New Reporter
05-04-23, 09:25
Amid housing rental boom, where are Singapore’s sweet spots for yield?
A dramatic jump in private residential rents last year boosted yields for many owners. Which regions and postal districts recorded the highest rental yields? How should one select a property to buy for rental income?
Apr 04, 2023
PRIVATE residential rentals surged in Singapore at a much faster pace than private home prices last year, resulting in an increase in rental yields.
Knight Frank’s analysis of URA Realis data showed that the island-wide gross rental yield for 99-year leasehold non-landed private homes stood at 4.1 per cent in the fourth quarter of last year, a 0.6 percentage point year-on-year increase. From the trough during the pandemic in the second quarter (Q2) of 2020, the yield has risen 0.8 percentage point.
For freehold properties, the yield has appreciated 0.5 percentage point year on year and 0.6 percentage point since Q2 2020 to reach 3.4 per cent in Q4 2022, for the first time since Q4 2014.
Those investing in private homes here are generally not too hung up on rental yields, which are typically low. Their primary goal is capital appreciation; that said, the strong rental escalation since last year has been music to their ears.
https://i.imgur.com/rQufQPE.png
The steep rent rise came on the back of a sharp fall in housing completions when the pandemic struck. “Construction delays led to some Singaporeans and permanent residents who had been awaiting completion of their new homes, to turn to the leasing market in the interim,” said Leonard Tay, head of research at Knight Frank Singapore.
PropNex’s head of research and content, Wong Siew Ying, said that the reopening of the economy also led to the return of students, foreign workers and expatriates.
Edmund Tie’s head of research and consulting, Lam Chern Woon, said: “The influx of senior professionals who exited Hong Kong and China would have also led to strong rental pressure in the top-end Singapore residential market, and caused a cascading rental rate effect to other segments. Market euphoria and fomo (fear of missing out) factors might also have led to landlords pushing up rents aggressively and tenants making urgent bids to secure units.”
Last year, the Urban Redevelopment Authority’s (URA) rental index for private homes soared 29.7 per cent over the preceding year, nearly 3.5 times the 8.6 per cent rise in its private home price index.
Sleepless tenants, relief on the way
Lam gave some perspective on the stats: “If we consider the horizon from 2017, the rental growth in this cycle is not completely out of line with property price growth. The fact remains that rents picked up later than property prices, and the sharp pace of rental growth from 2022 is causing considerable anxiety for tenants who find themselves priced out.”
Market watchers noted the strong jump in rents was also a growing concern for corporates with overseas staff working in Singapore. However, the tight supply situation is expected to improve some time this year.
From a low of 3,433 new private home completions in 2020, the figure started to recover to 6,388 units in 2021 and 9,526 units in 2022. This year, as more of the construction backlog clears, an estimated 17,427 units are expected to receive Temporary Occupation Permits (TOP).
Said Wong of PropNex: “This year, we are expecting rentals to stabilise or perhaps rise at a much slower pace – depending on the locations and attributes of properties – as rent resistance will set in and curb further upside, after the robust growth witnessed last year.”
Tay of Knight Frank said: “Until such time when the majority of the 17,000-plus new private homes slated for completion this year are ready for occupation, rents are likely to continue growing, albeit at a much slower clip than in 2022. Notwithstanding tenants’ affordability issues taking centre stage, rental increase has every chance of moderately outpacing price increase, pointing to potential for a marginal yield expansion this year.”
Edmund Tie’s Lam said that on the back of expected softening in both rental growth and price growth this year, yields could trade sideways. “There could be growing risks of a rental correction in the later part of this year, given the higher supply completions, coupled with the difficult business environment and current elevated rents.”
Yield draw muted by hikes in interest rates, property tax
A seasoned property investor said that investing in a residential property for rental income is not so straightforward at this juncture. “Although gross rental yields have improved in the past few years, property taxes and interest rates on mortgages are also going up. And the buyer’s stamp duty was recently raised by 2 percentage points.”
Even after the wave of supernormal rent hikes in the Singapore private residential market subsides, for investors who still need to find tenants while they wait to crystallise their desired level of capital appreciation, Knight Frank’s analysis of gross rental yields provides some interesting insights.
The property consulting group estimated gross rental yields on a quarterly basis between 2000 and 2022, based on median per square foot (psf) rents for non-landed private homes (excluding executive condominium or EC units) and the median psf prices of 99-year and freehold properties. (ECs are a public-private housing hybrid.)
