Truth About Leasehold Property

Recently, I received the Sale & Purchase Agreement (SPA) for the house that me and my wife recently bought for our signature. Flicking thru the agreement, then only I discovered the true meaning of a leasehold property. All this while, my understanding about leasehold property was that the land is leased to the house owner for a period normally 99 years from the day the owner takes vacant possession of the house.

However, in my agreement, it is stated that the leasehold period is for 99 years and will expire in the year 2095. What this mean is that the leasehold tenure has started since year 1996. The house that we bought is still under construction and will only be ready by 2011. This means that we already lost out 15 years of the leasehold period. We are only left with 84 years to stay in the house. How did this happen?

The normal practice for developing residential properties in Malaysia is that the developer will acquire a piece of land to be developed. Then, the land will be developed and sold in phases because of capital contraints. The whole development might take up to 20 years to be completed. Even though the development will take up to 20 years, the leasehold period for the whole land will start the moment the developer acquires it. Owner of the later phases will have shorter leasehold period compared to the earlier phases owner.

For certain people, 84 years is a long time. Not many will even reach to that age. As for me, if I were to live another 84 years, I'll be more than 100 years young! So why should I bother about the leasehold being only left with 84 years? Well, it was not a concern in the first place until I discovered something in the current book I'm reading.

In this book, the author stated that for leasehold property with tenure less than 60 years, its quite difficult to get financing from banks. This means, the target market is significantly reduced because only buyers with cold hard cash can afford the property. This also means, since the target market will only consist of a small pool of people, you will be at the losing end if any negotiation takes place. I have yet to confirm this fact with any banker but to me, the reasoning is quite logic. Why should a bank hold onto a mortgage which decline in value? Take note, when I say decline in value means when the leasehold period is lesser than 60 years. Not before that. Should this be the case, it also means that ideally we stay for about 20 years in this property before selling it to fetch a fairly good value (if it rise in value of course) for the property instead of waiting the leasehold to be less than 60 years.

Of course ideally, whenever you can, try to buy freehold property. This way, you will not have to worry about the declining value. But in reality, it has to be admitted that freehold property has become scarce in our part of world today. Even if you can get one, surely you will have to pay a premium for it. As a precaution, follow these steps. It might help:

1. Whenever buying a leasehold property, find out when was the first phase of development started. If the salesperson could not answer this question, request to have a copy of their SPA. It is clearly stated when will the leasehold period expires.

2. Always try to buy early phases in a development. This way you will get more leasehold years.

3. Pray and fingers crossed that the state government will convert all leasehold land to freehold like what the Perak Pakatan Rakyat government wanted to do before they were toppled. Hope the Selangor government will do the same.

4. If possible, try to sell off property before its leasehold period is less than 60 years.