Do rising rents make Singapore homes ripe for investment?

In the 10-year period from Q4 2011 to Q4 2021, typical prime net yields fell from 2.49% to 1.87%: study

Feb 15, 2022

Singapore

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) said: "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.

Robust demand

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.