When looking for property investment, investors will always look into the plans of Urban Redevelopment Authority (URA) and the opportunities it presents; especially if the upcoming new condo launch is near MRT.

Let’s call these phenomena the Urban Planning and MRT rules for investing in Singapore property. Should you have used these rules to identify areas that sees good chance to appreciate in value, your next target is to choose a condo in that location.

Every real estate has a land tenure that governs the length of ownership for that parcel of land. The land tenure will highly impact on the price you pay, your rental yield, and how much you can sell to exit in the future.

For investment purposes, there are generally 2 types of tenures in Singapore: 99-year leasehold and freehold (estate in fee simple).

A 99-year leasehold entitles the owner to hold that land for 99 years and while a freehold has no limitation on the period. Example, if the 99-year leasehold owner sells the land after 10 years, the buyer will have 89 years remain on the lease. In contrast, the buyer buys a freehold, the land can be used indefinitely. Freehold sounds like a better deal, right?

Not so fast.

Periodically, Singapore Real Estate Exchange (SRX) Property monitors the performance of freehold vs 99-year leasehold condo. Studies after studies, similar results are found: As you would expect, buyers pay more for the right to freehold land tenure. But 99-year leasehold condos consistently outperform in terms of the rental yield.

Details as follows:

During July and August 2014, buyers paid 16.5{f0b75ed1e328315e2db5b1e6368b41df15eae04e673435cc25ba2021b46ef27c} more to purchase a freehold unit in Districts 9, 10 and 11 of the Core Central Region. In Districts 20, 26 and 27 of the Outside Central Region, buyers paid a premium of 44.5{f0b75ed1e328315e2db5b1e6368b41df15eae04e673435cc25ba2021b46ef27c} to own a freehold unit instead of a 99-year leasehold unit.

BETTER GROSS RENTAL

Yet, for the same period, the 99-year leasehold residential units earned better gross rental yields. Gross rental yield is the total rent divided by the cost of the property. The higher the yield, the more rental income your property can generate as a percentage of what you paid for, making it a better investment.

In the case of the Core Central Region, landlords of 99-year leasehold properties fetched 25.8{f0b75ed1e328315e2db5b1e6368b41df15eae04e673435cc25ba2021b46ef27c} more in gross rental yield than that of a freehold landlords.

It makes sense that a 99-year leasehold would outperform in terms of gross rental yield. Tenure has little to no impact on rents. Hence, for similar homes with different tenures, freehold landlords must rent out their units at the same price as that of 99-year leasehold owners.

But think of it, the cost of freehold property is much more expensive that the 99-year leasehold, making freehold units less attractive investment when comes to renting. In terms of 10-year capital appreciation, 99-year leasehold owners came out ahead in the Core Central Region, with prices appreciating 12.1{f0b75ed1e328315e2db5b1e6368b41df15eae04e673435cc25ba2021b46ef27c} on average each year, compared to 10.9{f0b75ed1e328315e2db5b1e6368b41df15eae04e673435cc25ba2021b46ef27c} for freehold owners. In the Outside Central Region, freehold owners did better.

This data allows us to establish the land tenure rule for investing in condos. In general, the obvious part is, freehold condo are more expensive than 99-year leasehold condos and they tend to underperform in gross rental yield. However, when it comes to capital appreciation, it is mixed bag.

Examples of 99-year leasehold properties that perform well in sales are LakeVille Condo at Lakeside Jurong, The Skywoods at Dairy Farm, La Fiesta at Sengkang and Nine Residences at Yishun (with all the 9 rounds of cooling measures implemented).

Not forgetting that there are still freehold properties that performed very well in sales in 2014 such as: The Citron at Farrer Park, Kallang Riverside Condo at Kallang Riverside, Guillemard Suites at Guillemard Road, 28 RC Suites at Farrer Park, Jade Residences at Serangoon and Hills TwoOne at Hillview Terrace