The rent figures were for gross rental payable by the tenant without factoring in maintenance fee, property tax and other expenses incurred by the owner, as the divergence of these variables makes for difficult comparison over time and across different segments. Prices were based solely on resale transactions, as these reflected the value of private homes that were ready for occupation.
Rental yields were typically lower for freehold properties than 99-year properties, due to the higher values that freehold properties command. However, other property attributes such as age, quality and specific location might have led to instances where yields of freehold properties might have overtaken those for 99-year ones in any sizeable region with a wide range of housing projects.
https://i.imgur.com/kgbA6nw.png
Slicing and dicing
Knight Frank’s number crunching showed that on an island-wide basis between 2000 and 2010, quarterly gross rental yields on 99-year properties averaged 4.8 per cent, and yields on freehold properties averaged 3.7 per cent.
A high of 6.1 per cent yield for 99-year properties was posted in Q3 2008 and 5.0 per cent for freehold yields between Q2 to Q4 2008. This followed Singapore’s emergence as an attractive investment and global business destination after the announcement in 2005 that the Republic would have two integrated resorts (with casinos). Rents remained elevated in 2008 while prices had started to decrease from the fallout of the sub-prime crisis.
However, from 2011 to 2022, the quarterly average yield compressed to 4.0 per cent for 99-year properties and 3.2 per cent for freehold properties. This was due to a surge in private home completions from 2014 to 2017.
Besides an island-wide analysis, Knight Frank also drilled down yields geographically to the three regions: the prime areas or core central region (CCR); the city fringe or rest of central region (RCR); and the suburbs or outside central region (OCR). (See table titled “Yields improve as rental gains outpace price increases”).
The property consulting group also sliced and diced the data by postal district (see table “Where are the highest yields?”). The finding was that although prime Districts 9 and 10 in the CCR and the popular District 15 in the RCR registered among the highest volumes of leasing transactions in 2022, it was mostly selected districts in the OCR and a few from the RCR that had some of the highest rental yields.
“This was due to the comparatively lower capital values – against a period of accommodation shortage pushing up returns in some of the less prominent non-central neighbourhoods,” said Tay.
https://i.imgur.com/wrFDETW.png
Postal districts with highest yields
In the 99-year leasehold category, District 25 (which includes the Woodgrove estate in Woodlands) was top with an estimated average yield of 4.2 per cent in 2022, followed by District 28 (including Sengkang and Seletar locales) at 3.9 per cent. Tied in third place were District 18 (Tampines, Pasir Ris) and District 27 (Yishun, Sembawang) at 3.8 per cent.
Among freehold residences, District 27 (Yishun, Sembawang) and the RCR District 14 (Geylang, Eunos) were top with an estimated 4.1 per cent yield, followed by District 13 (MacPherson, Braddell), also in the RCR at 3.9 per cent. Districts 18 (Tampines, Pasir Ris) and 28 (Seletar and Sengkang) were tied in third place at 3.8 per cent.
Summing up, Tay said: “While the prime and centrally located popular residential neighbourhoods remained popular with tenants in 2022, it was the more modest suburban condominiums in some of the comparatively more outlying locations that chalked up some of the best recurring income returns in a time of accommodation shortage.”
PropNex compiled a few actual examples of rising yields in each of the three regions between Q2 2020 and Q4 2022 (see table “Sample of rising yields”).
https://i.imgur.com/ef3Ym44.png
Cultural paradigm shift needed before yield play gains primacy
Like many other property market observers, Knight Frank’s Tay said the improvement in gross rental yields was unlikely to change the way people viewed investing in Singapore private residential property, with an eye on capital appreciation first and foremost. “If they can lease out the property and the rental income can cover part or all of their monthly mortgage repayments to the bank and/or other property expenses, they’re happy.”
“It would take a cultural paradigm shift for them to look at buying a private residential property as yield play, solely for recurring rental income. For that to have a chance of happening, we’ll need several years of rental increases consistently outpacing price growth...
“This phenomenon we saw last year of rental hikes outstripping price gains for Singapore private residential homes is temporary. It is more the exception than the norm if you look at history; this is also likely to be the case in future.”
Tay noted that Singapore had a very high rate of homeownership. “It is ingrained in our culture to own the roof over our head. In more recent years, we are seeing some younger working adults moving out of their parents’ homes to live in a rental property. But these are still in the minority. Most in the younger generation still aim to buy their own home,” he said.
Higher yield versus ease of renting
PropNex chief executive officer, Ismail Gafoor, said: “A project in a more central location may be pricier and therefore command lower rental yield, but it may be in high demand among tenants due to its proximity to the city and amenities. Conversely, another project in a less convenient location could have a higher yield but may not find tenants so easily.”
