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Private residential leasing - filling the pigeonholes

With shrinking rental budgets, landlords may take to finding tenants for individual rooms in an apartment.

Most market watchers expect that if the leasing market fares well, the sales market should also perform well. However, what we are experiencing today is that while leasing demand and rents are soft, prices at new launches are holding up generally.

WHILE the debate on whether residential prices have come off significantly rages, at the sidelines, another no less important topic - leasing - has somehow been left out.

The performance of the latter has been befuddling to say the least because on the ground, what market specialists have observed is that despite rising vacancies coupled with stepped down rents, prices of completed properties have only budged a little.

Using the high-end market as an illustration, while Savills' average luxury non-landed residential price has fallen by 11.3 per cent from the peak in Q4 2007 or 8.8 per cent from the last crest in Q1 2013, our average rental value for the same segment has fallen much more, by 27.3 per cent from the peak in Q1 2008 and 19 per cent from the rebound high in Q2 2011.

If one factors in the higher vacancies, the effective loss in rental revenue by a typical landlord is even greater.

Savills does not have baskets for the non-landed mid-tier and mass-market segments but Urban Redevelopment Authority's rental indices for non-landed properties in Rest of Central Region and Outside Central Region are at an early stage of decline with the former falling by 3.1 per cent from Q1 2014 to Q2 2015 and the latter registering a 6.7 per cent decline from Q2 2013 to Q2 2015.

In the meantime, we are receiving statistics that the volume of leasing transactions has been on an uptrend, breaking records quarter after quarter. The does not square with the fact that rents have declined noticeably.

Most market watchers expect that if the leasing market fares well, the sales market should also perform well.

However, what we are experiencing today is that while leasing demand and rents are soft, prices at new launches are holding up generally.

Why the disconnect? It is about the breakdown in the fundamental relationship between yields and prices - where yields and occupancies are falling but new sale prices are holding up. We believe that this can be explained in terms of the high level of household liquidity.

The liquid assets held by households have risen to such heady levels that even if rental yields are coming off in the face of rising interest rates, the appetite for buying residential properties for investments remains unsatisfied.

The healthy sales of North Park Residences in Yishun and Commonwealth Towers are a giveaway that the liquidity building up in our households, frozen after the implementation of the Total Debt Servicing Ratio (TDSR) framework as buyers waited out for prices to fall, is starting to thaw.

What could result from the interaction between this liquidity, the cooling measures, the TDSR, and planning regulations on the average minimum unit size, for projects away from the Central Area, of 70 square metres?

One is that buyers can overcome the high equity downpayment hurdles if the absolute purchase price quantum is manageable.

Smaller one and two-bedroom apartments have therefore been popular among investors (these buyers are not likely to be HDB upgraders because public flats are often much larger than the private homes they purchase from developers).

The question now is, when they are completed, are these units going to meet the needs of the new breed of overseas nationals arriving in Singapore?

On the rental front, we are observing the increasing trend of overseas nationals being employed on local terms, meaning they do not have rental allowances. For those who have such housing perks, they have been trimmed.

This is due to the increasingly challenging business environment that companies here face - both domestically and in the region. With the Chinese economy entering into a significant slowdown on top of the clampdowns on government officials' ostentation, the conditions for non-Chinese companies doing business there and in Asia become tougher.

The fallout of this will be greater cost control, trickling down to rental budgets of their overseas staff.

Already, we are observing that a greater number of new overseas nationals arriving in Singapore are prepared to be co-tenants in a single housing unit, something quite unheard of just a decade ago. The chart "More Flatmates" shows that the number of Employment Pass (EP) holders per unit of leased out private property has jumped to 3.37 in 2014. Vacancies on the other hand have been increasing.

The question that arises then is: Why are there more EPs staying in a rented home but at the same time, vacancy levels are rising? If each unit leased out is getting more densely populated, shouldn't vacancies fall instead?

What this implies, and ties in with our observation from the ground is, that with greater budget constraints, more overseas nationals now cannot afford to rent an entire housing unit (for example, an apartment). This has implications on the leasing market and also how a landlord can position his unit for lease.

Before we attempt to look for a strategy, we may want to take a cursory look at what is known as the pigeonhole principle. In layman's terms, the pigeonhole principle puts it that if we have say 12 pigeons but there are 10 holes to accommodate them, at least one hole will house more than one pigeon.

