Stay awhile: How long-stay serviced apartments may change the housing landscape

The new long-stay serviced apartment format will have implications on Singapore’s rental market, but is likely to be a boon to developers

Mar 22, 2024

IN LATE November last year, the government unveiled a new category of serviced apartments following a boom in the rental market, with a longer minimum-stay requirement of three months to better meet demand.

At first glance, the new rental housing option appears late to the party as private residential rents have started to soften amid an easing in the housing shortage.

Yet, there may still be a place in the Singapore residential accommodation spectrum for long-stay serviced apartments.

Market watchers say they serve a niche segment that sits between the minimum seven-day stay for the prevailing serviced apartment type and the private residential rental market, where most landlords would issue leases of one to two years (although the minimum period stipulated by the Urban Redevelopment Authority, or URA, is three months).

“Minting the long-stay serviced apartment category may be timely given a nascent mindset change among some young Singaporeans who are open to renting initially when they fly the coop,” says Knight Frank Singapore’s research head, Leonard Tay.

Pockets of demand

The announcement of long-stay serviced apartments came after the URA’s rental index for private homes surged 58.3 per cent over a span of 11 quarters to the third quarter of 2023. This happened as demand soared when there were supply disruptions due to the pandemic.

However, the rental market may be reversing course. Quarter on quarter, URA’s rental index for private homes fell 2.1 per cent in Q4 2023. This was amid a doubling in the number of private home completions for the whole of last year to 19,968 units, from 9,526 units in 2022.

But there may still be pockets of demand.

Aside from some younger Singaporeans who might choose to rent first before buying, another segment of the resident population that has needed to turn to the rental market on an interim basis is those awaiting completion of their new or renovated homes.

Foreigners who travel to the city-state to study or work may also seek rental accommodation.

“While serviced apartments partially cater to this demand, potential tenants who need to rent serviced apartments for longer durations would have to compete with those seeking shorter stays, including tourists and business travellers,” URA said in December when explaining the need for long-stay serviced apartments.

Vincent Yeo, the chief executive officer of the managers of CDL Hospitality Trusts (CDLHT), notes: “Long-stay serviced apartments will help to address the gap for renters requiring more than three months but less than the typical one- or two-year lease periods required for normal housing.”

He adds: “Implicit in all this is the expected lower cost for this new rental housing option versus more transient options such as serviced apartments and hotels, and the avoidance of break costs for longer-term typical lease options, for durations of stay under one to two years.”

Boosting developers’ recurring income

To spur the development of this new rental housing format, the URA has so far revealed three sites on the confirmed list of the government land sales (GLS) programme – in Zion Road, Upper Thomson Road and Media Circle – that can potentially yield a total of 1,050 to 1,160 long-stay serviced apartments. There is also a GLS site next to Great World MRT station on the reserve list that can generate 200 to 220 such units.

Developers may also submit to URA proposals for this new rental housing type for their existing properties.

Long-stay serviced apartments are expected to be a boon for residential developers, providing them with a new source of recurring rental income.

“This can mitigate some of the risks from developing residential units in Singapore for sale, especially when homebuying demand is lacklustre and sales are slow,” says Tay of Knight Frank.

Developers have to complete a residential project and sell all its units within five years of buying the site for the project, in order to qualify for upfront remission of the additional buyer’s stamp duty (ABSD) on the site purchase; the remittable ABSD rate is at 35 per cent currently. The penalty for failing to meet the sales deadline would put most residential projects in the red, given thinned profit margins.

Leasing model not new to developers

Residential leasing is not a new strategy for developers. As JLL Singapore’s head of residential research, Chia Siew Chuin, notes: “In the past, some Singapore developers and corporations were able to retain units in their residential developments here for rental income.”

These may have encompassed entire developments, designated units or unsold units in certain projects.

For example, Pontiac Land Group has a residential leasing portfolio that includes the whole of its iconic Grange Road property The Colonnade and Hana on Tomlinson Road.

Far East Organization has more than 1,900 private rental homes – including the whole of Leonie Condotel, Amber Glades, Grange 70 and Grange 80, as well as some units in the Orchard Scotts condo and the Parksuites project on Holland Grove Road.

Ho Bee Land has around 200 private homes for lease at the Cape Royale and Seascape condos in Sentosa Cove. City Developments Ltd (CDL) has about 100 rental units, the bulk of them at the Cliveden at Grange.

Great Eastern Life Assurance Company has built up a residential leasing portfolio in Singapore comprising all the residences in Newton Gems, Holland Gems, Gallop Court and Gallop Gardens. The four projects, which are the result of redevelopments undertaken by the insurance group over the years, have a total of 287 residential units.

