Gazing into the crystal ball for condo, EC rentals

Last issue, we gave the GuruView on HDB rentals. This issue, we look at the private residentialrental market to understand where the market will be going in the next six months and beyond.

By Chang Hui Chew

The story of the private residentialrental market is one that has taken adouble whammy over the past few years,with many landlords dealing with fallingrents, weak yields and a difficulty inattracting tenants.

On the demand side, a decreasingnumber of employment passes are beingissued, leading to fewer expatriatesarriving on our shores. Furthermore,expatriate remuneration packages arebeing localised, leading to lower budgetsto be spent on housing. This appliesfurther pressure on rental prices as well,and shifts demand from centrally locateddistricts such as 9, 10 and 11, to districtsfurther afield.

On the supply side, a record numberof residential units have been completedor are due to be completed in 2015 and2016, before tapering down in 2017.Many of the units due to hit the marketinclude investor favourites such asshoebox, one-bedroom and one-plus studyconfigurations, adding on to stockthat is already in the market.

Units rented, units coming
Supply side factors, coupled withweakened demand, is one of theprimary reasons why landlords arefinding it hard to tenant their units.Stocks of private condos have been ona steady increase in the past two years,and hit just under 250,000 at the end ofthe second quarter of the year (refer toFigure 1). Current URA estimatesindicate that almost 20,000 privateresidential condo units will be completedby the end of 2016, and another13,000 by end 2017. This was due toan increase in government land salesbetween 2011 and the start of 2013,together with aggressive buying by
developers building up their land banks.

At the same time, vacancy rates havealso been on an upward trajectory,crossing nine percent at the end of Q42014, and again in Q2 2015. Vacancyrate, as defined by the URA, is thepercentage of stock units that are notphysically occupied. Market watchershave expressed concern that vacancymight hit 10 percent by the end of theyear as well. What this means forlandlords is a lot more competition for ashrinking tenant pool, putting furtherpressure on rents.

While stock has increased, demandfor units has not. Overall private condotransaction volumes between 2013 and2014 actually increased 11 percentyear-on-year, with volumes in the OutsideCentral Region (OCR) growing by 16percent over the same period (refer toFigure 2). For 2015, the first half of theyear saw just under 8,700 rental contractsreported in the OCR, a 15 percentincrease from H1 2014. In contrast, theCore Central Region (CCR) and Rest ofCentral Region (RCR) saw rental transactionsinch upwards by nine and sevenpercent respectively. This suggests thatdemand for private condo rentals has notnecessarily shrunk yet. Rather, withexpatriate housing budgets shrinking,demand is shifting from the city centreand city fringe to suburban regions.

Rental price and yields
With the upcoming increases in stockand shifts in demand, landlords need toprice their rentals aggressively in order totenant them. With current marketconditions, rental prices have had tomoderate. The URAs overall Rental PriceIndex (refer to Figure 3) saw rental priceson an upward climb until it reached apeak around Q3 2013, before it began itsdecline. Since then, the Index saw anoverall decline of about 5.4 percent to itscurrent level of 111.0.

The more price-sensitive OCR, with amuch wider variety of competition, wasthe first to bow to market pressures, withprices starting to fall from Q3 2013,dropping 6.7 percent between its peakand the end of Q2 2015. The CCR heldout a little longer but began to seedeclines from Q1 2014. It also saw thelargest percentage tumble at 7.2 percentfrom its last peak in Q3 2013. The RCRproved more resilient, with prices onlyseeing declines from Q2 2014 onwards,and a slighter dip at 3.1 percent.

Knight Frank tracks rental pricesthrough a basket of properties, classifyingthem as high-end, mid tier andmass-market. According to the consultancysfigures, average rentals for themass-market fell nine percent, themid-tier 10 percent and the high-endseven percent between Q2 2013 and Q22015 (refer to Figure 4). The mid-tier sawthe sharpest drop in actual rentalquantum as well, falling $0.50 betweenQ2 2013 and Q2 2015. This suggeststhat over the period, landlords of anaverage sized 800 sq ft apartment wouldhave seen $400 less in rent per month.

