26 May Rental Gems
High rental yielding projects in Singapore’s property market
Overall gross rental yields in Singapore for non-landed private homes are around 2.7% to 3.9%. Currently, based on our basket of projects, Core Central Region (CCR) rental yields are around 2.7% to 3.5%, Rest of Central Region (RCR) rental yields average around the 2.8% to 3.6% range, while rental yields in the Outside Central Region (OCR) command higher yields at 3.2% to 3.9%. However, there are projects that manage to command attractive rental yields of 4% and above.
Current gross rental yields are calculated by taking the annual rental income of the project and dividing it by recent resale prices of the corresponding project. As such, rental yield has a positive correlation to rents and is negatively correlated to prices. For example, if prices goes up and rents remains the same, rental yields would fall. Readers should note that these are gross yields, and does not include other costs such as vacancy costs, maintenance fees etc.
Since 3Q13 to 1Q15, overall residential prices and rentals have fallen by 5.9% and 5.1% respectively, according to the URA index. Should prices fall at a faster rate compared to rents, rental yields should rise and we should see more attractive rental gems surfacing in the market. So what are the common characteristics of such rental gems? Below, we have identified some major projects (100 units and above) with attractive rental yields currently, and have listed out their common characteristics.
Top yielding projects
For this report, we used rental data from major non-landed projects with more than 100 units to derive their rental yields, together with the resale data for the corresponding project over the past one year (2Q14 to 1Q15). To derive average rental $psf, we weighted the quarterly rental data based on the number of rental transactions in each quarter. To mitigate the effects of outliers which may skew rental yields, we excluded projects with less than 20 rental transactions and with less than 5 resale transactions. Also, due to the data limitations, privatised HUDCs and Executive Condominiums were omitted.
99-year leasehold projects dominates rental yields
As expected, on a whole, leasehold properties are considered to be the most attractive when comparing rental yields – 29 out of the 34 selected projects (85%) are 99 year leasehold. This is because of a lower relative $psf when buying a 99 year leasehold property compared to freehold, assuming all other things are equal. As tenants are generally not concerned about the tenure of the property, leasehold properties tend to have an advantage as compared to freehold when looking purely at rental yields.
Projects with small units pull up rental yields
In the current market, shoebox units do appear to command higher gross rental yields, due to their smaller sizes. Suites @ East Coast has a large proportion of units under 50 square metres. As such, we see Suites @ East Coast taking the first spot with a gross rental yield of 5.7%. However, one should not blindly jump onto the shoebox bandwagon. The performance of shoe box units is not homogeneous across the market, one should consider the rental demand and available supply of such units in the vicinity.
Majority in the Outside Central Region (OCR)
56% of the identified projects with high rental yield are in the OCR, with CCR and RCR projects taking up 12% and 32% respectively. As prices are one of the main determinants for rental yields, and since prices in the suburbs are usually relatively lower compared to the central region, the rental yields for suburban projects tend to be higher.
Older projects achieve higher rental yields
56% of the projects identified are more than 10 years of age, with 29% between 5 to 10 years old and 15% aging less than 5 years old. Property values depreciate as the building ages and lease shortens for leasehold projects. Although, newer projects tend to be easier to rent out compared to older projects, tenants also consider other project characteristics, such as design, facilities and general upkeep of the project.
Queenstown, a mine of rental gems
Notably, among the chosen 34 projects, 6 projects are located in the Queenstown planning area. Queenstown is enjoying good rental demand due to its ideal location attributes. It is centrally located and a short drive away from Orchard road and the Central Business District (CBD). Queenstown is also home to One North, the main R&D and high technology cluster of Singapore, and the National University of Singapore. The close proximity to major job centres and education clusters have kept rental demand healthy in the area.
Distance from MRT
Notably, the projects that are within walking distance to a MRT station do not necessarily command high rental yields. 20 out of 34 projects are not within walking distance from a MRT station(We define walking distance as 400m and below which would be around 5 minutes walking time). This is understandable because projects located near to MRT stations command a price premium over projects located further away. Tenants would be willing to pay a premium for convenient locations. However, there may be differences in rental and sale premiums. This would explain why projects that are relatively inaccessible are still able to command high rental yields. Based on our analysis, it seems that high rental yielding projects may not necessarily be located near an MRT station.
Ultimately, rental yield is still just one part of the return equation, with regard to total investment return. When investing in real estate, one should also look at the capital growth potential. Looking at rental yields is one way of filtering out mispricing in the market, and may sometimes reveal undervalued properties. For example, the lower the purchase price, the higher the likelihood that rental yields will be favourable.
Projects which have lower values tend to be older, 99 year leasehold suburban projects. However, investors do need to factor in project ‘rentability’ factors like location and nearby amenities as well as broad market conditions such as rents easing due to impending supply in the pipeline. For investors with a higher budget, they may look towards the Queenstown area, where the ‘rentability’ factor is high. For those who are on a tighter budget, they would find that there are some rental gems in the suburban areas too.
Photo credit: Flickr/Matthias Ripp