No respite from scorching Singapore rents

Singapore’s property market is in the grip of a 2008-style madness, with landlords squeezing tenants for the last possible penny. The previous frenzy ended with the bankruptcy of Lehman Brothers. This time, too, stratospheric apartment rents will come down to earth, though the process is unlikely to be as quick as the city-state’s expat community might hope.

Among the world’s major cities, Singapore is tied with New York for the dubious distinction of having the fastest rent increase in the first half of 2022. But the pain for tenants is not over yet. To understand why, consider the problem from the perspective of owners. Mortgage costs of 2.4% – a 1 percentage point premium to Singapore’s 3-month average overnight rate – are double what they were a year ago.

During the pre-Lehman real estate craze, variable mortgage borrowing costs were down. Now they are surging. As the US Federal Reserve pushes its key rates even higher, homeowners will want to earn at least 3.5% per year on their purchase cost. However, rental returns of more than 3% on a new investment can only be found in the eastern or western suburbs, or in the northern parts of the island – near Malaysia.

Home values around the central business district, preferred by expat renters, have become so expensive that yields have compressed: rents there will need to rise further for the math to work for homebuyers. Higher rents will find many takers in a tight market. But they will pinch bankers and executives returning to the city as economic activity normalizes after the pandemic. PropertyGuru Pte. says that based on converted sessions on its portal – when house hunters leave the listing page to inquire about properties – rental demand in the so-called Central Central region is back. Although rents in this pricey neighborhood jumped 7.7% in the second quarter, they continue to catch up.

The other reason why tenants should not hope for an early reprieve is Hong Kong. Singapore’s rapid reopening after the pandemic has boosted its appeal, even as its rival financial hub’s half-measures – such as reducing the mandatory hotel quarantine for visitors and returnees from seven days to three – are life-changing. in the Chinese special administrative region a frustrating experience. As Hong Kong shrinks – its population’s 1.6% decline in the 12 months to June was the worst in at least six decades – Singapore must strengthen. This will require a readjustment of its housing market.

In 2020 and 2021, household formation in the city-state all but came to a halt as Covid-19 hollowed out the ranks of foreign-born residents. In at least the past four decades, the only other example of such a severe freeze was in 2011-12, when the government reacted to its poor electoral performance by harshly cracking down on immigration. But as the traditional source of condo rentals — the expat population — has dwindled during the pandemic, local demand has increased. Delays in the construction of Housing and Development Board subsidized flats have resulted in young Singaporean couples temporarily renting HDB flats to others. When this narrowed the affordability gap between public and private housing, some of the pent-up demand spilled over into the condo market.

Now, however, there are early signs of a reversal. In what is “perhaps a sign that the HDB rental market is finally slowing down”, asking rents for public housing on PropertyGuru posted their first quarterly decline in three years in the three months ending June, note portal researchers. Although provisional, this is good news for expats. About 78% of resident households live in public housing; even a slight shift in and out of this larger market affects rental demand for condominiums, which account for 17% of units. (The remaining 5% live in primary residences.)

Even if the government is picky about the number of expats it lets in and construction continues at its pre-Covid-19 pace, new homes to alleviate the current crisis will not be built overnight; tenants will be stuck a little longer. Once rental yields are more in line with rising homebuyer interest costs, there will be takers for the 17,400 new homes that will be ready across the island in 2023, up sharply from to 10,300 this year. This is when rent growth could moderate, according to Bloomberg Intelligence.

Help will come from the government: Singapore imposes high fees on developers who accumulate land to create a shortage. Many of the upcoming 2023 projects may want to avoid the tax by selling their units to individual buyers or investment firms. The faster new homes are built and sold, the sooner the private residential vacancy rate of 5.4% will approach the long-term average of 7%.

Yet this is not 2008. Absent a major shock to the housing market from a global recession, the supply-demand balance will take time to recover. Meanwhile, tenants may be struggling for respite from searing rents.