Do rising rents make Singapore homes ripe for investment?
The Business Times, 15 Feb 2022, Tue 5:50 am
By Fiona Lam
ON the face of it, the bullish outlook on leasing demand for Singapore residential property has ostensibly strengthened the value proposition for buying an additional home to collect rental income. But the reality is not so straightforward.
The new cooling measures' effects on rental supply and demand, as well as long-term trends in capital values and yields, are among factors to be contemplated.
For instance, could the hikes in stamp duties inadvertently bring about higher rental yield? A study in Canada suggests there is a possibility, as would-be homebuyers may switch to join the tenant pool.
Many investors in Singapore have also set their sights on selling for profit. In turn, they focus less on income.
Heightened leasing demand for homes has pushed some rents up to levels unseen in recent years. The Urban Redevelopment Authority's (URA) figures showed that rents of private homes jumped 9.9 per cent last year, reversing from the 0.6 per cent drop in 2020.
Lee Nai Jia, deputy director at the NUS Institute of Real Estate and Urban Studies, noted that rental yields for private residential properties in the city-state "are very low to begin with", hence most individuals purchase with capital appreciation in mind.
He has observed yields tending to hover at around 1 to 2 per cent for high-end condominiums and reaching just 3 to 4 per cent for mid-tier and mass-market condominiums.
Christine Yu, chief executive officer of International Property Advisor (IPA), told The Business Times: "To be honest, we are unsure why anyone will be buying in today's market for rental returns of less than 2 per cent per annum for freehold properties in Districts 9, 10 and 11."
Yields of new project launches that will be completed in 2 to 3 years' time might narrow by the time tenants move in, as buyers paid top dollar last year and rents there are "probably not going to move up much", she added.
To ascertain whether rising rents could continue to make investment for rental income viable, there is a need to analyse capital values, rents and yields over a longer time horizon. JLL Research data showed that in the 10-year period from Q4 2011 to Q4 2021, typical prime net yields fell from 2.49 per cent to 1.87 per cent.
Ong Teck Hui, JLL Singapore senior director of research and consultancy, said this came about as capital values appreciated while rents softened during the decade. "So while rental yields declined, investors may feel they were compensated by capital appreciation."
Investors often consider total returns, which comprise both rental yield and capital appreciation. "Investors tend to accept low net yields, of around 2 per cent or less, because they feel that capital appreciation could provide a higher upside in returns over the longer term," Ong said.
A slight yield expansion looks to be in store for 2022, as rents could rise more quickly than capital values, which are likely to record slower growth due to the latest property curbs, he added.
Lam Chern Woon, Edmund Tie's head of research and consulting, highlighted that the yield compression story has not been uniform across segments. For landed properties, prices in 2021 rose at a much faster pace of 13.1 per cent compared to the 4.6 per cent increase in rents. But prices and rents of non-landed homes exhibited similar growth, at 9.9 per cent and 11.2 per cent respectively.
Lam anticipates continued yield compression for landed properties in 2022, as their prices should continue to post fairly strong growth on the back of a scarcity of stock.
For non-landed homes, Edmund Tie's price growth expectations this year are more moderate relative to the strength of rental growth. "As a result, the financial case remains for investing in the non-landed segment, given the sanguine rental outlook," Lam said.
Yu reckons that if and when rising property prices are causing rental yields to shrink, investors will simply change tack to focus on capital gains instead of income; some will even sell their financial investments to buy property in such a scenario.
A preliminary research paper on Toronto's housing market found that an increase in transaction taxes led to more buy-to-let transactions by investors and fewer purchases for owner-occupation, partly as more individuals chose to rent to avoid paying higher transaction taxes. The paper, published in March 2021 by the Centre for Economic Performance at the London School of Economics and Political Science, noted that the tax increased the rental yield, thus attracting buy-to-let investors.
But Dr Lee said that for such an increase in buy-to-let transactions to take place, property prices must first drop significantly and thus boost the rent-to-price ratio or yield. That scenario may not happen in Singapore, as many individuals here still prefer to own their homes rather than rent.
For now, buy-to-let investors may prefer to wait on the sidelines to watch for any price declines in light of the cooling measures, before deciding whether to enter the market, he added.
Ong said Singapore's punitive additional buyer's stamp duty rates will deter acquisitions of subsequent residential property to earn rental income, which could translate into fewer investment purchases in the short term.
However, some units bought in the primary market would only be completed in about 5 years' time, so any decrease in investment purchases will not have an immediate impact in this segment, he added.
On the other hand, the supply of homes available for rent could see an uptick from another part of the market. Amid softer demand from buyers after the cooling measures, sellers may now find it tougher to achieve their asking prices. Some of these owners will thus decide to lease their units instead, given the favourable rental market, Ong said.
Rentals in Singapore are expected to sustain their upward momentum as more vaccinated travel lanes open. Moreover, the fresh cooling measures could prompt prospective homebuyers who urgently need accommodation to turn to the leasing market temporarily while they take more time to consider their purchases, Dr Lee said.
