Freehold vs. Leasehold: Know the Difference

What is a freehold property?

The Malaysian National Land Code, 1965 states explicitly that all State lands are owned by the State authority. If the land is given to an individual for an indefinite period by an authority, it will become a freehold title.

In most cases, this is true when you purchase a freehold bungalow, private home or condominium on a specific piece of land. A developer who purchases a freehold land would acquire ownership in the form of a Master Title. Once the developer has purchased the property, he can then build landed houses before transferring them to the buyers. Unlike major developments such as condominiums and high-rise strata buildings, buyers of condo units will only own a portion of a residential condominium. This portion is typically distributed to the buyer via Strata Title. As a result, developers will retain land ownership. What are the advantages of buying freehold properties?

• The buyer owns the land on which the property is built.

• The buyer is free to make changes to the property's structure and land usage at his discretion. In any case, updates and modifications must be approved by town planning and environmental officials.

• Owners can divide or assign their land as they wish. However, town planning controls may apply.

• Owners can expect a high resale price for their property in the future. If the property is strategically located, the capital appreciation will increase steadily with time under normal economic conditions.

• The value of a freehold property will not diminish as the years pass.

• Land transfers are less restricted, therefore the buyer can sell the property faster.

• The sale of a freehold property can generally be completed in 3+1 months, as stated in the Sales and Purchase Agreement (SPA).

How do leasehold properties work?

A leasehold title exists when the State permits the transfer of a piece of land to an individual for a period not exceeding 999 years. Following the leasehold period, the land reverts to state ownership. For the owner to retain ownership of the land, a leasehold extension must be applied for before the lease expires. Upon renewal, the owner of the property is allowed to extend the lease in exchange for a premium payable based on the land's current market value.

A leasehold property may have a tenure of 30, 60, 99, or 999 years. In contrast to freehold title owners, leasehold title holders are subject to stricter rules and regulations. There are specific restrictions on the type of activities permitted on the land stipulated on the leasehold title.

As per the land legislation, the buyer will be responsible for maintaining and developing the land. Leases can be forfeited if the State authority finds that the buyer is not capable of taking care of the land.

Why is it beneficial to buy a leasehold property?

• A leasehold property typically costs 20% less than a comparable freehold property.

• The rental yield of properties with a lower entry point is higher.

• Landlords of leasehold properties usually provide better facilities and incentives for buyers to remain competitive.

Criteria	Freehold	Leasehold
Ownership	Assets are fully controlled for an indefinite period unless they are restricted freehold properties or interfere with public development.	Once lease tenure expires, property then belongs to the state authority unless renewed.
Land Ownership	A property owner owns the land on which it is built.	Property owners do not own the land.
Land usage	Building work is free to be done. It is strictly governed by environmental and land use regulations.	Leasehold tenures are limited to 30, 60, 99 or 999 years. Land legislation and environmental control limit the use and activities on the land.
Duty of care	Environmental protection laws and common law apply	​Responsible for the maintenance and development of the property.
Distribution of land	Depending on town planning regulations, it can be subdivided or distributed.	A state's consent or an equivalent is required.
Tenure and security	Protected	Leasing agreements can be forfeited if the tenant does not uphold the duty of care.
Transfer of ownership	Faster and easier transfer of ownership upon sale. To close a sale, it takes an average of 3+1 months	Needs state or equivalent’s consent to initiate the process, which can take up to a year. Buying second-hand leasehold properties in Selangor and KL will take more than a year.
Price	The price is higher	In general, entry costs are 20% lower than freehold prices.
Value of property	A greater capital gain over the long run.	In the first 20-30 years, the value of property increases substantially, but decreases as tenure shorten.
Rental	Lower rental yield due to high entry points.	Rental yields are higher due to low entry points and more facilities.
Financial margins	It is easier to obtain bank financing and one can secure a margin of up to 90%.	Financing can be difficult as the leasehold tenure shortens. It is possible that the lender will refuse to finance the property if the remaining tenure is less than 50 years.
Additional facilities	Only available if the owner has constructed it himself	A leasehold property has additional amenities such as a gym, a park, a concierge service, etc.

However, even though it's freehold land, it can still be seized by the state under the Land Acquisition Act 1960 for public purposes such as economic or infrastructure development. If this scenario unfolds, the owner will be compensated for the market value of the property.

The choice depends on your own preferences, needs, and wants, as well as your financial means. If you wish to buy a home in the hopes of leaving it to your children and grandchildren, taking a freehold property will probably be a better choice. In either case, a leasehold property will be a great option if you are on a budget and intend to sell in the short term.

It is therefore imperative that you explore all your options as a homebuyer and decide base on what is best for your family, yourself, and your wallet.