In the face of high home rentals, consider growing a build-to-rent segment

Mar 20, 2023

PROPERTY tax rates have risen for residential landlords. Borrowing costs are escalating for many homeowners.

Low-risk alternatives to investing in homes such as Singapore dollar fixed deposits, treasury bills and Singapore Savings Bonds are looking more attractive with higher interest rates offered.

However, residential landlords here are buoyed by rapidly rising rental rates. Based on the Urban Redevelopment Authority’s data, private home rentals jumped 29.7 per cent in 2022, after rising by 9.9 per cent in 2021.



Rentals also increased for Housing and Development Board (HDB) flats. Based on HDB’s data on approved applications to rent out HDB flats, the median rent of a four-room HDB flat rose by 25-33 per cent year on year to S$2,900 in Ang Mo Kio, S$3,200 in Clementi, S$3,600 in Queenstown and S$2,650 in Woodlands in Q4 2022.

Among luxury private homes, a four-bedroom unit at The Marq on Paterson Hill, was leased at S$100,000 a month starting from October 2022. In January, a detached landed home at Astrid Hill achieved monthly rent of S$170,000.

The government has acted to cool home prices, so they do not run ahead of economic fundamentals. Measures implemented included raising Additional Buyer’s Stamp Duty (ABSD) for many home buyers in mid-December 2021 and tightening limits on home loans in late-September 2022.

Impact of rising home rentals

Is there a need for heavy intervention to cool home rentals?

Generally, rental rates of HDB flats on the open market and private homes are private arrangements between owners and tenants. The rates depend on factors, such as location and provision of fittings and furniture in the property.

Higher home rentals help some retirees who rely substantially on collecting rental income. For these retirees, the higher rental income can help to mitigate the rising cost of living.

However, there are negatives arising from a rapid rise in home rentals.

Firstly, while many locals are homeowners, there are young adult Singaporeans who rent homes. This includes couples who are trying to secure a new HDB flat or waiting for their new home to be ready. Some singles, who are below 35 years old, may rent first, before they can buy an HDB home.

Some potential home buyers may rent a home first because they hope to accumulate more savings to make the down payment for a home purchase or are counting on earning higher income in future to boost their borrowing capacity to fund a purchase.

Amid costs of many items rising substantially, higher home rentals can hurt young adults who want a home to anchor themselves here and start a family.

Secondly, higher home rentals can make it trickier for locals who are looking to right size their homes.

As society ages, more people may want to trade their existing homes for cheaper replacement units to free up funds to help finance retirement needs.

Homeowners looking to sell a private home and buy an HDB unit may need to rent a place in the interim. A wait-out period of 15 months applies for private homeowners as well as former private homeowners who want to buy a non-subsidised HDB resale flat. The wait-out period will not apply to people aged 55 and above who are moving from private homes to four-room or smaller resale flats.

Locals selling owner-occupied homes may need to rent in the interim to give themselves time and peace of mind when finding a replacement home, or because of tax reasons.

After selling a home, which is his or her sole property here, a single Singapore citizen may have to rent a home first, before buying another home, in order to avoid paying ABSD.

Married couples, comprising at least one citizen, who jointly own a private home, can get full ABSD remission when buying a new home, without first selling the existing home, subject to meeting various conditions.

One condition is the first home must be sold within six months of the date of purchase of the second property for completed property, or the issue date of the Temporary Occupation Permit / Certificate of Statutory Completion, whichever is earlier, if the home was uncompleted at the time of purchase.

Still, some married couples may sell their owner-occupied home first and rent in the interim before buying a replacement home, in order to avoid coming under time pressure to sell their existing home.

Thirdly, many foreigners rent homes here. As at mid-2022, Singapore citizens and permanent residents (PRs) made up nearly two-thirds of the total labour force of 3.75 million.

Many highly-skilled foreigners, who can afford to buy homes here, may rent because of uncertainty over the length of their stints here, and ABSD of 30 per cent for a non-PR foreigner buying any home here.

Having competitive home rentals matters, as global companies may factor in home leasing costs when deciding where to grow operations and base talent.

Also, young people from the region could be put off pursuing further education and job opportunities here due to high home rentals.

In short, high home rentals can hurt Singapore’s ability to draw global talent and young people, who contribute to the economy and the city’s vibrancy.

Build-to-rent

Nonetheless, it may be best to let market forces dictate home rentals. Tenants have choice with locations, age of units, unit sizes, private or public housing as well as over renting a whole unit or a room.

In the longer term, growing a build-to-rent (BTR) segment in the private housing market here merits consideration. BTR housing is a proven investment asset class in some other jurisdictions.

The government could sell sites for BTR housing projects. A buyer of such a site can be mandated to develop the site for housing units that are to be put up for lease and not strata sold. Maybe, BTR housing developers need not pay ABSD.

Having a vibrant BTR segment can provide more choice to home renters and rental homes that are professionally managed.

Owners of BTR housing developments will drive rent hard, but they may deliver a high quality experience to users. Home renters benefit if BTR housing developments compete among themselves and with other residential landlords to meet diverse needs by offering strong products as well as competitive rates.

Over time, Singapore’s capital markets gain too if investors can invest in listed BTR trusts.

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