RELATIVE DESIRABILITY BETWEEN FREEHOLD AND LEASEHOLD FLATS

Abstract

This dissertation was undertaken to prove the hypothesis that the 'tenure' of a property (ie whether it is a freehold or a 99-year leasehold) is one of the most important considerations in the purchase of private residential properties. That is, given a choice between similar freehold and 99-year leasehold properties (with respect to age of the property; locational, physical and social characteristics) , buyers would prefer freehold to leasehold properties . This is because leasehold properties face certain legal and financial constraints which are not similarly imposed on freehold properties. In addition, as the remaining leases of leasehold properties shorten, it is more difficult to sell them as compared with freehold properties. Another disadvantage of 99-year leasehold properties is that as the unexpired lease term shortens, their prices decrease at a much faster rate than freehold properties of around the same age. Two case studies were undertaken to test the validity of the hypothesis with the help of the multiple regression analysis technique and graphical analysis. The case studies were carried out based on the assumption that the the preferences of buyers are reflected in the sales prices. In other words, a buyer would be willing to pay more for a flat, if, in the buyer's opinion, the flat is relatively better compared with any other(s). The findings of the study show that 'tenure' is one of the important criteria in the purchase of a residential property. The degree of importance of 'tenure', however, depends on the age of the building and the prevailing market conditions. When a property is older, 'tenure' tends to be relatively more important to a buyer than when it is newer because the remaining unexpired lease of an older property is shorter. Also, in poorer market conditions, buyers are more concerned about the 'tenure' of the properties they buy and as a result, leasehold properties tend to fetch relatively much lower prices than similar freehold ones.