Lam from Edmund Tie, too, said: “In general, higher yields are to be found in the mass market, but we expect stronger capital appreciation in the prime segments.”
In the same vein, Ismail gave this advice to investors: “Rental yield is an indicator to assess the property’s investment potential, but it is also important not to get too fixated on it and miss out on other factors. Buyers should consider the prospects of capital appreciation over time. This should not be disregarded, as the capital growth from asset price appreciation over the mid- to long-term may also substantially boost total returns and justify a lower yield.”
The current high interest rate environment eats into net rental yield. The loan quantum will also have a bearing on cash flow.
Knight Frank’s Tay said: “If a buyer’s loan-to-value is less than 50 per cent, there is a better chance of the rental income being sufficient to cover the monthly mortgage instalment to the bank, especially with rents in the current market increasing faster than prices.”
To buy a new unit, or older resale unit?
For those thinking of investing in a private home and renting it out, picking a completed unit in the resale market would typically result in a higher rental yield due to the lower capital value compared with the price premium for new uncompleted units, all other factors remaining constant, said Tay.
Ismail of PropNex said the key benefits of buying uncompleted new homes were mainly “getting a brand, new product with (a) fresh lease, being able to enjoy the progressive payment scheme, and possibly a better chance at capital appreciation from having bought the property first-hand from the developer”.
On the flip side, Lam pointed out that “buying units in projects under construction involves some uncertainty as to the state of the rental market upon completion, and the deluge of investors putting up their units for rent upon TOP could lead to competition”.
Picking up a completed private home from the resale market involves having to cough up the full purchase price within a few months. “However, the wait time to let out the unit could be shorter. In addition, some projects have established tenant communities, which improves the ease of securing tenants,” Lam noted.
He added that acquiring older units could entail retrofitting works.
As property buyers and landlords ruminate on their options, they might want to be mindful not to kill the goose that lays the golden eggs. Although it is a landlord’s market now, there will eventually come a time when the balance of power will switch to the tenant, especially with the projected supply of new housing completions in the next couple of years.
https://www.businesstimes.com.sg/opinion-features/amid-housing-rental-boom-where-are-singapores-sweet-spots-yield
A dramatic jump in private residential rents last year boosted yields for many owners. Which regions and postal districts recorded the highest rental yields? How should one select a property to buy for rental income?
Apr 04, 2023
PRIVATE residential rentals surged in Singapore at a much faster pace than private home prices last year, resulting in an increase in rental yields.
Knight Frank’s analysis of URA Realis data showed that the island-wide gross rental yield for 99-year leasehold non-landed private homes stood at 4.1 per cent in the fourth quarter of last year, a 0.6 percentage point year-on-year increase. From the trough during the pandemic in the second quarter (Q2) of 2020, the yield has risen 0.8 percentage point.
For freehold properties, the yield has appreciated 0.5 percentage point year on year and 0.6 percentage point since Q2 2020 to reach 3.4 per cent in Q4 2022, for the first time since Q4 2014.
Those investing in private homes here are generally not too hung up on rental yields, which are typically low. Their primary goal is capital appreciation; that said, the strong rental escalation since last year has been music to their ears.
https://i.imgur.com/rQufQPE.png
The steep rent rise came on the back of a sharp fall in housing completions when the pandemic struck. “Construction delays led to some Singaporeans and permanent residents who had been awaiting completion of their new homes, to turn to the leasing market in the interim,” said Leonard Tay, head of research at Knight Frank Singapore.
PropNex’s head of research and content, Wong Siew Ying, said that the reopening of the economy also led to the return of students, foreign workers and expatriates.
Edmund Tie’s head of research and consulting, Lam Chern Woon, said: “The influx of senior professionals who exited Hong Kong and China would have also led to strong rental pressure in the top-end Singapore residential market, and caused a cascading rental rate effect to other segments. Market euphoria and fomo (fear of missing out) factors might also have led to landlords pushing up rents aggressively and tenants making urgent bids to secure units.”
Last year, the Urban Redevelopment Authority’s (URA) rental index for private homes soared 29.7 per cent over the preceding year, nearly 3.5 times the 8.6 per cent rise in its private home price index.
Sleepless tenants, relief on the way
Lam gave some perspective on the stats: “If we consider the horizon from 2017, the rental growth in this cycle is not completely out of line with property price growth. The fact remains that rents picked up later than property prices, and the sharp pace of rental growth from 2022 is causing considerable anxiety for tenants who find themselves priced out.”
