Home leasing market to slow but downside seen mitigated

⋅ March 16, 2012

 

Leasing activity in the private residential market is expected to slow this year as the uncertain economic outlook causes companies to be more cautious in hiring expatriates. But there may be some leasing opportunities arising from recent property market cooling measures, particularly December’s announcement of the 10 per cent additional buyer’s stamp duty (ABSD) on foreigners who purchase private homes.

Expatriates who are liable to pay the ABSD are expected to avoid buying private homes as far as possible. Even those who are not liable to pay the duty may continue to lease homes in the fear that housing prices may fall shortly after they make their purchases. This provides some support for the residential leasing market and mitigates drastic falls in rentals.

There are typically two groups of foreigners who buy residential property: The first comprises those who are not in Singapore and purchase properties here for investments, while the other group consists of those who work here and decide to buy a home after growing familiar with Singapore.

The spate of corporate expansions in 2010 and the first half of last year resulted in an increase in expatriates coming to Singapore, whether on partial or full housing packages or on local terms. Some of these foreigners who signed one-year leases may have bought a residential property last year, while some who signed two-year (or one-plus-one year) leases will be ready to look for a property to buy.

But with the ABSD, this group of foreign buyers is even more likely to think twice before committing to a private home in case prices slide after the purchase, particularly for resale homes. Given the new measures, this group may hold back their buying decision and renew leases for a year, or extend by half a year if this is possible.

About 12,000 new homes will be completed this year, in excess of the 15-year average of about 10,000 new units per year. This number is not considered shocking as the recent years have seen rapid population growth in Singapore.

The new units that will come on stream this year will be seen as moderate supply if there is continued economic growth momentum. This means the leasing market this year will be demand-led instead of supply-driven. The real supply-led concerns will surface in 2014, when about 20,000 units are expected to be completed.

The challenging economic conditions this year are expected to encourage new property owners to be more realistic in their asking rentals in order to secure tenants. As rentals for new units become competitively priced, older apartments in poorer physical condition will suffer rental pressure. There may be some “flight to quality” by tenants whose leases expire, to relocate to newer apartments if the asking rents are attractive.

The slowdown is not a new phenomenon in a mature property market such as Singapore. After going through quite a few property market cycles, homeowners here recognise that property ownership and investment is for the long term.

Having a long-term view also means that many owners of centrally-located properties know that they have to “put up a little” during the year by offering more competitive rentals. There can be potential for raising rentals eventually when economic growth picks up pace again. While this reflects increasing the maturity and market sensitivity of owners, it also means that competition in the leasing market will become more intense as more owners become increasingly strategic.

The challenging economic climate is eroding the financial stability of some property owners, including those who have bought homes for owner-occupation.

More owners, including some who bought resale apartments in centrally-located areas for own stay last year and are liable for seller’s stamp duty if they resell their properties within four years, are now considering renting out a room or two to ease their financial burden.

Meanwhile, more mid- to senior level expatriates are opting to live in lower-cost accommodation upon lease expiry in light of the weakened economic and business conditions. Expatriates with housing allowances are focusing more on functionality than on luxury, reflecting their sensitivity to the companies’ running costs in Singapore.

As such, luxury apartments of 2,000 sq ft and above may lose some shine to the “second best high-end” apartments in the central area. The latter include the River Valley and Somerset area, where “walkability” to the main Orchard Road area can be an attraction to young professionals. Some well-positioned areas like Novena, Bukit Timah, East Coast, or even new growth areas like one-north may also be quite attractive for the mid-level expatriates who are on partial housing allowances or on local terms.

By Ong Kah Seng – director at R’ST Research, an independent property market research firm in Singapore.