Freehold Property Or Leasehold Property, Let's Talk About It

In Malaysia, it is common to come across two types of properties: freehold and leasehold. While the notion of freehold property might evoke the idea of "forever ownership", it is essential to delve deeper into these concepts to gain a comprehensive understanding of each term and their implications on property ownership.

b) Leasehold: The land is owned by the state or government, and the National Land Code (NLC) allows for a maximum lease period of 99 years. When the lease term expires, the land returns to the State Government unless the lease is renewed.

Freehold property grants ownership to the individual owner, while leasehold property involves the government owning the land and lending it to the leaseholder for a specified period.

Freehold Property: Pros & Cons

Under Act 56 of the Malaysia National Land Code, 1965, State lands are unequivocally owned by the State Authority. However, when the State Authority transfers the land to an individual for an indefinite period, it becomes a freehold title.

Owning a freehold property has several advantages:
- Freehold properties often yield better resale prices, especially if they are strategically located, as they experience steady capital appreciation over the years, unaffected by the passage of time as seen in leasehold properties.
- The transfer of ownership for a freehold property is less restrictive, enabling quicker and smoother sales transactions compared to leasehold properties.
- Freehold property owners have more freedom to subdivide or allocate the land, subject to town planning controls.

On the downside, freehold properties have some drawbacks:
- Complete ownership of freehold properties may not always be guaranteed, as the State can reclaim the land under certain circumstances, such as for public purposes like infrastructure development, resulting in compensation to the owner based on current market value.
- Freehold properties generally come with a higher price tag than leasehold properties.
- Rental yields for freehold properties tend to be lower due to the higher initial investment required.
- Some freehold properties might lack the extensive facilities commonly provided by their leasehold counterparts.

Freehold properties offer benefits in terms of ownership and resale value, but potential buyers should also be aware of the potential risks and consider their individual preferences and circumstances before making a decision.

Leasehold Property: Pros & Cons

When the State transfers a parcel of land to an individual for a specified period, not exceeding 999 years, it becomes a leasehold title. Once the leasehold period concludes, ownership of the land reverts to the State Authority. If the owner desires to retain the land, they must apply for a leasehold extension before the lease expires. The extension is subject to approval and involves a premium payment based on the land's market value.

Leasehold properties come with varying lease tenures, ranging from 30, 60, 99, up to a maximum of 999 years. In contrast to freehold titles, leasehold title owners must adhere to stricter rules and regulations. The usage and activities permitted on the land are governed by the regulations outlined in the leasehold title.

The buyer assumes responsibility for maintaining and developing the land in accordance with land legislation. Failure to adequately care for the land may result in the forfeiture of the lease by the State Authority for non-compliance.

Contrary to popular belief, leasehold properties are not necessarily worthless. In fact, leasehold properties have gained popularity due to their numerous advantages.

- Leasehold properties are typically priced lower compared to similar freehold properties, making them more affordable for buyers.

- Leasehold properties also offer higher rental yields due to their lower entry costs.

- Developers of leasehold properties often provide better amenities and attractive incentives to attract buyers and remain competitive, such as incorporating unique features like a massive waterfall within the leasehold development area.

- Leasehold land usage is subject to constraints imposed by land legislation, town planning, and environmental regulations. While the owner may have some freedom to renovate the property, certain activities like stocking levels and cultivation could be limited by the lease conditions.

- Owners of leasehold properties carry a greater responsibility for maintaining and developing the land, as stipulated in the land legislation. Failure to fulfill these duties could result in the State Authority forfeiting the leasehold title due to non-compliance.

- Selling a leasehold property requires obtaining consent from the State or relevant authority, which can lead to a lengthier transaction process.

- Banks typically prefer leasehold properties with at least 75 years remaining on the lease when considering home loan approvals. If the remaining lease term is less than 50 years, securing financing for the property might become challenging, and the owner may need to settle for a lower margin of financing.

So Which Kind Of Property To Choose ?

Ultimately, the decision of which type of property to choose lies in your hands. A shorter tenure, such as a leasehold property, doesn't necessarily indicate inferiority; it may appeal to property investors seeking higher rental yields and exclusive facilities.

On the other hand, opting for a freehold property offers the advantage of perpetual ownership of both the land and building. Additionally, capital appreciation can lead to higher market value, providing the opportunity to gain significant returns when engaging in property transactions. So, consider your preferences and investment goals carefully, and you'll find the perfect property that aligns with your aspirations and lifestyle.