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3 Private Home Rental Market Observations Amidst Sluggish Economy

The late Mr Lee Kuan Yew’s old house at 38 Oxley Road was in the limelight for the past few days as Singaporeans watched the FamiLEE drama unwind. But family/political disputes between our Prime Minister and his siblings might not be on the top of Singaporeans’ list of concerns.

Despite the reported economic rebound, Singapore’s economy is still under the pressure of falling consumer spending, rising unemployment, rising pay gap (wages growing faster than productivity), as well as rising household debt to GDP ratio.

Against this backdrop, Savills Singapore pointed out three observations in a report based on residential leasing transaction statistics in Q1/2017.

1. Volume of private residential leasing soars to another quarterly high

Q1volume
Q1volume

In spite of the hovering economic gloom, both Q1 and yearly leasing volume seem to be on a rising trend over the decade. According to the Savills report, the island-wide landed property segment registered a QoQ increase of 5.2 percent in leasing volume. Non-landed private homes wise, those in the Core Central Region (CCR) increased by 8.7 percent, and those in Rest of Central Region (RCR) increased by 17.0 percent.

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On the other hand, suburb condominiums in the Outside Central Region (OCR) saw volumes decline by 1.7 percent QoQ in Q1/2017, following a 9.5 percent drop in Q4/2016. The report states, “increasing number of tenants are relocating to the mid-tier and high-end markets, encouraged by softening rents in those markets as well as new project completions”.

2. Rents have declined for the 14th successive quarter

median rent_non landed
median rent_non landed

According to the URA’s rental index, overall rents for private residential properties declined by 0.9 percent QoQ. Similarly, Savills basket of high-end non-landed residential properties saw their average monthly rents record another quarterly drop of 0.8 percent QoQ to S$4.09 per square foot (sq ft) in Q1/2017.

However, across all regions, the non-landed private properties’ rental levels were almost flat compared with Q4/2016.

Savills pointed out that this finding shows that private properties’ rents are close to a bottom, and “the rental gap between private non-landed homes, especially in the suburbs, and public housing units has narrowed significantly over the years”.

Savills also expects the rate of rental decline for private homes to start slowing over the next few quarters unless there is a big drop in public housing unit rents.

3. Number of vacant private residential units decreasing

vacant units_private residential
vacant units_private residential

Island-wide occupancy in Q1/2017 has improved, mainly thanks to the good take-up in the RCR, where vacant units decreased from 9,617 units in Q4/2016 to 8,466 units in Q1/2017. However, vacant units for CCR and OCR increased QoQ by 13 and 409 units respectively.

Conclusion

With all that being said, the leasing of private property still depends largely on the pace of Singapore’s economic growth and changes in business/industry formation. Savills believed that the abovementioned statistics did not fully reflect the undercurrent in the employment market for overseas workers (who would likely contribute significantly to transaction volumes).

Moving ahead, for the remainder of 2017, the pipeline supply of non-landed homes is 10,922, meaning that around 30 percent are still looking for tenants.

Savills opined that his situation would be less than ideal for landlords as rental budgets should continue to face downward pressures, especially when businesses in the “old economy” continue to face disruptions and margin pressures.

However, do not assume that property prices will fall just because of deteriorating rents.

Savills explained that the holding power of landlords should not be underestimated, as “many of the projects completing this year and next were launched post-TDSR”, and thus “the system already would have screened through their creditworthiness” (i.e. their likelihood of repaying mortgage loans).