To overcome the situation, the owner must either renew the lease before it expires or apply if the lease has expired. The bad news is that both will require a lot of money, almost like buying the land all over again!

So because of this, it is obvious that (1) freehold properties are more coveted, and (2) leasehold properties that are close to the end date will drop in value. However, the reality is that most of the freehold land in Kuala Lumpur and many parts of Petaling Jaya are already developed, which means that you can only buy them on the secondary market (sub-sale). This leaves only the leasehold properties if you want to buy them brand new.

In the long term, properties, especially those in urban areas (both freehold and leasehold), will increase in value. So, to avoid them just because they are on leasehold land would be incorrect. As long as the lease has some way to go (anything more than 50 years), you should still consider buying the property if the location is hot and you can get it at a price below the market value – even if it is leasehold. The hot location should enable you to charge a high rental, therefore increasing both your yield and capitalisation rate. As the years go by and the lease reduces, you should sell the property before it gets to the 50 year mark, thereby pocketing a generous capital gain in the process.

Of course, a different answer applies if the lease is less than 50 years. If this is the case, you should really look elsewhere! Anyway, there are literally hundreds of thousands of properties in Malaysia. And more are being built as you read these words. Surely, you can find a few gems among them.

Incidentally, the most profitable real estate deal for me came from a leasehold property. Thought you’d like to know that.

Regards,

Azizi Ali

 

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