Faster growth in suburban rents

Property 2011

Published September 15, 2011

Faster growth in suburban rents CHUA CHOR HOON and LEE LAY KENG highlight factors to look out for when investing in a private home IN tandem with the exceptional growth of Singapore's economy in 2010, rents for private residential properties rose 18 per cent that year, according to the Urban Redevelopment Authority's (URA) private residential rental index. The growth rate slowed to 2.5 per cent in the first half of this year. Rents of apartments and condominiums islandwide are still below the peak levels in Q2 2007. Rents in the Outside Central Region (OCR) grew the fastest in the first half of 2011 by 3.1 per cent, to about 2 per cent off their previous peak levels. Rents in the Core Central Region (CCR) and Rest of Central Region (RCR) grew by 2.1 per cent and 1.3 per cent respectively in the first half of 2011, and were still about 5 per cent off their previous peak levels. The stronger growth in OCR could be due to the lower rental levels (see Table 1), and they cater to an increasing group of foreigners without expatriate housing allowances. The take-up of units in the prime districts of 9, 10 and 11 with higher rents ($15,000 and above, for example) is slower as the pool of demand is smaller and there are many newly completed developments this year competing for tenants. Rental growth for landed properties has also moderated in the first half of 2011 compared to 2010, but the rate of growth was still faster than that for non-landed properties. URA's rental index grew by 5.9 per cent for terrace houses and 4.8 per cent for semi-detached houses in the first half of 2011, compared to 16.8 per cent and 16 per cent respectively in 2010. Rents of both terrace and semi-detached houses have exceeded their previous peak levels. The faster increase in rents for landed homes is due to the limited supply of landed homes for lease, as most are owner-occupied and there are relatively fewer new additions to the landed stock. Landed homes are typically popular with expatriate families for the bigger space they offer. Popular types of developments Even though the inflation rate in Singapore has hovered around 5 per cent so far this year and is higher than the average net rental yield of around 2-3 per cent, residential properties are still considered to be an attractive investment option by investors with few options, given the almost zero savings rate and volatile stock market. The low interest rate environment in Singapore has made it cheaper for investors to finance property purchases with the possibility of leverage and potential for capital appreciation. If you are looking to invest in a property for rental income, the following factors will affect tenants' decisions on where and what to rent: Accessible location Tenants prefer developments that are easily accessible by public transport. Older developments with better locations are more popular than newer ones with poorer accessibility. Even though asking rents for some older developments are trending upwards and tenants might be able to rent a bigger-sized unit elsewhere for a lower rent, they would prefer to stay put if the currently tenanted place is more conveniently located. While the oceanfront living and quiet environment in Sentosa Cove are attractive, the area is generally considered to be more inaccessible than the mainland. This is the case even for expatriates provided with a car, as they tend to prefer to commute to work and leave the car for their wives' use. Age of development All else being equal, tenants prefer newer developments because the facilities and designs are newer and more up-to-date. However, it may take a longer time to lease out new units if there are many investors in the development as they will be leasing out their units at the same time. Unit size and availability of facilities Tenants with families prefer bigger units, such as the three or four-bedroom units. Developments with children-friendly and full kitchen facilities will be in higher demand from this group of tenants. In the CBD, smaller units such as the one or two-bedders which attract singles and couples are more popular than bigger units. However, not all tenants working in the CBD like the idea of living in the CBD, as some find it too close for comfort. Facing West-facing units are less popular and can take a longer time to be leased out. Units with views of the pool or greenery tend to attract more demand. Construction works nearby also turn off potential tenants. Tenant profile Tenants renting apartments and condominiums in the prime districts are still predominantly foreign expatriates, with most of them on corporate leases. Most are from MNCs and span various industries such as financial services, shipping and logistics. Correspondingly, most of them work in the CBD. Foreign expatriates (mostly Caucasians) with families are usually the ones who rent landed homes. They usually have their own furniture and prefer a large built-up area. Most would stay in areas close to international schools that their children attend. For example, Americans prefer Woodlands which is close to the American International School, Australians prefer the Lorong Chuan area, Koreans prefer the Toh Tuck area, and Japanese prefer either the East Coast or West Coast areas where the Japanese international schools are located. However, there are also expatriate families who would prefer to live in established choice expatriate areas such as the Dover, Bukit Timah or Holland areas, to be close to other expatriate families and where there are amenities catering to their needs. Foreign working professionals without housing allowance or with a lower budget prefer to rent apartments and condominiums in the suburban areas. They are usually working professionals in middle management, who can afford a monthly rent of around $3,000 for a three-bedroom unit in the suburban area. Generally, tenants rent in places that are more convenient for work. For instance, developments in District 5 (Clementi, West Coast area) see tenants working in Jurong Island, International Business Park or in companies located in the Alexandra belt. Anecdotal evidence shows that there are increasingly more foreigners relocating to Singapore to either set up a branch office or to start new businesses in Singapore. Some of them, who are just starting their operations, would rent well-located developments near the CBD and work from home. Outlook Rental demand in the second half of 2011 is likely to slow down due to seasonal effects, the tightening of immigration policies and the more cautious business outlook. Most expatriate moves to Singapore take place between June and September, before the start of the international school session in August and after the summer holidays in the US and Europe. The weak economy in the US and Europe may lead to companies holding back or cutting down on their expansion plans in Singapore. They may also introduce cost-cutting measures such as the reduction of housing allowances, which will affect the rental demand of larger apartments and condominiums in the prime districts and city areas. Correspondingly, the lower housing budgets would lead to expatriates and foreign professionals renting smaller units in the prime districts and city areas, or renting larger units in the suburban areas. Rental demand for such units will continue to be supported by the inflow of foreign professionals from the Western economies to Asia and Singapore as they search for better opportunities outside their home countries. However, this would be tempered by the tightening in immigration and foreign worker policies. The qualifying salaries for new employment pass holders were raised with effect from July 1, 2011, and will be increased again on Jan 1, 2012. Based on DTZ's estimates, a total of about 8,660 private residential homes are expected to be completed in 2011. This is similar to the five-year average completion of about 8,800 units between 2006 and 2010. With about 5,250 units already completed in the first half of 2011, another 3,410 units are estimated to be completed in the second half of 2011 (Table 2). Of the total 8,660 units in 2011, about 43 per cent (3,700 units) is located in the prime districts of 9, 10 and 11, city and Sentosa areas. This proportion is significantly higher than the 24 per cent of private homes in the prime districts of 9, 10 and 11, city and Sentosa areas, out of the total stock of private homes in Singapore as at end-2010. Hence, the trend of suburban rents growing faster than rents in the prime areas is expected to continue in the second half of 2011. While the number of new private residential units to be completed in 2011 is not excessive, the proportionally larger supply of units in the prime areas with a smaller pool of potential tenants may see rents in this segment moderate more than rents of units in suburban areas. Ms Chua is head of South-east Asia research and Ms Lee is senior manager of research at DTZ