A patchwork quilt of rental yields

In an era of cooling measures and loan curbs, sales transactions in the Singapore property market continue to languish. The action is in rentals, at least in terms of the number of deals.

SRX Property data shows that rental deals represented about 67 percent of a total of 115,864 property transactions last year and are hovering at about the same percentage so far this year.

In contrast, rentals represented 37 per cent of the market’s transactions in 2010, when the Government started implementing the seller’s stamp duties in the first major phase of cooling measures.

In dollar terms, almost S$300 million in rental value was transacted last year, compared with a sales value of nearly S$41 billion. While the market’s rental value pales in comparison to sales value, individual rents are no small potatoes to landlords and renters.

There is a natural tension between the two groups: Landlords want to keep rents up while renters want them down. The challenge for landlords is embedded in the rental-yield formula. From the landlords’ perspective, the gross rental yield is the annual rental income divided by a home’s purchase price.

A landlord’s first task is to find the right home at the right price, so 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 less expenses and 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 is at the mercy of market forces. Many factors influence rent, such as supply, demand, location, property type, attractiveness of buying versus renting and a rental unit’s condition.

By looking at SRX Property’s heat map for market rental yields, you can get a sense of what you can earn if you buy a home today and rent it out.

The heat map 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 a unit’s rental yield. It then took all the individual rental yields and calculated the average for each planning region.

Note that SRX Property calculated 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 rental yield.

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

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

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

For example, in a low interest-rate environment where cash yields below 1 per cent, you may consider a 3 per cent gross rental yield as justifying the hard work and risk of being a landlord.

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

Or, maybe, you will invest in both stock and real estate, as you are happy with the 3 per cent 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 patchwork quilt of market rental yields. Thus, it is up to you to determine whether the market rental yield in your neighbourhood makes it interesting for you to invest in rental units there.

ABOUT THE AUTHOR: Sam Baker is co-founder of SRX Property, an information exchange formed by leading real estate agencies in Singapore to disseminate market pricing information and facilitate property listings and transactions. For more details on the data and calculations used in this article, visit SRX.com.sg/research.