The chart does point to the pigeonhole effect because the number of EP holders mapping into each private residential unit is surprisingly high, meaning there are more tenants out there than there are housing units (not rooms) available for the right rent.

Market observers have thus far tried to explain the soft rental market using traditional demand versus supply arguments. The more astute would drill down the demand and supply numbers to analyse in greater levels of granularity.

However, they are still stopping short on a solution for landlords pertaining to leasing or why policy makers may have to rethink on cooling measures in their current form if it is beginning to create an unviable leasing market.

For landlords, anecdotally since we have an increasing number of multiple tenancies per apartment let out, it signals that there are more tenants in a certain budget range than there are apartments available to fill that budget. (There could be more apartments in the market but they are just not made available to a singular tenant with a much lower budget because the landlord is not willing to accept that level of rental or the landlord is not prepared to have multiple lettings for his/her unit.)

To ensure that his/her unit falls within the set of tenanted properties, the landlord therefore has only two options. One is to lower the rent and let out to a single tenant; the other is to accept multiple tenancies for his/her apartment.

Unless they do not mind gapping down the rents to the same or a replacement tenant upon lease renewal, landlords may find their units vacated.


Serious consideration should therefore be made on the option of renting out to multiple tenants. For some locations, particularly the non-central areas, the total rental collection from leasing out each room in an apartment to a different tenant, may be higher than from leasing out the entire apartment to a single tenant.

Landlords must continue to be alert to the strong possibility that moving forward, business conditions are expected to be even tougher and companies may attempt to rein in hiring overseas nationals and in turn train locals to take on expanded roles. This is the time to be realistic. Multiple lettings can reduce the risk as there is a diversification of the tenant base.

On the supply side, the issue is more complicated. With lower rental budgets, in terms of unit sizes, the minimum lot size for habitation is a bed space per person. We do not believe that for EP holders, it will come to that and the lower bound is that of a room. This is where investors have to be wary of what has lettable value and what may experience sharper rental declines in future.

Presently, studios, one-bedders and shoebox apartments are still finding traction with tenants. Being small in size, these housing types are a one-to-one mapping from a tenant to a housing unit. Unfortunately, if payroll cost cuts continue, will the one-to-one move down a level, to that of rooms?

If so, it will be a multiple tenants-to-one housing unit mapping, that is, larger apartments with multiple rooms that will be in demand.

Should that be the outcome, and very likely to be the case, then rents of shoebox apartments will adjust towards single-room rates. In other words, shoeboxes can fall prey to sharp falls in rents.

Using district 14 as an illustration, the rent for a room within a private apartment there is about S$1,700 per month. Shoebox apartments in the same district are going for about S$2,000-2,300 per month.

As more rooms become available for lease, their rents should fall and with it those of shoebox apartments too as the gap between the two narrows (but not coalesces).

In an environment where businesses are economising expenditures to the limit, a greater demand for rooms rather than singular housing units like studios and shoeboxes may be the outcome.

Owing to lower rents payable, units with more rooms will improve their probability of finding tenant(s) for at least one of their rooms than for the entire unit. It is unfortunate that the TDSR and cooling measures have made larger units less affordable.

This policy in action is observed in many of the new launches where one and two-bedders are sold at a more rapid pace than bigger units.

Cognisant of this affordability issue, developers have also been limiting the supply of larger units by keeping to the lower bound 70 sq m average size unit rule.

The effect of this will be that if corporates continue to pare their staff payroll and ancillary expenditures, the multitude of studios, one-bedders and shoebox apartments sold may reap sub-par rental returns upon completion.

All this may seem commonsensical and one may wonder why this roundabout way of explaining the recent leasing market behaviour. It is when one adopts a prismatic view that vested parties, involving landlords, developers and policy makers, begin to approach the issue of matching tenants to housing units from a new angle.

This angle sheds light on how landlords can still get their vacant units filled and command a firm rent. Policy makers may have to think hard about recalibrating the measures to lower the bar for more to purchase larger units (with more rooms).

There is still an increasing number of overseas nationals coming on one-year stay and taking up residence in serviced apartments and some even in budget hotels. The number of single-room tenants in the market has not yet been fully tapped by private residential landlords.

In conclusion, landlords need to stay nimble and realistic to maintain cash flow.

Tenancy diversification is a good way to reduce the probability of having the whole unit lying vacant. As the rental market is becoming increasingly competitive, active lease management - with multiple tenants for a housing unit - may be the way forward.

  • The writer is research head, Savills Singapore