RENTAL growth of private non-landed residential properties continued to moderate in 2012, rising by only 2.4 per cent after larger increases of 3.4 per cent in 2011 and 18.4 per cent in 2010, based on Urban Redevelopment Authority (URA) statistics. The deceleration in rental growth last year is against the backdrop of slower economic growth and the government's restrictions on foreign labour inflow.

The slowdown in rental growth was most significant in the Core Central Region (CCR). The rental index of non-landed properties in the region rose by only 1.6 per cent in 2012 after a larger 2.6 per cent increase in 2011. Elsewhere on the island, the rental index rose by 2.7 per cent in the Rest of Central Region (RCR) and 4.1 per cent in the Outside Central Region (OCR) last year.

Rental volumes in 2012 showed a similar picture of a slowdown in the CCR, where the 9 per cent growth in 2012 was weaker than the 17.2 per cent growth in 2011. The bigger fall in rental volume growth in the CCR came on the back of lower demand as financial institutions and companies trimmed their headcounts and expenses worldwide.

With housing allowances being reduced or removed, rental volume growth was stronger in the RCR and OCR as budget-conscious tenants traded down to units with a smaller rental quantum. The total rental transaction volume in the RCR rose the most by 16.0 per cent in 2012, more than double the 6.0 per cent growth in 2011 while that in the OCR rose 7.1 per cent in 2012, up from 4.1 per cent in 2011.

Policies impacting rent growth

We expect rental growth to slow further in 2013 due to the higher level of private home completions as well as lower demand from a more calibrated approach towards population growth by the government.

According to the URA, around 16,439 private homes will be completed in 2013, 53 per cent higher than the five-year annual average of 10,761 private home completions from 2008-2012. This will also be a record high of private home completions since data was available and will be surpassed in 2014 and 2015.

Around 44 per cent of these completions in 2013 will be located in the OCR, 33 per cent in the RCR and the rest in the CCR. In both relative and absolute terms, completions in the OCR will peak in 2016, mainly from projects under the Government Land Sales (GLS) programme.

Notably, the pressure point on vacancies has started to tilt towards the suburban areas in 2012. A closer look at the vacancy rate in the region shows that it has been slowly creeping up from a low of 2.3 per cent in Q1 2011 to 3.7 per cent in Q4 2012, partly due to the larger number of completions in 2012.

Around 4,100 private homes in the suburban areas were completed in 2012, slightly higher than the three-year annual average of 3,500 completions in 2009-2011. Given the higher number and proportion of pipeline supply in the OCR for 2013, we expect that this will continue to cause the vacancy rate to trend upwards and test the resilience of residential rents in the region.

On the demand front, restrictions on foreign labour inflow by the Government are expected to dampen demand in the rental market to some extent in the year ahead. The higher worker levies imposed on S Pass workers and various work permit holders have already kicked in in January this year and will be raised again in July. Further increases will be implemented in July 2014 and in July 2015 following announcements in the 2013 Budget.

The Population White Paper released by the Government in January this year guided that the non-resident population could increase from the current 1.5 million to 1.8 to 1.9 million by 2020. These projections imply a compound annual growth rate of between 2.4 and 3.0 per cent for the next eight years in the non-resident population, less than half of the past three-year compound annual growth rate of 6 per cent.

This slower growth in foreign worker inflow will have a more pronounced impact on the rentals in the OCR and RCR private housing market where the budget-conscious foreign workers reside.

In addition, the removal of the property tax refund concession for vacant properties announced during the 2013 Budget would increase the holding cost for investors if the properties were left vacant. They could therefore be more open to rental negotiations amidst increased competition for tenants due to the high level of completions. This pressure is likely to be greater for larger apartments in the prime areas where the rental quantum is higher and investors will now have to pay higher property taxes for these properties under the new property tax structure announced during the 2013 Budget.

HDB rents

Rents in the public housing market showed more robust growth compared to the private market, albeit more muted compared to previous years as well. On average, rents for a four-room HDB flat rose 6.3 per cent in 2012, outperforming all market segments of the private housing market. This was, however, a slower pace of growth compared to 13.2 per cent in 2011. In terms of rental volume, HDB subletting volumes picked up pace in 2012, rising by 3.8 per cent after a 5.4 per cent decline in 2011.

Completions from the public housing market are expected to have a more limited impact on the rental market compared to those in the private housing market. This is because newly completed HDB flats are subject to a five-year minimum occupation period (MOP) before the whole flat can be rented out.

An estimated 2,900 units completed in 2008 would be added to the total stock of rentable HDB flats in 2013, much smaller than the five-year annual average of 5,900 public home completions from 2003-2007. Nevertheless, the estimated 13,600 public home completions in 2013 could siphon some rental demand away from tenants who are currently renting while waiting for their HDB flats to be completed.

The latest round of cooling measures also disallowed PR households from subletting their whole flats. This removes around 2,300 HDB flats which are currently being sublet by PRs or about 8.5 per cent of the 27,000 HDB subletting transactions in 2012. We expect the smaller stock of rentable HDB flats as well as demand from a larger pool of tenants with limited housing allowances to exert upward pressure on HDB rents.

Li Jinquan is research analyst and Lee Lay Keng is head of Singapore research, DTZ