While the overall smaller drop in thehigh-end tier might suggest it is a littlemore resilient in the medium term, itseems to be more volatile in the shortterm, with the sharpest decline (2.3percent) out of all three segmentsquarter-on-quarter in Q2 2015.

As rental prices fell, gross yields werealso hit (refer to Figure 5). Mid-tier andmass-market condos saw rental yieldsfalling to just under 3.6 percent in Q22015, according to Knight Franksestimates. Gross yields for high-endproperties, however, inched upwards 3.2percent despite falling rental prices, andare doing so for the second consecutivequarter. With gross yields so tight, it islikely landlords will still be required tocome up with money out of pocket tofoot other costs of ownership.

Without any expected changes tomarket conditions, rental prices are notexpected to see upsides for the rest ofthe year. Knight Frank predicts that theOCR is likely to see the largest softeningin rental prices for the second half of theyear, with an estimated 63 percentcontribution to the upcoming supply inthe latter half of 2015.

This places landlords of newlycompleted units who do not haveadequate holding power and canstomach lower rents in a difficult dilemma.Holding on to their rentals wouldmean more money out of pocket eachmonth, even with a tenanted unit.However, trying to offload thesepoor-yielding rental units would not onlyexpose them to the weak privateresidential resale market, but also subjectthem to Sellers Stamp Duty (SSD), whichcould range from four to 16 percent,depending on when they bought theunits. Landlords who wish to offload theirunits will also need to contend with thechilly private residential resale market,and it is unlikely they would be able tosell at a price they might find palatable.

Landlords need tocompromise
Given the shrinking tenant market and aglut of rental units on the market, landlordsneed to realise tenants are in a much betterbargaining position. It would therefore beunrealistic for them to hold on to a desiredrental price level, or be choosy about theirtenants. They would be far better offcompromising and accepting a lower offerthan leaving the unit untenanted.

The math is simple. Assume that alandlord is currently paying a mortgageof $3,200 a month for a one-bedroomcondo unit, and a tenant is offering$2,800. Over the course of a one-yearlease, the landlord would have to pay$4,800 out of pocket to make up thedifference in the mortgage. However,if the landlord were to leave the unituntenanted for just two months, he orshe would already owe $6,400 inmortgage payments out of pocket.

Aside from compromising on rentalprices, landlords can also negotiate onother aspects of the rental contract. Forinstance, landlords can offer to providefurnishing or to offset utilities. They canalso consider negotiating for a shorterone-year lease instead, as it providesthem the chance to re negotiate termsif market conditions were to improve.

Private-public hybrid:What about EC rentals?
Executive condominiums (ECs) area public-private housing hybridproduct that has proven to be verypopular with Singaporeans, as theyoffer a private condominium lifestyle ata lower cost. However, like HDB flats,ECs cannot be bought to let. Homeownerswill need to fulfil a five-yearminimum occupation period (MOP)before they can lease outtheir entire unit.

Rental volumes for ECs have creptup over the period of analysis, with2014 seeing a 6.7 percent increase inrental volumes over 2013 (refer toFigure 6). The second and thirdquarters of the year are an active periodfor rentals, with the majority of transactionstaking place then. Rental volumesfor ECs are crawling upwards, as theirlower pricing, larger sizes and proximityto suburban amenities like schoolsmake them an attractive prospect forexpatriate families. ECs are also likelyabsorbing some rental demand fromtheir private market counterparts, asshrinking expatriate packages areshifting tenants out of the city centreand city fringe, to the OCR where ECsare located.

While ECs are seeing relativelydecent volumes, prices have been on adecline. From their recent peak in Q12013, average EC rental prices havefallen 13 percent to $2.40 psf permonth, a trend reflected in the overallresidential rental market. While thedecline in prices is worrisome, it is lessof an issue for EC landlords than theirprivate counterparts. Due to the MOPand a lack of EC launches from 2005to 2010, EC rentals hitting the marketright now are likely to be older unitsthat were bought at lower prices. EClandlords are therefore likely to be in amuch better position to weathermarket conditions than their privatecounterparts.

			This article was first published in the print version The PropertyGuru News & Views. Download PDF of full print issues or read more stories now!

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