[SINGAPORE] As dusk descends upon the Singapore skyline, the excess capacity building up in the private housing market is evident. Dark patches in some condominium developments completed six to 12 months ago, or even longer, point to significant vacancy.
Analysts cite a host of factors, including strong investment demand for real estate after the global crisis, escalation in private home completions of late, and slower expatriate inflow. Vacancies are set to climb and rents fall in general. Suburban locations, where most of the supply is, will be the worst hit.
"If increasingly there are a lot of empty units," says Lee Lay Keng, DTZ regional head (SEA) research, "it could indicate we're not making the best use of our limited land resources."
After the global crisis, investors sought refuge in trusty assets such as real estate. Fuelled by the low interest rate environment, some took to hoarding property at new launches and are hence not bothered whether they can find a tenant after taking possession of their units, say observers. Some high net worth foreign buyers treat their Singapore property as a holiday home and leave it unoccupied most of the time.
But there are others who leave units vacant because they are not able to find tenants. As Ms Lee notes: "Competition for tenants is increasingly intense, with both demand and supply factors at work. On the demand side, changes in labour policies have slowed down the flow of foreign professionals into Singapore while on the supply side, there is a higher-than-average number of private home completions."
JLL national director Ong Teck Hui highlights that "those who bought for rental returns would find themselves in a more competitive leasing market today, where units in mediocre locations would be more difficult to lease and therefore remain vacant for a longer duration, especially during this period of strong supply".
Ku Swee Yong, CEO of Century 21, explains that those who acquired private homes, say in 2010, would already be sitting on profits. "If they bought for capital gains, they may prefer to keep their unit empty rather than rent it out because it is quite usual for a fresh tenant to have a clause in the lease agreement protecting them from viewings by the landlord in the first six or even 12 months."
R'ST Research director Ong Kah Seng says that, due to low rents, some owners have left their units empty, especially the cash-rich set who did not take any housing loan for their purchase. "A vacant unit may deteriorate faster but leasing it out at a low rent may not be feasible since it will incur high maintenance costs. High-end properties have the finest finishes, so maintenance and repair costs may be hefty. Selected fit-outs and finishings such as tiles may be of limited collection and difficult to replace if it is damaged by the tenant."
Developers left with unsold units, especially in the slow high-end segment, also contribute to vacancies as these projects are completed. Other factors may also be at play in specific projects. But the overall trend of rising vacancies and softening rents is clear amid climbing private home completions since last year.
The 13,150 private homes that received TOP last year was 27.3 per cent above the previous year's 10,329 and 40 per cent above the past 10-year average of 9,395. The figure for Q1 this year was 4,114 and the full-year tally is expected to hit 17,138, based on estimates submitted by developers to the Urban Redevelopment Authority. Thereafter, completions are slated to climb further to 21,738 next year and 26,252 in 2016 before easing the following year.
URA figures show that the pool of vacant private homes has risen to 19,284 at end-Q1 2014 from 18,003 at end-Q4 2013 and 14,532 at end-Q1 2013. The islandwide vacancy rate rose to 6.6 per cent at end-Q1 this year from 6.2 per cent a quarter earlier and 5.2 per cent at end-Q1 2013.
CBRE executive director (residential) Joseph Tan says that the latest quarter's increase could be due partly to families that had yet to move to the new homes that were completed in Q1.
Rising vacancies have been accompanied by softening rentals. For the first time since Q3 2009, URA's private home rental index contracted in Q4 last year. The index dipped 0.5 per cent quarter-on-quarter, followed by a further 0.7 per cent drop in Q1.
CBRE predicts a 5-8 per cent drop in rents generally this year. JLL predicts a 4-8 per cent decline; Century 21's Mr Ku reckons competition for tenants will drive rents down by 8-10 per cent, followed by a further drop of up to 25 per cent in 2015.
Against the backdrop of the large supply, says DTZ's Ms Lee, some landlords could become more flexible on their rents, particularly after the removal of the vacancy tax refund with effect from Jan 1, 2014. "Landlords now have to pay property tax on their vacant units and some may accept a lower rent and have the unit rented out instead of leaving it empty."
This could create downward pressure on rents.
JLL's Mr Ong predicts the vacancy rate could be around 7-9 per cent at end-2014.
Mr Ku reckons vacancy will head towards 7.5-8 per cent mid to late next year, adding that price drops are likely to be limited to 5-10 per cent per year - assuming the economy is fine.
Competition for tenants is likely to be more intense in suburban projects, as the bulk of completions last year as well as the potential supply pipeline are in Outside Central Region (OCR). URA's Q1 rental index for non-landed private homes in OCR was down 2.3 per cent from a year ago. This compares with a decline of 0.3 per cent for Core Central Region (CCR) and a rise of one per cent in Rest of Central Region (RCR).
Of the 67,507 homes under construction at end-Q1, about 59 per cent were in OCR, 22 per cent in RCR and 19 per cent in CCR. Four years earlier, of the slightly over 36,000 units under construction, the respective shares were 30, 36 and 34 per cent, notes JLL's Mr Ong. "The heavy buying in OCR in the past few years has resulted in units under construction in this submarket surging 270 per cent over the past four years. While it is true that a high proportion of purchases in OCR is for owner-occupation, the level of investment purchases in the past few years has also been substantial.
"Based on rental contracts registered last year, OCR's share of the leasing market was about 31 per cent. Hence, the disproportionate oncoming supply may be expected to impact on this submarket more significantly."
Ms Lee, too, expects a bigger impact on rents and vacancy rates in the suburbs, "although rental demand will still be supported by budget-conscious foreign professionals as the rental quantum for suburban condos is lower than city-fringe or prime condos".