reporter2
29-03-22, 10:39
Positive rental momentum buoys home landlords but challenges loom
They may want to temper their optimism on rental outlook as supply of private homes is rising; their tax burden could also increase further
Mar 29, 2022
https://i.imgur.com/JFeSSUi.png
IN THE game Monopoly, players set out to own properties to grow rich by collecting rent from their opponents. Whether inspired by this game or by friends and relatives, many people here aspire to be a landlord. Own another home, besides the one that is owner occupied, and collect rent to fund retirement needs.
Private residential landlords can cheer that rents rose 9.9 per cent in Q4 2021 from a year ago, almost in line with the 10.6 per cent rise in private home prices according to data by the Urban Redevelopment Authority (URA). But rental rates of homes have generally grown at a much slower pace than prices.
Over periods of 5, 10 and 20 years to 2021, private home prices rose 26.5 per cent, 17.8 per cent and 107.2 per cent respectively while rental rates rose 9.3 per cent, 0 per cent, and 66 per cent respectively, based on URA's data.
Perhaps being a tenant works fine as the rental rate was flat over a 10 year period. Over a 20 year period, the rental rate grew at a compound annual growth rate (CAGR) of 2.6 per cent. Meanwhile, median household income of resident employed households rose at a CAGR of 3.1 per cent and 3.6 per cent for the 10 years and 20 years to 2021 respectively.
Low interest rates
Cheap home loans have contributed to prices rising faster than rental rates.
Some home loans have mortgage rates that are pegged to the Singapore Overnight Rate Average (SORA). Today, the 3-month compounded SORA is over 0.2 per cent per annum compared with over 1.2 per cent in early 2020 and over 3 per cent in early 2007.
With low borrowing costs, home buyers can accept a lower rental yield from their private home investments.
The trend of home prices rising faster than home rental rates though could stop or reverse if interest rates rise substantially.
A home buyer who relies on rental income to service a home loan may have little buffer. Assume a buyer takes out a S$400,000 loan with a 25 year tenure to buy a S$1 million home, which generates annual net income of S$20,000 based on a net yield of 2 per cent. With an interest rate of 1.3 per cent per annum on a floating rate loan, annual loan repayment is S$18,744.
If the home loan's annual interest rate rises to 1.86 per cent or more, the home loan repayment amount exceeds the net income of the property.
However, even if interest rates rise, residential landlords can take comfort that rents may continue rising this year according to property analysts. Vacancy rate of private homes excluding executive condominiums fell to 6 per cent at the end of Q4 2021 from 6.4 per cent in the previous quarter.
Rental demand
Rental demand be it of HDB or private homes has been helped by home buyers who are facing delays in completion of their new homes, single professionals working from home, long-term visit pass holders who have stayed in Singapore amid the pandemic and Malaysians who were stuck here due to pandemic-related curbs.
More rental demand may come from foreign expatriates, business persons and students as international travel picks up. Some Malaysians though may vacate their rental homes as ease of travel between Singapore and Malaysia improves.
Residential landlords may want to temper their optimism on the rental outlook as supply of private homes is rising. Around 11,247 and 19,840 new private homes and executive condominiums are slated for completion in 2022 and 2023 respectively.
Longer term, a critical figure to track for rental demand of private homes here is the number of employment pass (EP) holders. Over the past few years, the number of EP holders has declined - 161,700 as at Dec 2021 versus 193,700 as at Dec 2019. How will the higher minimum qualifying salary for new EP applicants and the new points-based system to assess EP applicants impact the growth in the number of EP holders going forward?
Another factor to consider is whether more people will rent instead of own a home. Perhaps some people may choose to rent a home as they do not want to tie up large sums in a home so that funds can be used to generate investment returns.
Also, with high transaction taxes, some foreigners who live here may rent a home instead of buying one.
There can be potential game changers such as the Johor Bahru-Singapore Rapid Transit System, which is scheduled to begin commercial operations in a few years time. Perhaps more people may in future own a cheaper home across the causeway while renting a place here.
Challenges
In the longer term, policy moves may hurt residential landlords. Property taxes rates for homes will go up starting from 2023, with high-end homes seeing a steeper increase.
For non-owner-occupied homes, the property tax rate will rise from 10-20 per cent of annual value presently, to 11-27 per cent from Jan 1, 2023, and 12-36 per cent from Jan 1, 2024.
Some analysts see the property tax hike on homes held for investment as manageable. Still, the pain of holding an investment home that is vacant increases. More worryingly, the tax burden on residential landlords could rise even more in future as the government seeks to raise more revenue to fund rising expenditure such as on health care.
Residential landlords may also have to deal with strong competition from serviced residences and co-living spaces. Serviced residence operators that are active here such as The Ascott Limited, Far East Hospitality, Frasers Hospitality, Oakwood and Pan Pacific Hotels Group can leverage economies of scale, customer network, professional know-how and branding in competing for long stay guests.
Collecting rent from owning a home can be a good source of recurrent income. But it may take hard work and judicious spending on asset enhancement to ensure that one's home can compete for tenants.
Policies that discourage rent seeking activities and promote more economically productive activities will further complicate the long term picture for residential landlords.