Market watchers noted the strong jump in rents was also a growing concern for corporates with overseas staff working in Singapore. However, the tight supply situation is expected to improve some time this year.
From a low of 3,433 new private home completions in 2020, the figure started to recover to 6,388 units in 2021 and 9,526 units in 2022. This year, as more of the construction backlog clears, an estimated 17,427 units are expected to receive Temporary Occupation Permits (TOP).
Said Wong of PropNex: “This year, we are expecting rentals to stabilise or perhaps rise at a much slower pace – depending on the locations and attributes of properties – as rent resistance will set in and curb further upside, after the robust growth witnessed last year.”
Tay of Knight Frank said: “Until such time when the majority of the 17,000-plus new private homes slated for completion this year are ready for occupation, rents are likely to continue growing, albeit at a much slower clip than in 2022. Notwithstanding tenants’ affordability issues taking centre stage, rental increase has every chance of moderately outpacing price increase, pointing to potential for a marginal yield expansion this year.”
Edmund Tie’s Lam said that on the back of expected softening in both rental growth and price growth this year, yields could trade sideways. “There could be growing risks of a rental correction in the later part of this year, given the higher supply completions, coupled with the difficult business environment and current elevated rents.”
Yield draw muted by hikes in interest rates, property tax
A seasoned property investor said that investing in a residential property for rental income is not so straightforward at this juncture. “Although gross rental yields have improved in the past few years, property taxes and interest rates on mortgages are also going up. And the buyer’s stamp duty was recently raised by 2 percentage points.”
Even after the wave of supernormal rent hikes in the Singapore private residential market subsides, for investors who still need to find tenants while they wait to crystallise their desired level of capital appreciation, Knight Frank’s analysis of gross rental yields provides some interesting insights.
The property consulting group estimated gross rental yields on a quarterly basis between 2000 and 2022, based on median per square foot (psf) rents for non-landed private homes (excluding executive condominium or EC units) and the median psf prices of 99-year and freehold properties. (ECs are a public-private housing hybrid.)
The rent figures were for gross rental payable by the tenant without factoring in maintenance fee, property tax and other expenses incurred by the owner, as the divergence of these variables makes for difficult comparison over time and across different segments. Prices were based solely on resale transactions, as these reflected the value of private homes that were ready for occupation.
Rental yields were typically lower for freehold properties than 99-year properties, due to the higher values that freehold properties command. However, other property attributes such as age, quality and specific location might have led to instances where yields of freehold properties might have overtaken those for 99-year ones in any sizeable region with a wide range of housing projects.
https://i.imgur.com/kgbA6nw.png
Slicing and dicing
Knight Frank’s number crunching showed that on an island-wide basis between 2000 and 2010, quarterly gross rental yields on 99-year properties averaged 4.8 per cent, and yields on freehold properties averaged 3.7 per cent.
A high of 6.1 per cent yield for 99-year properties was posted in Q3 2008 and 5.0 per cent for freehold yields between Q2 to Q4 2008. This followed Singapore’s emergence as an attractive investment and global business destination after the announcement in 2005 that the Republic would have two integrated resorts (with casinos). Rents remained elevated in 2008 while prices had started to decrease from the fallout of the sub-prime crisis.
However, from 2011 to 2022, the quarterly average yield compressed to 4.0 per cent for 99-year properties and 3.2 per cent for freehold properties. This was due to a surge in private home completions from 2014 to 2017.
Besides an island-wide analysis, Knight Frank also drilled down yields geographically to the three regions: the prime areas or core central region (CCR); the city fringe or rest of central region (RCR); and the suburbs or outside central region (OCR). (See table titled “Yields improve as rental gains outpace price increases”).
The property consulting group also sliced and diced the data by postal district (see table “Where are the highest yields?”). The finding was that although prime Districts 9 and 10 in the CCR and the popular District 15 in the RCR registered among the highest volumes of leasing transactions in 2022, it was mostly selected districts in the OCR and a few from the RCR that had some of the highest rental yields.
“This was due to the comparatively lower capital values – against a period of accommodation shortage pushing up returns in some of the less prominent non-central neighbourhoods,” said Tay.
https://i.imgur.com/wrFDETW.png
Postal districts with highest yields
In the 99-year leasehold category, District 25 (which includes the Woodgrove estate in Woodlands) was top with an estimated average yield of 4.2 per cent in 2022, followed by District 28 (including Sengkang and Seletar locales) at 3.9 per cent. Tied in third place were District 18 (Tampines, Pasir Ris) and District 27 (Yishun, Sembawang) at 3.8 per cent.
