How have high vacancy rates impacted rental yields?

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According to statistics from the Urban Redevelopment Authority (URA) and Singapore Property Watch (SPW), the island wide private residential vacancy rates (both landed and non-landed segments) rose to a peak of 7.6 percent during the first quarter.

ST701 Editorial Team - June 23, 2014 
By: Tay Hock Meng

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 Business Times (BT) article published on 10 June 2014, entitled “Dark Condos shine light on rising vacancy” discussed the rising vacancy rates and its impact on the local property market. According to statistics from the Urban Redevelopment Authority (URA) and Singapore Property Watch (SPW), the island wide private residential vacancy rates (both landed and non-landed segments) rose to a peak of 7.6 percent during the first quarter of 2014 (1Q 2014), compared to the past four quarters-average vacancy rate of 6.4 percent, and the previous peak of 7.4 percent during the 2008/2009 financial crisis.

Source: Singapore Property Watch (SPW), Urban Redevelopment Authority (URA)

The article has also pointed out some of the reasons behind the long-term vacancy rates were caused by the mix of current property cooling measures, an escalation of private home completions lately, and slower expatriate flow which might impact the property sales and rental transactions going forward.

We decided to analyse using past rental transactions of the properties cited in another follow-up article published on 10 June 2014, entitled “Let there be light”. The article pointed out some non-landed residential developments that have no or few occupants residing in them. These include projects such as Hilltops, The Laurels, The Vermont on Cairnhill,Goodwood Residence, NV Residence, The Interlace, RV Edge, and Marina Bay Suites. We decided to use these projects, together with their comparable projects around the area, to evaluate the impact high vacancy rates will have on these properties. We will be focusing on the 12-month median rental yields to see if surrounding properties were impacted by the high vacancy rates, and the potential spill-over effects.

Subsequently, we will be analysing the historical rental prices across different regions to see if transactions in each region have largely held up in terms of rental price changes on a quarter-over-quarter (QoQ), and year-over-year (YoY) basis. The rental prices were obtained through the latest publication of the Urban Redevelopment Authority (URA) Rental Index as of first quarter of 2014 (1Q 2014).

Analysis of historical rental transactions (First part)

View the results of our analysis here. 

Note: Bold coloured property names denote the quoted properties cited in the 10 June 2014 article.

Most of the rental yields of the surrounding properties have been minimally impacted by the potential spill-over effects of high vacancy rates from the quoted property names. For example, Hilltops’ rental yield stands at approximately 2.4 percent, but median rental yields of the surrounding properties stand at approximately 3.2 percent. Similar impacts were also observed for most of the properties sampled, except for Marina Bay Suites where its rental yield was recorded at approximately 1.7 percent, compared to the nearest comparable development, Marina Bay Residences, which recorded a rental yield of 1.2 percent.

In general, based on the results of the analysis, it appears that the relatively high vacancy rates in the quoted projects have not impacted the rental yields of the surrounding properties. Factors including types of facilities offered, competitive sales prices, expatriate mix based on nationalities that lived in the surrounding properties, among others might be some of the contributory factors impacting the direction of the rental yields.

Historical rental trends grouped by planning regions (Second part)

Source: Urban Redevelopment Authority (URA)

Note: CCR denotes Core Central Region; Rest of Central Region (RCR); and Outside Central Region (OCR)

Based on the above chart, it shows that rental prices, in general, have largely held up in the Rest of Central Region (RCR), with the percentage change on a year-over-year (YoY) (1Q/2014 versus 1Q/2013) basis showing an increase of 1.0 percent, while rental prices in the Outside of Central Region (OCR) (1Q/2014 versus 1Q/2013) largely showed a decline of 2.3 percent on a year-over-year (YoY) basis. Factors that might impact the RCR’s rental prices positively include the proximity to city centre, and popularity among expatriates who might be drawn to neighbourhoods such as Marine Parade, and Tiong Bahru, among others.

Projects in the RCR command a rental yield between 2.0 to 3.0 percent, while OCR projects command a higher yield in the 3.0 to 4.0 percent range. Despite the lower rental yields in the RCR region, rental prices in the RCR region are expected to remain resilient due to the proximity to the city, while maintaining relatively lower prices than the CCR in the short to medium term. As the government looks to increase housing supply close the city centre, reported in a Business Times (BT) article dated 18 June, this situation could change and rental supply would likely increase. The area would also see an influx of locals interested in living close to the city centre.

Summary
In general, we believe that despite the relatively high vacancy rates in the quoted properties, the rental yields among the comparable properties were not impacted much by the spill-over effects. In addition, with the combination of positive attributes associated with RCR region properties, and the continued interest among expatriates in their rental choices in the RCR region, we believe that future rental demand for the city fringe residential projects is likely to remain resilient going forward.