It’s a Renter’s Market
3 Consequences for Landlords
Private apartment rents are down 12.4% since their peak in January 2013. In June, rents dropped another 0.5% even though the number of transactions increased.
The market has clearly shifted in favor of renters as landlords face increased competition (i.e., supply) and decreasing demand as a result of tightening of immigration rules and expatriate housing budgets.
There will continue to be downward pressure on rents as long as the current market dynamics prevail.
At this point, there are no signs that rental supply will tighten any time soon. In fact, urban planners expect more than 40,000 private flats to come on market by end of 2016.
On the demand side, it is a wait-and-see on the Government’s immigration policy. Furthermore, it is unlikely that employers will return to the pre-financial crisis go-go years of lucrative expatriate housing budgets.
The history of expatriate housing budgets is that employers are forced to provide lucrative packages in emerging markets to get employees to leave their home countries. The lease is put in the company’s name to protect the employee from dodgy tenant laws. As the market evolves into a first class economy, it is difficult for the multinational companies to unravel the housing budgets because they have set a precedent for the next generation of expatriates. The employers found that they could not cut the packages without a good excuse.
In the case of Singapore, multinationals were trying to rollback budgets long before the Global Financial Crisis (GFC) as Singapore is hardly a hardship post and the rule of law is strong.
Adroit multinational managers subscribe to the axiom “never let a good crisis go to waste” and most of them used the GFC to rollback the lucrative housing packages and shift responsibility for housing to the expatriate employee.
The current dynamics has three ramifications for landlords:
- Negotiating power has shifted to renters;
- Reduction in rental income and downward pressure on individual rental yields has significant financial ramifications for landlords and the rental industry;
- Expense management becomes even more important and tricky.
Negotiating Power
The balance of power has shifted to the renters. They know they have plenty of rental options. As such, they have the upper hand in negotiations.
In a down market, renters know that they should be able to get the rent at or below the X-Value. (SRX Property’s X-Value uses computers and comparable market analysis to estimate rents for all properties in Singapore and is available from your agent and or on your personalized webapp my Property Tracker at SRX.com.sg/tracker.)
Anecdotal evidence from focus groups with prospective renters reveals that some landlords are trying to dig in and rent above the X-Value. However, the same renters have later received SMS messages from many of those landlords’ agents telling them that the landlords have reconsidered and lowered the rents.
Rental Income and Rental Yield
According to SRX Property, the average X-Value rental yield for private apartments with a 99-year leasehold is 3.5% and 3.0% for those with a freehold tenure.
Some analysts suggest that Singapore’s average rental yield is low for a major international city. It is even worse in high end areas like Orchard, Tanglin, and River Valley where the market X-Value rental yield for 99-year leasehold is as low as 2.1%.
Decline in rents are putting downward pressure on individual rental yields, which are probably already low. If rental income goes too low on an individual basis, some landlords may find that their rental income falls below their mortgage payments. (An increase in interest rates could exacerbate the situation even more.) As such, they may find it difficult to service their loans and be forced to sell prematurely or even default.
For those investors interested in entering the rental market as landlords, the current market dynamic coupled with low rental yields portends a tough market ahead. In light of this reality, both investors and existing landlords should recalibrate their expectations for rental yield returns and take a fresh look at the performance and stability of their existing rental portfolios.
Expense Management
The tendency of some landlords in today’s tough rental market will be to cut back on maintenance and renovations to reduce costs as rental income deteriorates. Some will substitute cheap appliances for the old ones. Some will try to shift more of the maintenance costs to tenants. Some will fight even harder on returning security deposits.
Landlords should be cautious that their expense management strategies do not push away tenants in the hands of competitor landlords who are using renovations and other perks to entice renters.
During hot rental markets, landlords can be choosey in whom they take on as tenants. During cold rental markets, the reverse is true. Renters will look more closely at the quality of the rental, the lease agreement, and the reputation and disposition of the landlord.
In summary, whenever the dynamics of the rental market change, both landlords and tenants recalibrate their thinking. Whoever does this quickly and figures out to take advantage of the new market environment is likely to do just fine.