What is the difference between freehold and leasehold land, anyway? In this article, we look at what factors you should take into consideration when buying a house.
Oftentimes when people talk about purchasing a property, they would think only about the physical house – should they buy a landed home or a high rise unit such as a condominium or a serviced residence?
Unbeknownst to many home buyers, these residential properties could sit on different types of land. In Malaysia, there are several types of land titles, namely freehold, leasehold and Bumi Lot.
Below you will find the explanation for each type of land title. We delve into the differences as well as the limitations.
1. Freehold title
Freehold properties have always been the preferred choice as it belongs to you in perpetuity. Freehold property is when the state sets aside a plot of land and disposes of it indefinitely to an individual. This is seen when the developer builds freehold bungalows, private housing and condominiums. So when the developer owns the land, properties built on it are transferred to the buyer provided it is a landed residential property such as a bungalow or a terraced house.
This ownership will be in the form of Master Title, which is also known as the developer’s title. Here, the developer obtains permission to develop a piece of land and is granted this title for property development projects. For condominiums or other high-rise residential properties, the buyer owns a stake in the condo (based on the units) but the developer still owns the land. In this case, the developer will distribute the ownership via strata titles.
Advantages of freehold land
Freehold lands definitely have a fair bit of advantages. For one, owners face fewer and less stringent restrictions when they want to transfer their lands to someone else. Besides that, they also have the right to subdivide and allocate their lands, although this is still subject to town planning controls. Apart from that, the land also goes through stable capital growth provided the freehold property as a whole is in good condition.
Restrictions of freehold land
Do note that certain freehold property will require the consent of the state government when transferring ownership. This applies to properties that have been converted from leasehold previously. Therefore, it’s advisable for potential buyers to look at the title of the property to find out if there are any restrictions on the land before purchasing it.
Also, although freehold land provides perceived permanence in its title, the state government is empowered to acquire a plot of land owned by the public including freehold lands. Under the Land Acquisition Act 1960, the state can take back freehold land if it is to be used for public purposes such as an MRT project or for economic development. In this scenario, the landowner will be compensated according to the land’s current market value, which is determined by value’s hired by the government.
2. Leasehold title
Leasehold is the less popular land title in the market. The tenant is granted ownership of the property on a leasehold land for usually 99 years. If it is a subsale property, the lease tenure will be shorter – typically 30-60 years. Once the lease expires, the tenant would either have to return the land to the state government or pay a lease extension premium.
Leasehold lands come with a lot of restrictions spelt out in the lease. The tenant is required to care for the land as defined by the land legislation. If the state deems the tenant unfit, the security of the tenure can be compromised and the state can also forfeit the lease for non-performance.
Restrictions of leasehold land
1. Lengthy sale process
During the period of ownership, only the state government or an equivalent can grant approval for a transfer of the lease. The sale for a leasehold property takes 3 + 1 months, which process starts after the state has given its consent. This can take anywhere from six months to a year. Nevertheless, buying a house from a developer (primary property) is said to be easier.
2. Lower property value and property price
Properties with a 99 year lease grow in value at a similar rate with its freehold counterparts during the first 20 to 30 years. Do note that leasehold properties with a great location and strong surrounding amenities can gain more value than freehold ones during the early years. But after the third decade or so, the property value stagnates and depreciates until lease expiry. On the flip-side, a leasehold property may or may not be cheaper than a freehold of similar specifications such as unit built-up area and land size.
3. Lower margin of financing from banks
Financial institutions tend to be reluctant to lend to those wanting to acquire leasehold properties with less than 50 years remaining on the lease. Most banks will opt to provide financing to leasehold properties with at least 75 years left on the lease. Even if you do get your home loan approved, your loan amount will most likely be lower than the maximum 90%, which means you have to fork out the remaining amount by yourself.
3. Bumi Lot
As indicated by the title, a Bumi Lot is open for sale or lease only to Bumiputeras – Malays, Sabahans, Sarawakians and non-Malay Muslims. This property type exists in every new development whereby a certain percentage of the development is allocated to Bumiputeras. For instance, in the Klang Valley, all new developments must allocate 30% of its units as Bumi Lots. Find out how much land prices have increased in KL & Selangor over the years.
Conversion of a Bumi Lot to a non-Bumi Lot takes a long time, it typically spans a few years. Even then, in most cases, the request gets rejected. Hence, it would be tough buying a house on a Bumi unit if you do not meet the profile requirements. Bumi Lots are also the least attractive to investors due to their restricted market and a price appreciation that is said to be the slowest among all the three land titles.
On that note, there is another land category made available only to Malay Muslims – Malay Reserve Land. Properties built on Malay Reserve Lands can only be purchased by Malay Muslim buyers.