New long-stay serviced apartments a boon to developers, a bane for private landlords

Leslie Yee

Apr 2, 2024

HOME renters here will in future have more choices. Besides public and private homes, co-living spaces and serviced apartments with a minimum stay requirement of seven days, renters can choose a new category of accommodation: long-stay serviced apartments with a three-month minimum stay requirement.

The new long-stay serviced apartments may better meet the needs of some space users. These include foreigners who are studying or working here, and locals who may rent as a start, or are awaiting the completion of a new home or one that is undergoing renovation.

When long-stay serviced apartments come on stream, people who want to rent them for longer durations do not need to compete with those seeking shorter stays, such as tourists and business travellers.

Rates will probably be more reasonable for long-stay serviced apartments versus those with a shorter minimum stay requirement.

The appetite among developers for this new housing type will be keenly watched when the tender for the Zion Road (Parcel A) 99-year leasehold private housing site closes on Apr 4.

That land parcel, which is on the Confirmed List of the Government Land Sales programme, can yield an estimated 735 conventional homes and 435 long-stay serviced apartments. The site has a maximum gross floor area of 85,551 square metres (sq m), of which at least 20,000 sq m has to be used for building long-stay serviced apartments.

Like existing serviced apartments where the minimum stay requirement is seven days, the long-stay serviced apartments cannot be strata subdivided for sale.

Might developers with strong hospitality expertise bid aggressively for housing sites that have long-stay serviced apartment components?

Recurring income

I think developers will be keen on land parcels where they can build homes for sale as well as long-stay serviced apartments for rent. With such sites, developers can enjoy development profits and recurring income.

By selling uncompleted private homes off-plan, developers receive cash inflow from buyers who pay based on various project development milestones. This helps to lower financing costs and boost the internal rate of return of projects.

These benefits matter greatly when interest rates are high and net margins on property development projects are skinny.

However, besides targeting development profits from building properties for sale, many developers are also keen to grow their recurring income.

Having stronger recurring income makes earnings more stable for property groups and provides a buffer for times when development profits are lacking, either due to project completion timings or weak market conditions.

Owning the long-stay serviced apartment component of a project post-completion helps a developer grow its recurring income.

Over time, a developer which owns a portfolio of long-stay serviced apartments can create a whole new business. Such a developer might secure a competitive edge through investing in branding, marketing, customer relations and property management as well as enjoy cost savings via having economies of scale.

A developer who is active in the long-stay serviced apartment space can even position units in different developments to target specific groups, including elderly renters looking for higher service levels.

Subsequently, a portfolio of long-stay serviced apartments can be monetised through divestment to either a listed real estate investment trust (Reit) or private fund, depending on which offers better valuation.

Threat to individual owners

However, individuals who are existing or aspiring private residential landlords should beware of the threat posed by the emergence of long-stay serviced apartments.

A homebuyer seeking to buy a home for investment may view Zion Road (Parcel A) as having many strong attributes. Tenants could be drawn to flats that will be built on the site, given the proximity to Havelock MRT station, Great World City and the Singapore River.

However, there is a catch. For individuals looking to rent out a home that will be built on that site, they will have to compete with the developer who is building several hundred units of long-stay serviced apartments in the same land parcel for lease. Likely, the developer’s leasing efforts will overshadow those of individual residential landlords.

Going forward, if more long-stay serviced apartments are built islandwide, this new housing type may grab a large share of the private home rental market, possibly at the expense of individual landlords of conventional private homes.

After all, potential tenants might prefer staying in professionally managed long-stay serviced apartments that are fitted out well and are well-maintained.

Sure, there can be a growing pool of potential tenants to serve if more locals rent homes and more foreigners come to work or study here.

However, becoming a residential landlord is challenging. Buying an investment home may involve hefty transaction costs – a Singapore citizen pays Additional Buyer’s Stamp Duty (ABSD) of 20 per cent for buying a second home, and 30 per cent for buying a third and subsequent homes.

Also, the non-owner-occupier residential tax rate rose this year to 12 to 36 per cent of the property’s annual value.

To add to all this, leasing out private homes in the future can be trickier, as individual landlords compete with an expanding pool of co-living space operators and owners of serviced apartments.

Still, building more long-stay serviced apartments can help mitigate a possible slowdown in growth in private homes for lease, should fewer people buy homes for investment because of high ABSD.

Having adequate good-quality rental housing stock in turn expands housing choices for tenants, including young locals and foreign talent whom Singapore is keen to attract. The luring of talent here should be not be hampered by the lack of housing options at competitive prices.

To democratise real estate ownership, policymakers can perhaps nudge ownership of long-stay serviced apartments to rest with many individuals via vehicles such as widely held listed Reits. Ideally, such assets should not be largely held by institutions and wealthy families.

Give individuals who want to save and invest for retirement the chance to own long-stay serviced apartments as an exciting and stable new property asset class.