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Investment homes face declining rental yield
Trend a result of property prices rising faster than the increase in rent
By: Fiona Chan
PROPERTY investors in Singapore are starting to feel the squeeze as rental yields for investment homes sag across all segments of the market.
This is due to fewer leasing transactions taking place and rents flatlining even as home prices continue to rise, property consultants said.
Information compiled by Colliers International for The Straits Times showed that net yields of non-landed private homes have been declining since 2008, and are now at 3 per cent or below as of the second quarter of this year.
Net yields are calculated by deducting service charges and property taxes from the annual gross rent, which is then divided by the property's purchase price.
Homes in the suburban areas, where prices have proved stubbornly resilient in recent years, saw the largest dip in rental yields, from 4.1 per cent in 2008 to 3 per cent now, Colliers said.
Yields on the city fringe fell to 3 per cent, from 3.6 per cent in 2008, while yields for centrally located homes slipped from 3.3 per cent to 2.7 per cent in the period.
"The downward movement in yields in the last five years can be attributed to price appreciation in the residential market," said Colliers director of research and advisory Chia Siew Chuin.
"Rents have increased in a moderate manner, while prices continued to increase at a faster clip to reach a record high in the second quarter of this year, based on the recent flash estimates."
While home prices are now partly supported by home buyers' "aspirations" to own an investment property, leasing interest is generally more grounded on fundamentals, said Mr Ong Kah Seng, director of R'ST Research.
Tenants prefer "cost-effective, practical choices amid the ample new housing completions, and many expatriates have limited or no housing allowances", he said.
"This accounts for a generally stagnant, or slightly dipping yield situation."
A more in-depth look at rental yields by the Singapore Real Estate Exchange (SRX) also found that most areas across the island are offering lower rental yields for non-landed private homes now than last year.
Of the 34 planning areas in Singapore that had more than 30 rental transactions in the first half of this year, 32 areas posted lower yields, said SRX. Singapore has 55 urban planning areas in all.
The only two areas that recorded higher yields were the downtown core around the Central Business District, and Outram. In fact, investors in Outram scored the highest yields in the country, at 4.6 per cent, SRX said.
At the other end of the spectrum, Sentosa Cove and the Southern Islands had the lowest rental yield in the first half of this year at only 1.7 per cent, followed by Newton's 2.2 per cent and Orchard's 2.6 per cent.
Overall, rental yields for the island dipped to 3.9 per cent in the first half of this year, from 4.2 per cent last year and 4.4 per cent in 2011, SRX added.
Over the next 12 months, consultants expect rental yields to stay flat or even decrease. While prices are not likely to keep soaring, a slew of new homes will be completed soon, putting downward pressure on rents.
Colliers' Ms Chia said housing prices "are not expected to increase much further in the next 12 months", as buying interest - especially from investors - wanes amid the spectre of rising interest rates and recent loan caps introduced by the central bank.
"However, rents might slowly correct and ease downwards as there is a significant amount of new completions, bringing more supply into the market," she added. Some 32,700 units are expected to be completed between now and the end of next year.
"Generally, yields are not expected to increase in the next 12 months, and might experience a mild compression," Ms Chia said.
Still, net yields of 3 per cent for investment homes are not far below historical trends, and investment activity is likely to continue as Singapore offers a "safe haven" to park excess funds, she said.
"Whether yield numbers increase, stagnate or dip, it will not deter many intent and 'aspirational' investors, unless yields consistently drastically dip across the board," added R'ST's Mr Ong.