One of the key concerns in the Singapore property market, for 2021 and the near-term, is rental. Unsurprisingly, this is related to the Covid-19 situation. During economic downturns, there’s a chance that companies will cut costs – this means reducing the number of expat employees hired, or lowering their housing allowance. This could have a negative impact on landlords, as foreigners make up the bulk of tenants in Singapore. However, there are a few ways that landlords can cope, without incurring too much cost:
This was the prediction we heard from analysts last year, and the situation remains primarily unchanged.
In particular, the key concern is for properties in the Core Central Region (CCR), such as Orchard, Raffles Place, or other prime city-center areas.
We can see that, since January of 2020, it is CCR properties that have seen the largest drop in rental rates on a psf basis. Rental for CCR districts was down about 3.8 per cent in January 2021, from $4.19 to $4.03 psf.
CCR properties are more vulnerable because they have the greatest proportion of affluent expat tenants, and rely heavily on this segment. In addition, existing tenants here may move a short distance to the city fringe, to areas such as Bukit Timah, where rents are lower but travel time is still not too long.
As such, we can see that RCR properties have been more resilient. Rental has dipped by less than one per cent, and stood at around $3.48 psf in January 2021; it’s more or less similar to last year, when it was at $3.50 psf.
OCR properties have conversely done better in this weak rental market, rising by about 1.7 per cent to $2.85 psf. This was because of a strong – but temporary – uptick that resulted from foreign workers who were unable to return home; one example would be Malaysians who suddenly needed accommodation, due to the Movement Control Order (MCO). As the OCR offers the most affordable rental options, this caused a spike in fringe region condos (actually it was HDB resale flats that seized the lion’s share of these tenants; but I won’t go into that as this article is focused on private homes).
That said, I would caution against being overly confident regarding OCR condos, as their pick-up was due to a transient issue.
There are a few key elements to focus on, in a weak rental market:
1. At the very least, ensure the property is not a liability
Some landlords find it hard to accept a drop in rental income. For example, for certain districts, the rental rate has dropped to around $2,500 per month; a rate that some landlords associate with rented flats.
In the CCR, some landlords find it hard to believe that their monthly rental rate has dropped below $4,000 a month; the psychologically (but not factually) “correct” rental rate for a prime region condo.
The complaints are a bit predictable: “How can my condo have the same rental rate as a flat?” or “How can my condo in Newton be below $4,000 a month?”
However, landlords should remember that property is a long-time commitment with occasional down periods. During these times, it’s important to be realistic. One of the worst mistakes is to be stubborn and accept long vacancies, rather than just getting a tenant to cover the costs.
In 2021, it’s important to remember that a vacancy is always worse than having lower rent. A vacancy means the property is a liability: you are still paying the property tax rate of a let-out property, and you still have to pay the interest on the home loan.
As such, it should be a minimum requirement that, even if you cannot get the rental rate you want, you can at least cover the recurring costs of the property. As such, work out the minimum costs you need to cover, and focus on getting tenants that can at least absorb this amount. Don’t hold out for months on end and lose money, in the hope that a “better tenant” is around the corner (Covid-19 and its aftermath will continue for some time yet).
If you’re not sure about the minimum amount to set your rent at, tell me about your property and I can help you work out the rate.
2. Incentivise longer leases
In downturns, it can be worth giving a discount or non-financial concession (see below) to secure a longer lease.
It may surprise some of you to learn that, during economic downturns, some landlords will see higher leasing volume; and that this could actually be bad. It happens when savvy tenants know the rental market is tough on landlords – as such, they purposely pick minimum leases such as six months.
These tenants expect that rates will continue to decline; and the sooner their lease is up, the sooner they can renegotiate to pay less. As such, some landlords will see leasing volumes rise even as rental rates for their properties seem to fall.
(As an aside, short-term leases tend to incur other costs, such as if you repeatedly need to market the property to find new tenants).
As such, it may be better to give a lower rate to secure a tenant for a longer lease. Don’t forget that finding foreign tenants is also much tougher in a Covid-19 environment, when their numbers are lower.
3. Consider non-financial concessions
Lower rent is not the only way to retain or attract tenants in a downturn. You can also consider concessions that will widen the appeal of your property, without involving money.
A simple example of this is relaxing rules on pets or smoking. A simple change to the rule can result in dozens more prospective tenants. With regard to pets, for instance, tenants are often more reluctant to move after they’ve found a pet-friendly landlord.
Note that this may involve some needed changes, such as swapping out your more expensive furniture, art collectibles, etc (you don’t want your tenant’s cat to claw up your $3,000 sofa!)
These sorts of concessions tend to raise rentability (i.e. how easy it is to find or retain a tenant), but not rental yield (you will rarely be able to charge more because of them). However, they become a viable tactic in unusual situations like Covid-19.
4. Start a referral scheme among tenants
Sometimes, you can’t help the fact that your tenants have to leave. Sadly, Covid-19 has resulted in retrenchments or expats being sent home. What you can do about this, however, is encourage your tenants to bring in their own replacements.
Landlords who cater to student tenants have been doing this for years: students who are referred by their seniors (currently living on the property) may get discounts on rent. The same can be done for co-workers – for example, you can promise to give the same rate to a tenant’s co-worker, if they take over the property.
This can save you the costs of having to market the property all over again, as well as from the risk of vacancy while finding a replacement tenant.
5. Maximise tax deductions, and refinance
In my previous article, I explained that you could claim tax deductions of up to 15 per cent of gross rental income. Now is a good time to review the potential tax deductions, to try and cover for any corresponding drop in rental income.
At the same time, one of the few silver linings of Covid-19 is the low mortgage rate. At the time of writing, interest rates as low as 1.2 per cent per annum are possible (for comparison, the HDB loan rate is 2.6 per cent).
Assuming a loan of $1 million at 25 years, a home loan at two per cent – a common rate in 2018 – would have a monthly repayment of about $4,238. At 1.2 per cent, this falls to just $3,860; a difference of about $378 a month.
Coupled with savings from your property tax deductions, it can be a significant help in maintaining your overall rental yield – even in times of Covid-19.
This means choosing a property asset that will have a minimal disruption on your cash flow, after it’s been rented out. This could mean, for instance, picking a property that can cover its entire monthly repayment.
These types of properties can be tough to find, and are almost never found among new launches. Likewise, they aren’t necessarily the top in terms of return (a positive cash-flow doesn’t always mean good appreciation). But when making defensive property purchases in a downturn, this could be a cautious and prudent step for new investors.