ABSD, the up-ender

The introduction of the ABSD in December 2011, followed by successive rounds of rate increases over the years, has effectively forced developers to sell off all the units in their private housing projects.

Notwithstanding this, a seasoned developer told The Business Times that developers could still retain some units in a residential project for leasing by selling them to a related entity within the group. However, such intra-group transfers are no longer viable, after the ABSD rate for residential property purchases by entities was jacked up from 35 to 65 per cent from Apr 27, 2023.

Starved of fresh opportunities to grow their rental housing portfolios at home, a few Singapore developers have turned to the build-to-rent (BTR) or multi-family housing markets overseas. The terms typically refer to professionally managed, purpose-built residential buildings with individual apartments rented out to tenants, be they singles, couples or families. CDL has invested in this sector in the UK, Japan, US and Australia.

Some developers see long-stay serviced apartments as plugging a rental housing supply gap in Singapore caused by institutional landlords (including developers) no longer being able to grow their residential rental portfolio.

URA has said that long-stay serviced apartments, like existing serviced apartments, will not be allowed to be strata subdivided; they are expected to be owned en-bloc and operated by a single operator.

When a developer buys a residential site and decides to build serviced apartments on it, these are not subject to the five-year disposal period under ABSD remission rules – if the developer intends to own the serviced apartments. It must undertake not to convert them to residential units for sale.

URA’s guidelines for long-stay serviced apartments do not mandate the provision of support services such as concierge, housekeeping and laundry. “The range of services to be provided to occupants will be determined by operators of these developments, based on their assessment of occupants’ needs and their business models,” said a URA spokesperson.

Observers say that, put simply, the URA’s decision to classify the new rental housing format as serviced apartments has opened the door for developers to build up their rental housing inventory again.

That said, JLL’s Chia says that Singapore may not be entirely ready for a BTR market, given the tenet of Singapore’s home ownership policy. “Nevertheless, long-stay serviced apartments could potentially act as a catalyst for the development of the BTR market in Singapore.”

Potential competition

The new rental housing form may have implications for other segments of the Singapore accommodation spectrum.

CDLHT’s Yeo says: “Some business bound for hotels and serviced apartments such as long-stay project groups will (leak) to the new long-stay serviced apartments. However, the impact on the Singapore hotel market will be limited.”

Mom-and-pop landlords may also be affected. Tang Wei Leng, managing director and head of capital markets for Singapore at Colliers, says: “The long-stay serviced apartment model could potentially raise the bar for individual landlords of private homes, who may find it challenging to compete on the same level of service and amenities.”

Oversupply concerns

There are also supply concerns. Savills Singapore’s executive director for research and consultancy, Alan Cheong, says the roll-out of long-stay serviced apartments “may add significant supply to the leasing market at a time when current conditions are pointing to a softening of rents, a longer lead time to find a replacement tenant and higher property taxes”.

Cheong adds: “Often, about 50 per cent of units sold at new condo launches in the city fringe and suburbs in the past 10 years were bought for rental income, based on our tracking.

“Unless the authorities suddenly open the floodgates to foreigners, the supply of rental apartments is quite sufficient to meet tenancy demand. As the minimum stay duration is already three months for private residential lettings, it is similar to the long-stay serviced apartment concept.”

His suggestion is that the supply of sites that have this new serviced apartment option should be limited.

Tay of Knight Frank, too, has a suggestion. “Developers, being more in touch with demand from homebuyers as well as renters, should be given more leeway to decide on the mix of units for sale versus lease, upon being awarded GLS sites where long-stay serviced apartments are allowed.” Once the URA approves the developer’s proposed mix, however, this should be fixed to prevent abuse, he adds.

Brighter note

On a more positive note, Savills’ Cheong says the new rental housing concept may attract more property investments in Singapore, given that investment opportunities in the serviced apartment space here have been limited.

Some analysts also envisage long-stay serviced apartments creating a new property investment asset class in Singapore, potentially through public offerings. As Tang of Colliers says: “This may provide an entry investment for individuals who aspire to become residential landlords but have limited resources and do not fancy the hassle of maintaining the property and finding tenants.”

The surge in private housing rents from Q1 2021 to Q3 2023 was largely due to construction delays that arose from labour and material shortages from border controls and supply-chain disruptions caused by the Covid-19 pandemic.

JLL’s Chia says: “The long-stay serviced apartments will help build a buffer of rental accommodation, in case of another pandemic or black swan event that disrupts housing supply and leads to a resurgence of escalating rents.”

In a similar vein, Tang of Colliers says: “While the immediate pressure from the housing shortage seems to be easing, the URA’s introduction of the new category of serviced apartments is still timely as it addresses long-term market needs.”

Offering a sustainable model for rental housing could prevent future shortages and contribute to a more stable and diverse housing market, she adds.