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Published August 11, 2011
Leasing demand to stay solid
GCB market will remain tight while non-landed properties will continue to see growth, say ALAN CHEONG and PATRICK LAI
RENTALS for luxury properties in Singapore saw significant increases last year. For non- landed properties, 2010 ended with monthly median rentals of $4.29 per square foot, surpassing the previous peak of $4.22 psf achieved in Q3 2008, and rising 16.2 per cent over the corresponding period the previous year.
This year got off to a good start with H1 2011 rentals rising 3.7 per cent to reach $4.45 psf per month. Over the longer term from end-2000 till end-2010, rentals have been growing at an annual compounded rate of 5 per cent.
For 2005 till Q2 2011, rentals actually grew significantly by 11.2 per cent per annum. This period coincided with the increased number of foreigners and PRs coming into Singapore, boosting our population statistics. They averaged 134,000 per annum from 2005 to 2010, almost five times the 28,500 per year average in the first half of the decade.
Capital values of non-landed luxury properties have also been rising in a similar manner. For the decade 2000-2010, capital values of these properties rose by an average 4.1 per cent compounded rate. In the latter half of the decade up to Q2 2011, the annual increase was higher, at 8.9 per cent.
For foreign investors buying into this segment of the real estate market here, the gains have been exceptional. Against the US dollar (USD), the Singapore dollar (SGD) had been appreciating 3 per cent per annum from end-2000 till end-2010. For the shorter period 2005-Q2 2011, the SGD had appreciated 2.8 per cent pa. That means the total capital return in USD for investing in luxury non-landed properties here has been averaging about 12 per cent pa from 2005 to Q2 2011. Through the power of compounding, the investments in USD would have doubled in about 6.5 years! Put another way, if a foreign investor had bought a luxury non-landed property at the start of 2005, he or she would have seen a doubling of capital values by mid-2011, without even factoring in rental appreciation.
Initial yields have been quite stable. Despite yields hovering around the 2.5 per cent level, the spread over three-month interbank rates is more than enough to sustain capital values given current rents. Fears of rising interest rates, though valid, are not likely to force any major downside correction because evidence from the last decade shows that during the two periods when the three-month Sibor was above gross yields (2000-Q2 2001 and 2005-Q4 2007), capital values either stayed muted or rose sharply. This implies that the factors influencing prices were not just interest rates per se.
Leasing demand for luxury non-landed properties will continue to see strong growth in the coming years. Although the number of PRs and foreigners entering the population statistics is expected to slow, luxury non-landed properties will still be able 'to punch above its own weight' as PRs and foreigners are still expected to be a major part of our workforce. Even if the net average number of people obtaining PR or employment passes falls by half from the average 134,000 per annum from 2005 to 2010 to 67,000 per annum, there should still be ample demand for rental properties.
Assuming three persons per abode and assuming 15 per cent of the 67,000 rent non-landed properties within the Central Region (the Urban Redevelopment Authority categorises properties only by planning regions and the Central Region is where most of the luxury non-landed properties are located), there should be demand for an additional 3,350 units per annum or 16,750 units over the next five years.
Currently, the supply of non-landed properties that are in the construction or planning stage totals 42,448 units in the Central Region. These are scheduled to come onto the market over the next five years .
With about 16,750 foreigners and PRs who are assumed to lease such space over the same period, close to 40 per cent of the future supply in the Central Region should be taken up by them. With such a high percentage of leasing demand from foreigners and PRs, leasing activity would not only continue to remain high, but rentals should also perform well.
Good Class Bungalows (GCBs) are an exclusive category of bungalow housing with stringent planning guidelines. There are about 39 GCB Areas and these are in Districts 10, 11, 21 and 23. A bungalow that falls within a GCB Area is subject to a minimum land area of 1,400 square metres (15,070 sq ft) and building height of two storeys. There are about 2,300 completed GCBs on the island today, representing slightly over 3 per cent of all landed properties and about 22 per cent of all detached houses here.
The median rents for GCBs is $3.41 psf per month (based on built-up area) as at Q2 2011. Over the past decade, rentals have been stable, averaging 1.7 per cent compounded growth per annum. However, for the period 2005-Q2 2011, when the number of PRs and foreigners increased significantly, the average annual compounded rate of growth was 6 per cent. Increasingly, GCBs for rent have larger built-up to land area ratios. From observation, the provision of greater built-up space appears to be a recent and future trend and could moderate rentals on a psf basis for a few quarters as more of such properties are completed and leased out. The larger the built-up area, the lower the asking rentals on a psf per month built-up basis.
On an annual basis, since year 2002, GCB prices have never fallen, despite the severity of the global financial crisis of 2008.
In SGD terms, the average annual compounded rate of capital values has been a strong 8.8 per cent since 2000. However, if one measures capital growth rates from 2005, the average annual compounded rate of capital value growth is a whopping 20.6 per cent. GCBs should expect to see strong leasing demand and rentals are expected to increase due to limited supply. The GCB leasing market should remain tight because demand from top executives with the budget for these properties will meet limited supply. Vacancy levels are therefore likely to stay low.
Alan Cheong is associate director, research & consultancy, and Patrick Lai is director, corporate residential leasing at Savills Singapore
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