May 24 2009
Joyce Teo
Now that rents for condominiums are falling, investors looking for buy-to-let homes should be mindful of declining rental yields.
'Rentals in the private housing market are now falling at an estimated average rate of 3 per cent per month, so expect your rental yields to continue falling,' warned Chesterton Suntec International's head of research and consultancy, Mr Colin Tan.
Still, falling yields shouldn't be an issue over the longer term. Said Knight Frank's director of research and consultancy, Mr Nicholas Mak: 'There will be short-term adjustments, but long-term, yields tend to be stable at 2.5 to 3.5 per cent on a net level.'
Low rental yield means either lower rental value per sq ft (psf) per month or higher capital value per sq ft, noted Ms Jacqueline Wong, who heads Jones Lang LaSalle's residential division.For now, the fall in rents looks set to continue and even gather pace.
Urban Redevelopment Authority (URA) data shows private home rents fell 8.5 per cent in the first quarter - the largest quarterly fall since the fourth quarter of 1998. Rents for non-landed prime homes fell the most, by 10.3 per cent.CBRE Research expects rents to stay on a downtrend for the year.
It sees a 3 to 5 per cent fall per quarter till year-end, which would add up to a full-year decline of 15 to 20 per cent.If you are thinking of buying a newly completed unit for rental income, remember there are now fewer expatriates and smaller budgets, but plenty of supply.
Many new developments were bought by investors or speculators. 'Speculators are turning to the rental market to cushion their debt obligations while they wait for prices to improve,' Mr Tan said.
One property investor, who declined to be named, advised: 'If you're buying a resale home for rent, you should try to buy in at a 5 per cent rental yield so you will have, say, a 4 per cent yield when the rental contract ends and has to be renewed at a lower rent.'
This is because leases typically run for two years and rents take a while to catch up. For those still keen on buying to let, Ms Wong's advice is to go for areas popular with expatriates, and be aware of the supply, both existing and upcoming.
Homes in prime districts continue to enjoy stable yields as expats still prefer these areas, she said, adding that projects in such areas posted an average rental yield of 3.5 to 3.7 per cent in the first quarter.
Still, posh homes in prime areas do not command the highest psf rents. First-quarter URA data shows median rents at Icon in Tanjong Pagar and Strata in the Novena area came to $6 psf and $5.11 psf respectively.
In contrast, the newly completed, upscale St Regis Residences commanded just $4.80 psf. Ardmore Park, a coveted property, went for $5.42 psf, down from $6.15 psf in the previous quarter.
'The rental rates for Strata and Icon may seem high, but most of the units are 45 to 100 sq m, whereas those at St Regis Residences and Four Seasons Park are 210 to 300 sq m, so the absolute quantum is smaller,' said CBRE Research.
Rentals are a function of location, unit size, age, condition, quality and other factors. And generally, yields from luxury homes tend to be lower because of their high prices, experts said.
At St Regis Residences and Four Seasons Park, prices range from $1,700 to $2,100 psf, so yields would come to 2.8 to 3.4 per cent, lower than those at Icon, said CBRE Research.
Ms Wong noted that mid-tier projects with smaller units would have higher psf rental values than luxury market projects, as they would still be affordable. Such mid-tier projects would appeal to a middle management expat with a budget of $3,000 to $6,000 a month, she added.
For example, at $5.08 psf a month, a 689 sq ft one-bedder at The Sail @ Marina Bay would cost him $3,500 a month. At $4.83 psf a month, a 1,100 sq ft two-bedder at the swankier Cosmopolitan might appear cheaper at first, but he would have to fork out $5,300 for the larger unit.
All things being equal, 99-year leasehold properties enjoy higher rental yields than freehold ones as they usually cost less. A property's tenure - freehold or leasehold - does not affect the rental value as much as it does the price, experts said.
Location is key, said Ms Wong, so look for a property that is more lettable - one in a prime area or near an MRT station. 'The capital values of such properties will also hold better.'
