No respite from Singapore’s scorching rents

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Singapore’s real estate market is in the midst of a 2008-type mania, with landlords squeezing tenants for every penny they can. The previous frenzy ended with the collapse of Lehman Brothers. This time, too, apartment rents will skyrocket, although the process likely won’t happen as quickly as the city-state’s expat community is hoping.

Among major world cities, Singapore shared with New York the dubious accolade of fastest rent growth in the first half of 2022. But the pain for renters isn’t over yet. To see why, look at the problem from the landlord’s perspective. Mortgage costs of 2.4% – a premium of 1 percentage point over the 3-month average overnight rate in Singapore – are twice as high as a year ago.

During the pre-Lehman real estate craze, borrowing costs for variable-rate mortgages were falling. Now they are sloshing. As the Federal Reserve continues to hike interest rates, landlords will want to earn at least 3.5% annually on their cost of ownership. However, rental yields in excess of 3% on a new investment can only be found in the eastern or western suburbs, or in the northern parts of the island – close to Malaysia.

Property values ​​around the central business district, which are favored by foreign renters, have gotten so expensive that yields have fallen: rents there need to rise more for the bill to work for homebuyers. Higher asking rents will find many buyers in a tense market. But they will pinch bankers and executives returning to the city as post-pandemic economic activity normalizes. PropertyGuru Pte. says that based on converted sessions on its portal – when home seekers leave the supply side to inquire about the properties – leasing demand is back in the so-called central core region. Though rents in this expensive neighborhood rose 7.7% in the second quarter, they’re still catching up.

The other reason renters can’t hope for a grace period anytime soon is Hong Kong. Singapore’s rapid reopening after the pandemic has bolstered its appeal, even as the half-measures taken by the rival financial hub – like cutting mandatory hotel quarantine for visitors and returnees from seven days to three – make life in China’s SAR a frustrating experience. As Hong Kong shrinks – its 1.6% population decline in the 12 months to June was the worst in at least six decades – Singapore needs to strengthen. This requires some adjustments on the housing market.

In 2020 and 2021, household formation in the city-state all but ground to a halt as Covid-19 eroded the ranks of foreign-born residents. In the past four decades, the only other instance of such a severe freeze was in 2011-2012, when the government responded to its poor electoral performance by cracking down on immigration. But while the traditional source of condominiums – the expat population – has declined during the pandemic, local demand has increased. Delays in building subsidized housing by the Housing and Development Board resulted in young Singaporean couples temporarily renting HDB housing from others. As this narrowed the affordability gap between public and private housing, some of the pent-up demand flowed into the housing market.

However, there are now first signs of a trend reversal. In “perhaps a sign that the HDB rental market is finally slowing down,” asking rents for public housing on PropertyGuru posted their first quarterly decline in three years in the three months to June, the portal’s researchers note. This is good news for expats, albeit for the time being. Around 78% of resident households live in social housing; even a slight shift in and out of this larger market impacts rental demand for condos, which make up 17% of homes. (The remaining 5% live in cottages.)

Even if the government is choosy about how many expats it lets in and construction is progressing at the pre-Covid-19 pace, new homes to alleviate the current crisis are not being built overnight; Tenants will continue to be squeezed for a while. Once rental yields more closely match the rising interest costs of homebuyers, there will be buyers for the 17,400 new homes that will be ready for occupancy across the island in 2023, a sharp increase from the 10,300 this year. Then rental growth could weaken, according to Bloomberg Intelligence.

Some help will come from the government: Singapore imposes heavy tariffs on developers who hoard land to create scarcity. Many of the upcoming projects of 2023 may want to avoid the tax by selling their units to individual buyers or investment firms. The faster new houses are built and sold, the faster the private vacancy rate falls from 5.4% to the long-term average of 7%.

However, this is not the year 2008. Unless the real estate market is severely shaken by a global recession, it will take some time for the demand-supply balance to be restored. Meanwhile, renters may be struggling for a respite from the scorching rents.

More from the Bloomberg Opinion:

• Singapore’s Beverly Hills shows foam: Andy Mukherjee

• Singapore landlords are not afraid of a global economy: Andy Mukherjee

• Real estate in Singapore is in great demand even without expats: Andy Mukherjee

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering Asian manufacturing and financial services. He previously worked for Reuters, the Straits Times and Bloomberg News.

For more stories like this, visit bloomberg.com/opinion

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