Residential leasing - the laws of demand and supply

RENTS of private residential property have been correcting since August last year, in line with the weak economy. While the traditionally busy period in April saw a surprise 2 per cent spike in rental values, the question is whether a more sustainable recovery is in sight. To get an answer to this, we have to look at the supply-demand dynamics in the residential market.

A quarter of Singapore's 4.84 million residents are foreigners, and this is the group that drives the leasing market. This is because Singaporeans generally don't rent, choosing to live with their parents until they can buy their own homes.

Employment in the services sector grew by over 30 per cent in 2007, especially in financial and professional services, according to numbers from the Ministry of Manpower. This is a major factor accounting for the surge in the expatriate workforce. Foreign employment stood at 1.06 million, or 35 per cent of the total workforce of 2.95 million.

The profile of the expatriate workforce has evolved through the years. Expatriate employment is no longer limited to top management posts and now includes middle management and executive functions. There is a wider variety of expatriates as well -from Europeans and Americans to other Asian nationalities; and from singles to couples with teenage kids. Depending on demographics and employment status, their accommodation preferences vary.

For expatriates, location is a key consideration. They would prefer to stay 1) near transportation and amenities (MRT station, malls, even expatriate clubs), 2) near schools, and 3) close to the workplace. Residential projects that meet these criteria will generally see steady demand which means they can command good rentals.

Expatriate packages
Expatriate packages have been revised with the changing times. It is rare today to see the typical full expatriate relocation package that covers housing, car, club and school costs. With tighter budgets, mid-management expatriates are now mostly offered a package under localised terms that covers accommodation costs. Or it may be a hybrid package that offers a mix of benefits.

The expat housing terms usually fall into three categories. The first, a corporate lease, allows the landlord to deal directly with the employer. It is most commonly adopted for a full expatriate or hybrid relocation package.

The other two forms of leases, namely 1) corporate lease with personal indemnity and 2) personal lease, are usually signed under a package with localised terms. Under these terms, the employee is responsible for the expenses under the lease. The only difference is that under a personal lease, the leasing contract is between the employee and the landlord. Under a corporate residential lease with personal indemnity, the employer signs the leasing contract with the landlord while the personal indemnity is borne by the employee.

Under the latter two leases, the tenant bears the burden of any additional cost in a lease should it exceed the allocated budget. If the rent is below the allocated budget, the tenant who takes up a personal lease enjoys the savings. For the tenant who uses the corporate residential lease with personal indemnity, any savings on rent is split between the company and the tenant. This burden of costs/savings will have a major impact when it comes to rental negotiations.

Supply
A collective sale frenzy in 2006 and 2007 saw a slew of prime residential projects taken off the market for redevelopment, especially in districts 9, 10 and 11. There were close to 100 such developments transacted in the two years, which reduced the leasing inventory by about 6,000 units.

In the interim, the impact of this large withdrawal has been greatly felt. Of course, this removed stock will eventually return to the market as new supply. While this will give tenants more choices, landlords will face greater competition, especially if the economy doesn't improve and demand remains muted.

There are an estimated 4,000 prime residential units due to be completed by 2011. These include both luxury (usually with larger units) and typical prime units. Following the popularity of luxury units during the property boom, there are a few such projects scheduled to come into the market in the next two years. They include The Marq (66 units), The Hilltops (241 units), Ritz Carlton Residences (58 units), Ardmore II (118 units), Grange Infinite (68 units) and Orchard Residences (175 units).

This does not include the projects sold en bloc to developers for redevelopment into luxury condominiums which have yet to get their sales licences. As such, the names or number of units in these developments are not known. Among these projects are Ardmore III (Wheelock Properties), Pin Tjoe Court (Pontiac Land Group), Anderson 18 (joint venture between Wing Tai and City Developments), The Ardmore (SC Global), Lucky Tower (City Developments), Beverly Mai (HPL Properties) and Grangeford (OUE).

Rents are expected to come under severe pressure when ample new supply comes onstream at a time when market demand is weakening.

Overview and outlook
With the dampened sentiment in the corporate sector, housing budgets have seen cuts of 10-20 per cent. Expatriates, especially those on personal lease or corporate residential lease with personal indemnity, will be motivated to downsize or be on the lookout for discounted rents as they seek greater savings.

The softening demand and the new supply of some 2,000 non-landed units in the first quarter have put further downward pressure on rents. Some large completed projects include Rivergate (545 units), The Suites at Central (157 units) and the remaining City Square Residences (estimated at 439 units). In addition, there were about 1,600 previously en bloc units that have been released back into the rental market as short-term leases at much discounted rental rates.

These are the main reasons for the major rental correction of about 18 per cent over the past few months. Any recovery of the leasing market in April 2009 can be attributed to the following factors. Traditionally, the months from April to July are the seasonal highs in lease take-ups and renewals. Leases are usually signed to coincide with the summer break in international schools.

Islandwide demand has remained fairly stable as the retrenchment of the expatriate workforce in the financial sector was offset by new hires in other industries such as R&D and biomedical science. In addition, there has been restructuring of some financial institutions where business units in Europe and the US have been relocated to Singapore to tap into Asia's growing wealth.

A recent survey of five large, Singapore-based moving companies by the American Chamber of Commerce in Singapore has shown that inbound shipments rose more than 10 per cent from 2007 to 2008 and outbound shipments increased nearly 8 per cent from 2007 to 2008. However, they are expected to drop by 2 per cent in 2009.

As a cautionary note, there could be a delay in the correction of expatriate demand as most expatriates today hold personal employment passes (PEP). Under this scheme, PEP holders do not need to re-apply for a new employment pass when changing jobs. They also can stay for up to six months here without any valid employment compared to only two months previously. Should the employment market remain weak, we may begin to see a delayed exodus of these expatriates if they do not get re-employed soon.

Leasing demand may also soften as more expatriates weigh the attractions of buying their own home as opposed to leasing it. With the current low interest rates and discounted housing prices, it is possible that expatriates who have been living in Singapore for some time may seek a more permanent accommodation and residential status.

Having said that, supply remains limited this year, especially for larger luxury units. Existing projects such as The Claymore, Claymore Point, Four Seasons Park, Ardmore Park, The Colonnade, Regency Park, and Yong An Park are enjoying high occupancies. As such, renovated units in these older developments are still commanding high rentals.

Similarly, supply of quality residential projects in prime districts remains limited this year. The spillover demand for luxury projects will likely benefit these sub-markets. Residential projects in the prime districts are still the preferred choice for many expatriates.

But with more completions in the pipeline, impending supply remains the biggest concern for the market. Unless the global economy picks up and expatriate inflows increase, prospects for the leasing market here will be bearish, particularly in the luxury segment.