Why the long-stay serviced apartments model should be ditched

ARE property players here an unadventurous lot? Many groups seem to be giving the cold shoulder to the new category of long-stay serviced apartments labelled SA2. 

SA2 apartments are to be rented out for lodging purposes for a minimum period of three months, unlike other serviced apartments where the minimum rental period is seven days. Strata subdivision of both standard serviced apartments and SA2 is not allowed.

Three sites have been rolled out so far since the pilot programme was announced last year. The three state land tenders to date of sites with SA2 components – all of which closed this year – drew lukewarm responses. 

A 99-year leasehold site in Zion Road that can house an estimated 1,170 residential units, including 435 long-stay serviced apartments, was awarded in April to the sole bidder – a City Developments Ltd (CDL)-Mitsui Fudosan tie-up – for S$1.1 billion. 

The 99-year leasehold Upper Thomson Road (Parcel A) site, which is slated for the building of homes including SA2 units, drew no bids when the tender closed in June.

The tender that closed on Sep 19 for a 60-year leasehold Media Circle site for the building of long-stay serviced apartments with commercial at first storey drew a sole bid from a Frasers Property -led group. On Oct 3, the Urban Redevelopment Authority said it was not awarding this site as the S$120 million bid, which translates to about S$461 per square foot per plot ratio (psf ppr), was assessed to be too low.

Perhaps, developers dislike sites with both standard homes and SA2 as homebuyers may be wary of long-stay serviced apartments cannibalising rental demand for standard housing units within the development. 

Media Circle SA2 site

Still, what the tender results for the predominantly SA2 site at Media Circle, which can yield 520 serviced apartments, shows is that many property groups are uninterested in SA2.

The Media Circle SA2 site sits in the Buona Vista area, which is home to academia as well as firms in the technology and life-sciences sectors. Yet, many groups here with hospitality expertise did not bid for the site. One might have expected CapitaLand Investment’s The Ascott Ltd – a major player in serviced residences – possibly working with partners to bid. However, it, and other leading players with hospitality capabilities such as CDL, UOL Group , Far East Organization and Wing Tai , steered clear of the site.

Based on the Singapore Land Authority’s table showing leasehold values as a percentage of freehold value, land with lease terms of 60 years and 99 years are worth 80 per cent and 96 per cent of freehold land, respectively.

Applying the above, the bid price of S$461 psf ppr for the Media Circle SA2 site’s 60-year leasehold land translates to about S$553 psf ppr if the land lease was 99 years.

Such a price is far below that of S$1,191 psf ppr for a 99-year leasehold site at Media Circle, earmarked for residential with commercial at first storey, which was sold to Qingjian Realty and Forsea Residence in February.

Moreover, a developer of a 60-year leasehold SA2 project could conceivably exit by selling the completed building to a listed or unlisted property fund, which may be more focused on yield and less concerned with the property’s shorter land lease. Recently, CapitaLand Ascott Trust announced the proposed acquisition of hospitality asset lyf Funan, which has remaining land lease of about 54 years. 

User demand for SA2

Perhaps the tepid demand for sites with SA2 components ultimately reflects uncertainty over user demand for long-stay serviced apartments.

Presumably, long-stay serviced apartments occupy a mid-point in pricing between pricier standard serviced apartments and cheaper private homes for broadly comparable units.

The minimum rental period is three months for a private home and six months for a Housing and Development Board (HDB) flat.

Might foreigners working or studying here who need accommodation for several months or more prefer for cost reasons to choose a private or HDB home over an SA2 unit? Locals, who are renovating a home or waiting to collect the key to a new home, may likewise avoid renting long-stay serviced apartments due to cost considerations.

On the other hand, standard serviced apartments work better for those who are looking for lodging for under three months, as well as those who are unsure whether they need lodging for more or less than three months. For example, committing to a three-month stay in a long-stay serviced apartment might prove costly if one ends up staying for two months instead.

Certainly, the government should try out new ideas to help address housing needs such as introducing SA2. However, if the SA2 experiment yields lacklustre results, it may be timely to drop selling sites with SA2 components, and test other policy tweaks or new ideas.

Meeting rental housing needs

With private homes, there may be a more limited pool of new buyers purchasing homes to lease out, given the high Additional Buyer’s Stamp Duty (ABSD) that applies to Singapore citizens and permanent residents buying multiple homes, as well as non-permanent resident foreigners buying any home. Meanwhile, tight rental restrictions apply to new HDB homes that are classified as Plus or Prime.

Ideas to boost private rental housing supply can include lowering ABSD rates for various groups of homebuyers, or allowing developers of new homes to retain some units for leasing for a couple of years after completion without being hit with clawback of ABSD that was remitted upfront.

In public housing, maybe HDB should actively build and manage new homes for lease by locals and foreigners. This can go far beyond what it does today of renting homes to lower-income Singapore citizen households with no housing options or family support and providing temporary housing for first-timer married couples awaiting completion of the HDB flat they booked.

Meeting the rental housing needs of locals as well as foreigners who come to work and study here matters. However, going forward, ditch SA2 and try out other ideas instead so as to ensure ample choice of rental housing.