Among freehold residences, District 27 (Yishun, Sembawang) and the RCR District 14 (Geylang, Eunos) were top with an estimated 4.1 per cent yield, followed by District 13 (MacPherson, Braddell), also in the RCR at 3.9 per cent. Districts 18 (Tampines, Pasir Ris) and 28 (Seletar and Sengkang) were tied in third place at 3.8 per cent.
Summing up, Tay said: “While the prime and centrally located popular residential neighbourhoods remained popular with tenants in 2022, it was the more modest suburban condominiums in some of the comparatively more outlying locations that chalked up some of the best recurring income returns in a time of accommodation shortage.”
PropNex compiled a few actual examples of rising yields in each of the three regions between Q2 2020 and Q4 2022 (see table “Sample of rising yields”).
https://i.imgur.com/ef3Ym44.png
Cultural paradigm shift needed before yield play gains primacy
Like many other property market observers, Knight Frank’s Tay said the improvement in gross rental yields was unlikely to change the way people viewed investing in Singapore private residential property, with an eye on capital appreciation first and foremost. “If they can lease out the property and the rental income can cover part or all of their monthly mortgage repayments to the bank and/or other property expenses, they’re happy.”
“It would take a cultural paradigm shift for them to look at buying a private residential property as yield play, solely for recurring rental income. For that to have a chance of happening, we’ll need several years of rental increases consistently outpacing price growth...
“This phenomenon we saw last year of rental hikes outstripping price gains for Singapore private residential homes is temporary. It is more the exception than the norm if you look at history; this is also likely to be the case in future.”
Tay noted that Singapore had a very high rate of homeownership. “It is ingrained in our culture to own the roof over our head. In more recent years, we are seeing some younger working adults moving out of their parents’ homes to live in a rental property. But these are still in the minority. Most in the younger generation still aim to buy their own home,” he said.
Higher yield versus ease of renting
PropNex chief executive officer, Ismail Gafoor, said: “A project in a more central location may be pricier and therefore command lower rental yield, but it may be in high demand among tenants due to its proximity to the city and amenities. Conversely, another project in a less convenient location could have a higher yield but may not find tenants so easily.”
Lam from Edmund Tie, too, said: “In general, higher yields are to be found in the mass market, but we expect stronger capital appreciation in the prime segments.”
In the same vein, Ismail gave this advice to investors: “Rental yield is an indicator to assess the property’s investment potential, but it is also important not to get too fixated on it and miss out on other factors. Buyers should consider the prospects of capital appreciation over time. This should not be disregarded, as the capital growth from asset price appreciation over the mid- to long-term may also substantially boost total returns and justify a lower yield.”
The current high interest rate environment eats into net rental yield. The loan quantum will also have a bearing on cash flow.
Knight Frank’s Tay said: “If a buyer’s loan-to-value is less than 50 per cent, there is a better chance of the rental income being sufficient to cover the monthly mortgage instalment to the bank, especially with rents in the current market increasing faster than prices.”
To buy a new unit, or older resale unit?
For those thinking of investing in a private home and renting it out, picking a completed unit in the resale market would typically result in a higher rental yield due to the lower capital value compared with the price premium for new uncompleted units, all other factors remaining constant, said Tay.
Ismail of PropNex said the key benefits of buying uncompleted new homes were mainly “getting a brand, new product with (a) fresh lease, being able to enjoy the progressive payment scheme, and possibly a better chance at capital appreciation from having bought the property first-hand from the developer”.
On the flip side, Lam pointed out that “buying units in projects under construction involves some uncertainty as to the state of the rental market upon completion, and the deluge of investors putting up their units for rent upon TOP could lead to competition”.
Picking up a completed private home from the resale market involves having to cough up the full purchase price within a few months. “However, the wait time to let out the unit could be shorter. In addition, some projects have established tenant communities, which improves the ease of securing tenants,” Lam noted.
He added that acquiring older units could entail retrofitting works.
As property buyers and landlords ruminate on their options, they might want to be mindful not to kill the goose that lays the golden eggs. Although it is a landlord’s market now, there will eventually come a time when the balance of power will switch to the tenant, especially with the projected supply of new housing completions in the next couple of years.
https://www.businesstimes.com.sg/opinion-features/amid-housing-rental-boom-where-are-singapores-sweet-spots-yield