They may want to temper their optimism on rental outlook as supply of private homes is rising; their tax burden could also increase further
Mar 29, 2022
https://i.imgur.com/JFeSSUi.png
IN THE game Monopoly, players set out to own properties to grow rich by collecting rent from their opponents. Whether inspired by this game or by friends and relatives, many people here aspire to be a landlord. Own another home, besides the one that is owner occupied, and collect rent to fund retirement needs.
Private residential landlords can cheer that rents rose 9.9 per cent in Q4 2021 from a year ago, almost in line with the 10.6 per cent rise in private home prices according to data by the Urban Redevelopment Authority (URA). But rental rates of homes have generally grown at a much slower pace than prices.
Over periods of 5, 10 and 20 years to 2021, private home prices rose 26.5 per cent, 17.8 per cent and 107.2 per cent respectively while rental rates rose 9.3 per cent, 0 per cent, and 66 per cent respectively, based on URA's data.
Perhaps being a tenant works fine as the rental rate was flat over a 10 year period. Over a 20 year period, the rental rate grew at a compound annual growth rate (CAGR) of 2.6 per cent. Meanwhile, median household income of resident employed households rose at a CAGR of 3.1 per cent and 3.6 per cent for the 10 years and 20 years to 2021 respectively.
Low interest rates
Cheap home loans have contributed to prices rising faster than rental rates.
Some home loans have mortgage rates that are pegged to the Singapore Overnight Rate Average (SORA). Today, the 3-month compounded SORA is over 0.2 per cent per annum compared with over 1.2 per cent in early 2020 and over 3 per cent in early 2007.
With low borrowing costs, home buyers can accept a lower rental yield from their private home investments.
The trend of home prices rising faster than home rental rates though could stop or reverse if interest rates rise substantially.
A home buyer who relies on rental income to service a home loan may have little buffer. Assume a buyer takes out a S$400,000 loan with a 25 year tenure to buy a S$1 million home, which generates annual net income of S$20,000 based on a net yield of 2 per cent. With an interest rate of 1.3 per cent per annum on a floating rate loan, annual loan repayment is S$18,744.
If the home loan's annual interest rate rises to 1.86 per cent or more, the home loan repayment amount exceeds the net income of the property.
However, even if interest rates rise, residential landlords can take comfort that rents may continue rising this year according to property analysts. Vacancy rate of private homes excluding executive condominiums fell to 6 per cent at the end of Q4 2021 from 6.4 per cent in the previous quarter.
Rental demand
Rental demand be it of HDB or private homes has been helped by home buyers who are facing delays in completion of their new homes, single professionals working from home, long-term visit pass holders who have stayed in Singapore amid the pandemic and Malaysians who were stuck here due to pandemic-related curbs.
More rental demand may come from foreign expatriates, business persons and students as international travel picks up. Some Malaysians though may vacate their rental homes as ease of travel between Singapore and Malaysia improves.
Residential landlords may want to temper their optimism on the rental outlook as supply of private homes is rising. Around 11,247 and 19,840 new private homes and executive condominiums are slated for completion in 2022 and 2023 respectively.
Longer term, a critical figure to track for rental demand of private homes here is the number of employment pass (EP) holders. Over the past few years, the number of EP holders has declined - 161,700 as at Dec 2021 versus 193,700 as at Dec 2019. How will the higher minimum qualifying salary for new EP applicants and the new points-based system to assess EP applicants impact the growth in the number of EP holders going forward?
Another factor to consider is whether more people will rent instead of own a home. Perhaps some people may choose to rent a home as they do not want to tie up large sums in a home so that funds can be used to generate investment returns.
Also, with high transaction taxes, some foreigners who live here may rent a home instead of buying one.
There can be potential game changers such as the Johor Bahru-Singapore Rapid Transit System, which is scheduled to begin commercial operations in a few years time. Perhaps more people may in future own a cheaper home across the causeway while renting a place here.
Challenges
In the longer term, policy moves may hurt residential landlords. Property taxes rates for homes will go up starting from 2023, with high-end homes seeing a steeper increase.
For non-owner-occupied homes, the property tax rate will rise from 10-20 per cent of annual value presently, to 11-27 per cent from Jan 1, 2023, and 12-36 per cent from Jan 1, 2024.
Some analysts see the property tax hike on homes held for investment as manageable. Still, the pain of holding an investment home that is vacant increases. More worryingly, the tax burden on residential landlords could rise even more in future as the government seeks to raise more revenue to fund rising expenditure such as on health care.
Residential landlords may also have to deal with strong competition from serviced residences and co-living spaces. Serviced residence operators that are active here such as The Ascott Limited, Far East Hospitality, Frasers Hospitality, Oakwood and Pan Pacific Hotels Group can leverage economies of scale, customer network, professional know-how and branding in competing for long stay guests.
Collecting rent from owning a home can be a good source of recurrent income. But it may take hard work and judicious spending on asset enhancement to ensure that one's home can compete for tenants.
Policies that discourage rent seeking activities and promote more economically productive activities will further complicate the long term picture for residential landlords.