Fringe Benefits – Strong Rental Take-up in City Fringe

By Square Foot Research

April 30, 2014 12:00 AM SGT

Rental volume in the non-landed private residential sector saw a growth of 4.87% y-o-y and 3.33% q-o-q with a total of 11,945 contracts signed in 1Q14. RCR took the spotlight and grew by 12.5% y-o-y and 10.1% q-o-q, outgrowing the other regions by leaps and bounds.

Introduction

In line with the increase in demand, RCR was the only region that saw an increase in median monthly rent (Table 2). Median monthly rent in RCR rose moderately by 0.9% y-o-y and 0.3% q-o-q. The hike in rental volume in RCR is presumably due to the completion of new projects and the resulting increase in supply of rental units available in the region. In fact, a total of 1,165 contracts signed in 1Q14 came from projects completed since 3Q13 of which RCR contributed more than half, or 57% (Figure 2).

Highlights

For the first time since rental data is available since 2000, District 15 tops the list with the highest rental volume of 1,415 rental contracts signed in 1Q14, outperforming District 9 by a marginal 34 rental contracts. The quarterly growth in District 15 is due to the increased number of rental contracts signed in the RCR segment within District 15. The OCR segment of District 15 actually saw a decline (Table 3), this is consistent with the overall market trend described previously.

Rental volume saw the highest quarterly growth in District 4 where rental volume spiked by an impressive 44.4% q-o-q in 1Q14. The increase is due to the stellar performance of The Interlace, which was completed in 3Q13. The Interlace actually tops the rental volume chart in 1Q14 with a total of 193 rental contracts signed. The Sail @ Marina Bay came in second with 142 rental contracts. Both projects have over 1,000 residential units.

rental contracts in district 15 and 4 by region

Bedrooms and Sizes

Although 3-bedroom units are traditiionally the most popular in the rental market, demand for 3-bedroom units has seen a decline recently (Table 5). Total number of rental contracts signed in 1Q14 for 3-bedroom units stood at 4,241 units, a delince of 1.0% y-o-y. Overall, there has been a shift towards the two extremes – demand for 1-bedroom units and units with 4 or more bedrooms have seen increases respectively.

Rental demand for 1-bedroom units and units with 4 or more bedrooms saw increases of 14.5% and 6.2% y-o-y respectively. Compared to 1Q12, the increases were 65% and 51.8% respectively, far outweighing the other segments (Table 3).

Size-wise, rental demand for shoebox units (units with area less than 500 sq ft) and units between 500 sq ft to 800 sq ft saw increases of 59.3% and 14.2% y-o-y in 1Q14, respectively. Interestingly, rental volume for units larger than 1,700 sq ft saw an overall increase of 13.6% q-o-q and 4.3% y-o-y. Despite a marginal drop q-o-q for units ranging between 1,400 sq ft to 1,700 sq ft, there is an increase in rental demand for units larger than 1,400 sq ft, where number of rental contracts rose by 6.3% q-o-q and 5.5% y-o-y.

Rental demand for larger units first saw an increase in 2H13, which coincides with the implementation of Total Debt Servicing Ratio (TDSR). In addition, Property Price Index (PPI) for private residential also reached its peak in 3Q13. The ensuing effect of a restricted budget and skyrocketing prices may propel potential buyers towards sitting on the sidelines in anticipation of a price correction or further developer discounts. Many such buyers, especially foreigners, may want to rent while waiting for the market to soften. Sellers who have made profit from their property sales may also opt to rent a sizeable unit with their sales proceeds, which may have led to the increase in demand for bigger units in the rental market.

Future Outlook

Occupancy rate in the non-landed private residential sector has seen a decrease, which is presumably due to the surge in housing supply (Figure 3).

As of 1Q14, an additional 55,364 non-landed private residential projects are scheduled for completion by 2016 (Figure 4). Based on the assumption that a project takes about 3 years to complete from launch date, an estimated forecast and distribution of supply from new projects launched or announced since 2011 is shown in Figure 5.

62.7% of the future supply will be located in OCR, with the majority located in the East and North-East regions (Table 4).

A breakdown of rental contracts by region shows that the majority of rental demand is in the Central Region. In OCR, the East and West regions have the highest demand (Figure 6).

Taking into account the upcoming supply in the near future and the potential waning demand due to the tightening of employment pass criteria, vacancy rate is likely to continue to creep up from current levels and rental prices are expected to moderate as the rental market becomes increasingly competitive over a shriking pool of prospective tenants. This is especially so in OCR if future rental demand is unable to meet the deluge in supply. If resale prices remain at current levels in OCR, rental yields are expected to be compressed further.