However, he also highlighted that an increase in supply - from the completion of new residences - may exert downward pressure on rents, especially when mega projects come to the market. About 11,449 private residential units are expected to be completed in 2022, followed by 17,184 units in 2023, URA said in October 2021.
Therefore, while rising rents will definitely appeal to investors, "the savvy ones will probably look at how the new completions impact the market and how prices recalibrate to the latest cooling measures", Dr Lee added.
A buoyant collective-sale market can also drive rental demand, given the replacement demand from displaced tenants and from unit owners seeking interim accommodation. For such a spillover to occur, there is usually a lag of a few months after a collective sale, Lam from Edmund Tie noted.
He thus expects Singapore's rental market in H1 2022 to be supported by the successful en bloc sales concluded in 2021. That said, there could be a bit of uncertainty down the road, depending on the state of the collective-sale market in the next few months following the cooling measures.
"On balance, the risks to rental demand appear to be tilted to the upside, as construction delays in the public and private housing markets are likely to propel to-be owners to the rental market," he said. "Local workers have also turned to renting rooms or units in a bid for more privacy and conduciveness amid the rising prevalence of hybrid work arrangements."
IPA's Yu does not foresee a big surge in rents in the coming years.
In her view, the outlook for a continued increase in rents "is at best murky" at this point. It remains unclear how many expatriates will actually relocate to Singapore, given the adoption of remote work and fierce global competition for talent.
"Some of the highly paid top talents such as data scientists, investment bankers and tech researchers are already citizens of the world," she said.
Consider raising the income cap to allow more to buy HDB BTO flats
The Business Times, 15 Feb 2022, Tue 5:50 am
By Leslie Yee
MEET the eligibility criteria and one has the chance to participate tangibly in the Singapore dream by being able to buy a build-to-order (BTO) Housing Development Board (HDB) flat at a subsidised price.
For some young adults, the chance to jointly own a BTO flat is an incentive to get hitched. And for those who are rapidly climbing the career ladder, do tie the knot sooner.
To be eligible to buy a BTO flat, a couple comprising a Singapore citizen and another citizen or a permanent resident cannot have average monthly household income that exceeds S$14,000.
Being eligible to buy flats directly from the HDB also means being able to buy flats in prime areas that are being built under the prime location public housing (PLH) model.
Could the income ceiling be raised soon? Perhaps this is timely as home prices have been rising faster than income recently.
The income ceiling for the purchase of flats from the HDB was raised 3 times in the last decade - in 2011, 2015 and 2019. Prior to 2011, the income ceiling was kept unchanged for over a decade.
In September 2019, the income ceiling for families rose from S$12,000 to S$14,000 per month.
Based on recent precedents, perhaps the income ceiling will next be raised in 2023, being 4 years from 2019, and will rise by S$2,000 to S$16,000.
Assessment of meeting the income ceiling is based on average gross monthly household income that excludes bonuses and income earned from ad hoc overtime work, but includes allowances received on a regular basis.
The prevailing income ceiling of S$14,000 is estimated to cover more than 8 in 10 resident households.
Rising home prices
Buying a first home for a couple who bust the BTO income ceiling has gotten harder over the last two and a half years. Private home prices rose 13.6 per cent between the third quarter of 2019 and Q4 2021 based on the Urban Redevelopment Authority's index. Over the same period, the HDB Resale Price Index rose 18.9 per cent.
Take a couple with total annual income of S$200,000, comprising a combined regular monthly income of S$15,000 and an annual bonus equal to 11 per cent of the regular income. The price of a new private home in the suburbs of about 900 to 1,000 square feet would be around S$1.7 million - which, at 8.5 times of the annual income, may be a stretch financially for some.
More affordable options exist such as resale private flats in the suburbs or executive condominium units. Also, the said couple can pay around a million dollars for a resale HDB flat in the city area, which would be 5 times of their annual income.
The resale flat in the city area costs much more than a 4-room BTO unit sold under the PLH model at River Peaks I and II located in the Rochor area where the price range was S$582,000-S$688,000.
Amid digitalisation and the rise of artificial intelligence, the world of work is being disrupted. Some higher-income households may seek to buy a BTO flat rather than take up large multi-year loans to fund a more pricey home purchase because of fears over job insecurity or rising home loan rates.
Some may also seek to have greater financial flexibility or keep expenditure in-check amid rising inflation.
Generous income ceiling
People here are marrying later - the median age at first marriage for grooms and brides rose from 30.0 years to 30.4 and from 27.7 years to 28.8 respectively between 2010 and 2020.
By marrying at an older age when incomes may be higher, some couples could struggle to meet the existing income cap to buy BTO flats. Allowing more couples to buy BTO flats so they are less stretched financially may encourage couples to have kids.
In setting the eligibility criteria for couples to buy flats from HDB, perhaps err on the side of generosity - let more couples including higher-earning ones be eligible. If there is a need to manage the gains made by BTO flat owners when they sell their units, policies such as that of clawing back some of the sales proceeds of resale units, as is the case with flats sold under the PLH model, can be put in place.
