Rising Rents Offer Opportunities

By Sonia Kolesnikov-Jessop

Tenants in Singapore have been getting a nasty surprise. Having been stagnant for years, the rental market started to rapidly increase last year, especially for luxury residential property. An average 15% jump in 2006 means rents in Singapore are now the 15th most expensive in the world and the eighth highest in Asia, according to a survey by human resources research firm ECA International.

The shock has been nastiest for tenants coming out of a long-term lease, especially in prime districts, as they can often face increases of 50% or even more to renew their lease, as property owners strive to catch up with the current market level.

Savills estimates overall non-landed residential rents (all districts) averaged S$2.24psf per month in the second quarter of 2007, up 33% on the same period last year. But non-landed residential rents in prime districts 9, 10 and 11 have increased by 36% and now average S$3.30psf per month, while high-end developments within these districts are transacting at an average of S$5.56psf per month, a 26% increased compared to the same period last year.

“Overall, rental rates in Singapore are still cheaper than in Hong Kong,” points out Simon Hill, Savills’ Regional Director of Commercial Real Estate Services. For example, in Singapore, the asking rent for a luxury apartment at Ardmore Park is from S$17,000-$19,000 month, or S$5.90-$6.60psf, while a sought-after lifestyle condo, like Caribbean at Keppel Bay, can fetch about $5psf for a unit with a view on the waterway.

In comparison, the asking rent for a unit at the prestigious Branksome Crest in Hong Kong’s Mid-levels area is about S$24,000 per month or about S$10psf per month, while the average rent of other luxury residential in the Mid-Levels area is around S$7-$7.2psf per month.

Landlord’s market
Although Singapore’s rental market started on its upward path in the second quarter of 2005, the pace only really picked up at the end of 2006. Nicholas Mak, Knight Frank’s Director of Research and Consultancy, points out that rentals are now still 25% lower than the peak in 1996.

“One reason why tenants are complaining is because they’re used to the tenant’s market from 2001 to 2005, where there was lots of supply and low rentals. Landlords then were bending over backwards to please tenants. Now, it’s becoming a landlord’s market,” Mak says.

Tenants are likely to continue feeling the pinch for some time. Hill predicts rents in Singapore will continue to increase by another 10-15% until the end of the year and by another 25% in 2008. This fast increase in rents reflects the convergence of several factors.

“It really gathered pace in the last year with the en-bloc sales,” says Ong Choon Fah, DTZ Debenham Tie Leung’s Executive Director and Regional Head for Consulting and Research. “Last year more than 6,000 units were sold and people are looking for replacements. On top of it, we’re getting more expats coming into Singapore as the economy strengthens.”

The sharp rental spike in districts 9, 10 and 11 heralds the rise of several new trends in the local property market, including that many expatriates are now moving out of the prime districts. Some are considering landed properties and HDBs, while others are buying, thus lending further support to the recovery of the property sales market.

"Unless you have a good corporate budget helping cover this housing cost, it’s becoming quite pricey, which is why we’re seeing expatriates moving out of prime districts and into the fringes, like District 15, where rents are also rising but remain more affordable,” Ong says.

"For the high end of the market, we’ve found multinational companies are still willing to give housing allowances in order to attract and retain talent. However, middle managers are the ones squeezed out. They’re the ones moving out to the fringe areas, or to landed housing where rents are usually lower by 10-20% than a condominium because the locations are often not in a prime area.”

Time to buy
Hill adds that the desire to buy is increasing among expatriates, “particularly Australian and British expats who generally have more confidence in Singapore as a market and are more conditioned into buying rather than leasing homes”.

A DTZ analysis of the Urban Redevelopment Authority’s Realis caveat data revealed that foreigners and permanent residents bought 1,938 private homes in the first quarter of this year, just a fraction higher than the 1,934 homes in the fourth quarter of 2006, but still the highest number of foreign purchases recorded by the Realis system. Buying was concentrated in the prime areas of Orchard, Holland and Bukit Timah, as well as Katong and East Coast.

Interestingly, the number of foreigners who purchased apartments from developers fell 21% quarter on quarter, while the number of foreigners who bought resale apartments increased 13% quarter on quarter to total 1,315 transactions.

The immediate availability of private homes in the secondary market means that foreigners either want to have a share of the current buoyant leasing market or require immediate accommodation. “There are also some who have received permanent residency and are keen to own residential properties, partly as rents have been rising,” the DTZ report noted.

But if rents have been going up, rental yields remain fairly stable and in some case are even compressed because underlying property prices have been increasing at the same rate or at an even faster pace.

At Ardmore Park last year, rent for a 2,885sqft unit was about S$15,000 per month, and with a median price back then of $1,800psf this would give a yield of 3.5%. This year, the asking rent has gone up to about S$18,000 per month for a similar unit, but the median price has also increased to S$2,500psf, so bringing the yield down to only about 3%.

“Yield for luxury properties is currently around 2.5%-4%,” notes Hill, adding that for some mid-tier properties, and depending on the area and developments, some properties can still achieve a yield as high as 5%.

However, Ong notes that: "Most people don’t buy in Singapore for the rental yield but for the appreciation in capital gain, so they look at total return. Those that would have bought those high-end apartments in District 9 and 10 last year can look for a profit of 50-100% this year