Freehold vs Leasehold: Is Freehold Really the Better Investment?

Imagine two properties that are similar in location, size and rental potential.

One is freehold.

The other has a long remaining lease.

If both can achieve roughly the same rental income, but the freehold property costs considerably more, the leasehold property may produce the higher rental yield.

This is because rental yield is based on the relationship between your rental income and the price you pay.

A higher purchase price, without a proportionate increase in rental income, naturally reduces the yield.

Historical property analysis in Singapore has found that leasehold properties can offer higher rental yields than comparable freehold properties because of this price difference.

Because yield isn't the only reason people buy property.

Freehold ownership can appeal to buyers who value:

• Long-term ownership
• Scarcity
• Legacy planning
• Reduced concern over lease decay
• Potentially stronger appeal to certain future buyers

Recent market analysis also shows freehold private properties continuing to command a price premium over comparable 99-year leasehold properties.

For some investors, that premium may be worthwhile.

For others, it may not be.

Consider two hypothetical commercial properties.

Both properties generate the same rental income.

But the leasehold property produces the higher gross yield because the entry price is lower.

This doesn't automatically make the leasehold property the better investment.

The freehold property may have other advantages that justify its higher purchase price.

The important point is: Don't assume freehold automatically means higher yield.

This is where leasehold properties have a different consideration.

A 99-year lease is not the same as owning a property indefinitely.

As the remaining lease becomes shorter, factors such as financing, buyer demand and the property's future value can become increasingly important.

This doesn't mean every leasehold property is a bad investment.

In fact, the lower purchase price can sometimes provide a more attractive entry point and rental yield.

The question becomes whether the higher yield adequately compensates you for the risks associated with the remaining lease.

This is another area where investors should be careful.

It is tempting to say:

"Freehold properties appreciate more."

But property prices are influenced by many factors beyond tenure.

These can include:

• Location
• Entry price
• Supply and demand
• MRT connectivity
• Surrounding development
• Master Plan changes
• Property condition
• Tenant demand
• Redevelopment potential

Freehold tenure can be an advantage, but it does not guarantee capital appreciation.

Similarly, a leasehold property bought at the right price in a strong location can perform very well.

This is where the discussion becomes especially relevant for commercial investors.

A commercial property is often purchased partly for its income-producing potential.

If you pay a substantial premium for freehold tenure, you need to ask: How much additional income am I actually getting for paying that premium?

If the answer is very little, the investment case may depend more heavily on long-term capital preservation, scarcity or future value.

That's not necessarily wrong.

It simply means you are buying for a different objective.

Instead of asking:

"Is freehold better than leasehold?"

I'd ask:

"What am I paying for the freehold premium, and what am I getting in return?"

That is a much more useful investment question.

For an investor focused primarily on rental income, a lower-priced leasehold property with strong tenant demand may sometimes make more sense.

For someone focused on long-term ownership, legacy planning or scarcity, the freehold premium may be easier to justify.

When I evaluate a commercial property, I would never look at tenure alone.

I'd want to understand:

1. 1

   Purchase price

   Am I paying a reasonable price compared with comparable properties?

2. 2

   Rental income

   Is the current rental sustainable?

3. 3

   Gross and net yield

   What am I actually earning after relevant ownership costs?

4. 4

   Tenant demand

   Will there be demand when the current lease ends?

5. 5

   Location

   What makes businesses or customers want to be there?

6. 6

   Remaining lease

   For leasehold properties, how much lease remains and how might that affect future buyers and financing?

7. 7

   Exit strategy

   Who is likely to buy this property from me in the future?

I don't believe investors should buy a property simply because it is freehold.

And I don't believe investors should avoid a property simply because it is leasehold.

Freehold can offer scarcity and long-term ownership advantages, but those advantages often come with a higher entry price.

Leasehold can offer a lower entry price and potentially higher rental yield, but the investor needs to account for the remaining lease and the risks associated with lease decay.

Ultimately, the better investment is not determined by the word "freehold" or "leasehold" on the title.

It comes down to:

• What you pay
• What you earn
• What you own
• What risks you take
• Who will want to buy or rent the property from you in the future

That is why I believe tenure should be one part of the investment analysis—not the entire investment thesis.