Public housing here serves a social purpose of building diverse and inclusive communities, where people from different walks of life can live together, interact, and foster strong social ties. Thus, it can be beneficial for as many people as possible to experience HDB living.
Household income alone does not fully reflect the purchasing power of a couple. Lower-income couples, who have generous and well-off parents, may be able to comfortably buy private homes. In contrast, higher-income couples, who need to support family members, may find it hard to fund a private or resale HDB home purchase.
However, it may be inopportune to raise the income ceiling this year given the high subscription rates for recent BTO exercises.
Sure, the HDB is building more new flats to meet demand. But allowing more people to buy BTO flats could add to the difficulty faced by BTO applicants in securing a unit.
Invariably, the timing on when to raise the income ceiling for BTO flats is tricky. Also, should the income ceiling rise by more than S$2,000?
What may be worth considering is to adjust the income ceiling at fixed intervals based on a prescribed formula. For example, the income ceiling can be set at the 10th- or 12th- or 15th-highest percentile of household income of resident employed households, and revised annually based on the change in income.
Raising the income ceiling on a more frequent basis in the last decade has given more couples a chance to own a public housing flat at an affordable price.
As the HDB boldly builds new flats in prime areas and keeps them within reach of some of the less well-off with the PLH model, perhaps the government could let more citizens have the privilege of buying BTO flats.
Some of the well-off, who may benefit from spending less to buy a BTO home than a HDB resale or private home, could hopefully then go on to have more kids or start businesses - with such efforts contributing to the national good.
Row of Club Street shophouses put on market for S$28.5m or S$3,945 psf
The Business Times, 14 Feb 2022, Mon 3:49 pm
By Fiona Lam
FIVE adjoining shophouses at 1, 3, 5, 7 and 9 Club Street, within the Telok Ayer conservation area in the Central Business District, have been offered for sale with a guide price of S$28.5 million, exclusive marketing agent Savills Singapore said.
The site comprises 2 land titles: 1, 3 and 5 Club Street, which are 3 storeys high with an attic; and 7 and 9 Club Street, which are 2 storeys high.
The guide price works out to about S$3,945 per square foot (psf) based on the floor area. The shophouses span an estimated total built-up area of some 7,225 square feet (sq ft) and sit on a combined land of around 3,557 sq ft.
They come with food and beverage (F&B) approvals for the entire ground floor. These spaces are leased to popular F&B operators, including French wine bistro Merci Marcel, whose website states its address as 7-9 Club Street; Parallel Coffee Roasters, occupying 3 Club Street; and Yen Bar, at 1 Club Street.
The upper floors are offices occupied by multinational corporation tenants, Savills noted in a press statement on Monday (Feb 14).
In response to The Business Times' (BT) queries, the firm said that each of the 2 land titles is held by different names, but they are both related entities. They are a local Singapore family, who do not wish to disclose their identities at the moment, Savills added.
The firm also told BT on Monday that there are about 73 years remaining on the land tenure.
In July 2014, when the 5 shophouses had been put on the market with a S$22 million asking price, BT reported that 1, 3 and 5 Club Street were then owned by Citystate Properties, while 7 and 9 Club Street were owned by Ling Ai Ee, a shareholder of Citystate.
At the time, an insurance company occupied the ground level, and the upper levels were leased out as residences. Under the Urban Redevelopment Authority's Master Plan 2014, a stretch of Club Street and Gemmill Lane, including the 5 shophouses, was rezoned to commercial use, from the previous zoning of residential with first-storey commercial use.
As the shophouses sit on land zoned for commercial use, foreigners and companies are eligible to buy them. There is no additional buyer's stamp duty or seller's stamp duty imposed on the purchase of the properties, Savills said.
They also command a triple road frontage that is 50 metres wide, along Cross Street, Club Street and Gemmill Lane.
Savills Singapore associate director for investment sales and capital markets, Sophia Lim, said: "Hardly ever on the market, a standalone island site boasting prominent triple road frontages in the beating heart of the Central Business District is far and few between."
The properties are across the road from Far East Square and Cross Street Exchange, and an estimated 3-minute walk to Telok Ayer MRT station.
Also in the vicinity is the 8 Club Street hotel, slated for completion by the end of 2022. The upcoming 19-storey upscale development will have about 900 rooms as well as commercial spaces, and provide direct sheltered access via an underground pedestrian link to Chinatown MRT station, Savills said.
Lim noted that the 5 shophouses may thus see further rental and capital value upside as the hotel could boost footfall, traffic and vibrancy in the area in the near term.
She added that the precinct is exciting, fast-growing and still undergoing urban transformation.
The sale of 1, 3, 5, 7 and 9 Club Street will be conducted through an expression of interest exercise, which closes on Mar 29 at 3pm.
Sales of shophouses in Singapore hit an all-time high value of S$1.9 billion in 2021 amid bullish investor sentiment, surging by some S$1 billion from 2020, Knight Frank said in a report this January. The real estate consultancy foresees moderate spillover demand from the residential sector in 2022, as commercially zoned shophouses are not affected by the latest cooling measures.