Rental yields rebound, but hold that bubbly!

Gross rental yields of private condos have rebounded in the first half of 2014 in all regions across Singapore, after having slid since 2009. This is due to resale prices falling at a faster rate than rents.

 

However, market watcher say this rebound is likely to be a blip, given that the leasing market continues to soften and vacancy rates are rising.

 

Gross rental yields in the north-east region of Singapore led the recovery, up from 3.73% last year to 4.03%. The smallest improvement was registered in the central area, with yields increasing to 3.39% from 3.37% last year.

 

Topping the list of planning areas with the highest rental yields are Ang Mo Kio and Yishun, with gross rental yields of around 4.2%. Six planning areas attracted rental yields of more than 4%. The lowest-yielding areas are the prime locations, with homes in Orchard area attracted the lowest gross rental yield of 2.7%.

 

 

But the dynamic could shift with huge supply of completed condos coming onstream, mainly in the suburbs. The significant supply of units expected to enter the rental market during this year and next also comes at a time when expatriate hiring and leasing demand has moderated. Thus rental yields in the suburban market may weaken again if suburban rents fall faster than capital values.

 

Rising vacancy rates and difficulty in securing tenants are already weighing on the minds of investors, who typically want to invest in a property that can generate net positive cash flow on a stable and sustainable basis. And their property purchase will have to take into account of borrowing costs, operating expenses and property tax into their property purchase.

 

URA data shows that vacancy rate island-wide has spiked to 8.3% in Q2 2014 - higher than the 7.3% during the third quarter of the 2009 recession year.

 

With buyers more driven by appreciation than by gross rental yields, the slight improvement in yields is unlikely to influence their buying decisions. Investors are also more inclined to assume higher vacancy risks when prices fall substantially.

Info source: BT

 

So our local condos that will easily set you back more than a million dollars are currently averaging less than 4% in gross rental yields. And the yields (miserly as is) are expected to fall even further come next year. Then there is the double whammy of all the restrictions imposed on local property investment. Given such, can one really fault Singaporean investors for "looking outwards" (where purchase quantum are smaller and expected rental yields are higher) in search of better returns for their dollars, despite MAS harping about the added risks associated with such foreign property investments?