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Property News28 May 2015

Singapore Property: A Patchwork Quilt of Market Rental Yields

Find the Market Rental Yield for your area.

In the era of Cooling Measures, sales transactions in the Singapore property market are becoming more of a rarity.  The action is in rentals, at least in terms of the number of deals.

According to SRX Property, rental deals represented about 67% of the 115,864 total property transactions in 2014 and, so far, are tracking at about the same percentage in 2015.

In contrast, rentals represented 37% of the market’s transactions in 2010, when the government started implementing the sellers stamp duties as the first major phase of the Cooling Measures.

In 2014, the market transacted almost $300 million in rental value compared to a sales value of nearly $41 billion.  

While the market’s rental value pales in comparison to sales value, individual rents are no small potatoes to landlords and renters.

As such, there is a natural tension between the two groups.  Landlords want to keep rents up while renters want to move them down.

The challenge for the landlord is embedded in the rental yield formula.  From the landlord’s perspective, the gross rental yield is the annual rental income divided by the home’s purchase price.

The landlord’s first task is to negotiate the right home at the right price so that the denominator of the rental yield formula is as low as possible.  

The second task is to get the highest rent possible while keeping expenses low.  Expenses come into play in the net rental yield formula.  The numerator in net rental yield is rental income minus expenses minus taxes.  The landlord then divides this numerator by the home’s purchase price.

As much as the landlord would like to control the rent, he or she is at the mercy of market forces.  Many factors influence rent, including (to name a few) supply, demand, location, property type, attractiveness of buying versus renting, and the rental’s condition.

However, by looking at SRX Property’s heatmap for market rental yields, you can get a sense for what you could earn if you were to buy a home today and rent it out. 

The heatmap and tables show the real-time, market rental yield for each planning region.  SRX Property used the real-time rental X-Value and Sales X-Value for each apartment to calculate the unit’s rental yield.  It then took all the individual rental yields and calculated the average for each planning region. Heatmap of Market Rental Yield for Leasehold Condominiums by Planning Area 

Note that SRX Property calculated the gross market rental yields for both 99-year leasehold and freehold, as the latter tends to sell at a premium, which, in turn, pulls down the rental yield.

For example, the highest market rental yield for 99-year leasehold is 4.5% in Punggol.  In contrast, the chart-topper for freehold is Geylang at 3.7%.

Heatmap of Market Rental Yield for Freehold Condominiums by Planning Area

The logical conclusion is that if you plan to invest in a rental, it is better to buy a 99-year leasehold in terms of rental yield.  The reason is that tenants are unwilling to pay more in rent for a freehold than a 99-year leasehold because the difference in tenure registers no value with them.

In the end, what makes for a good gross rental yield is subjective.  It depends on the investor’s objectives, risk tolerance, and the returns available from other asset classes.

For example, in a low interest environment in which cash yields below 1%, you might consider a 3% gross rental yield justifies the hard work and risk of being a landlord.

However, if you can get a 7% return on stock with the same level of risk, you might decide to place your money in stock rather than in real estate.  

Or, maybe you will invest in both stock and real estate, as you are happy with the 3% gross rental yield as part of a diversified portfolio of cash, stocks, bonds, and property.

As you can see from the heat map, Singapore property is a patch quilt of market rental yields.  Therefore, it is up to you to determine if the market rental yield in your neighbourhood makes it interesting for you to invest in rentals there. 

Source: Singapore Property: A Patchwork Quilt of Market Rental Yields
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