Article written by Joyce Low, founder of industrialspace2u.com
Leasehold vs Freehold Property - which is better?
We have always been asked which is better? Freehold or leasehold property. My response is: it depends.
Firstly, let’s understand the term Freehold and Leasehold Property:
Understanding the term Freehold and Leasehold Property
Freehold
Leasehold property
- Freehold property belongs entirely to the owner with no control from the government.
- A leasehold property is owned by the government and can only belong to its owner for 30, 60, 99 or 999 years.
- A common restriction is the land cannot be transferred, leased or mortgaged without consent from State Authorities.
If an industrial area is predominantly having leasehold property e.g Shah Alam in Selangor, freehold industrial property in Glenmarie and Bukit Jelutong will stand out.
However, if the industrial area for example Bandar Bukit Raja Industrial Park is predominantly a freehold development, then a leasehold property in the vicinity would be overshadowed. Hence, the price appreciation of a leasehold property in a predominantly freehold area would naturally not increase as much when compared against the freehold property in the same area.
- Timeline for Completion of Purchase/ Sale Transaction of Leasehold Property is Longer
Purchasing Leasehold property has a slightly longer timeline for completion.
The difference lies in the fact that leasehold property would require State Authorities consent to be obtained before the property can be sold, transferred or charged.
The process normally takes 3 to 4 months to complete.
- Leasehold Extension for Industrial Leasehold Property
This discussion covers Selangor, the most industrialized state in Malaysia. Selangor Land Rules (2003) addresses the lease extension of leasehold property.
The formula for the extension of lease for commercial and industrial land in Selangor provided by Selangor Land Rules (2003) is as follows:
Formula: (3/4) x (1/100) x (value of the land) x (term of new lease minus the balance of the existing lease)
Example: Current leasehold property has 50 years remaining before expiry, Current Market Value of land RM100 per sqft
Lease Payment for Extension to 99 years of Industrial Property
= (3/4) x (1/100) x (100 psft) x (99-50)
Lease Payment for Extension to 99 years of Industrial Property
- Leasehold Extension for Residential Leasehold Property
Source: https://www.edgeprop.my/content/1430739/extend-your-land-lease-it-expires
The formula for the extension of lease for commercial and industrial land in Selangor provided by Selangor Land Rules (2003) is as follows:
Formula: (3/4) x (1/100) x (value of the land) x (term of new lease minus the balance of the existing lease)
Example: Current leasehold property has 50 years remaining before expiry, Current Market Value of land RM100 per sqft
Lease Payment for Extension to 99 years of Industrial Property
= (3/4) x (1/100) x (100 psft) x (99-50)
Lease Payment for Extension to 99 years of Industrial Property
Conclusion
If the Purchaser intends to leave a legacy of real estate property behind for their future generations (eg. grandparents to their great grandchildren ie. 3 generations and beyond) then, freehold property should be given more emphasis.
A failure to renew the lease of a leasehold property upon its expiry, would result in its ownership to revert back to the State Authorities.
As land value will appreciate over time, the renewal of leasehold property by the future generations would certainly be an expensive affair.
A lot of our clients wanting to leave behind inheritance for their future generations, not purely buying for the current usage per se, is more inclined to purchase freehold property, given a choice.
Do contact us for the selection of freehold industrial land available for sale and factory for rent, we would be happy to assist you. Happy Investing!