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Exploring the Benefits of Building-to-Rent Amidst High Home Rentals

Updated: Apr 6, 2023

Eight Riversuites

Residential landlords are facing higher property tax rates and many homeowners are experiencing escalating borrowing costs. As a result, low-risk investment alternatives like Singaporean dollar fixed deposits, treasury bills, and Singapore Savings Bonds are becoming more appealing due to their higher interest rates.

Despite this, residential landlords are seeing a boost in rental rates. According to data from the Urban Redevelopment Authority, private home rentals increased by 29.7% in 2022 after rising 9.9% in 2021. Even Housing and Development Board (HDB) flat rentals have also increased.

HDB's data on approved applications to rent out HDB flats show that the median rent of a four-room HDB flat rose by 25-33% year-on-year to $$2,900 in Ang Mo Kio, S$3,200 in Clementi, S$3,600 in Queenstown, and S$2,650 in Woodlands in Q4 2022. In the luxury private home market, a four-bedroom unit at The Marq on Paterson Hill was leased for S$100,000 a month starting from October 2022. A detached landed home at Astrid Hill hit a monthly rent of S$170,000 in January.

In order to prevent home prices from outpacing economic fundamentals, the government has taken action by implementing cooling measures such as raising Additional Buyer's Stamp Duty (ABSD) for many home buyers in mid-December 2021 and tightening limits on home loans in late-September 2022.

Do we require significant intervention to lower the soaring rental rates of homes? Typically, rental rates for HDB flats and private homes are determined through private negotiations between landlords and tenants, and are influenced by factors like location and the availability of furnishings and appliances. Although increased rental rates may be beneficial for retirees who rely on rental income as a major source of revenue, it may not be without its drawbacks. A rapid rise in rental rates could have negative consequences.

To begin with, although many Singaporeans are homeowners, there are also young adults who rent homes, including couples who are attempting to secure a new HDB flat or waiting for their new home to be completed. Additionally, some individuals who are under 35 years old and hoping to purchase an HDB home may choose to rent first. Furthermore, certain prospective homebuyers may opt to rent a home initially in order to save more money for the down payment or to increase their borrowing capacity for a future purchase by anticipating higher income.

With the substantial rise in the cost of many goods and services, increased rental rates for homes may pose a challenge for young adults who desire to settle down and start a family in Singapore. Moreover, higher home rentals could potentially complicate matters for locals who wish to downsize their homes. As the population ages, there may be more individuals who wish to trade their current homes for more affordable options in order to release funds to support their retirement expenses. Although there are adverse consequences associated with elevated rental rates, it may not be necessary to implement significant measures to cool the market.

Individuals who own a private home and intend to sell it to purchase a HDB unit may need to consider renting a property in the meantime. A waiting period of 15 months is enforced for both private homeowners and former private homeowners who wish to buy non-subsidised HDB resale flats. However, this waiting period is not applicable to those aged 55 and above who are transitioning from private homes to four-room or smaller resale flats.

For locals who sell their owner-occupied homes, renting a property in the interim may be necessary to provide them with the time and peace of mind to find a suitable replacement home or due to tax reasons. If a single Singapore citizen sells their sole property, they may need to rent a home first before purchasing another property to avoid paying ABSD.

On the other hand, married couples who own a private home jointly, with at least one citizen, can be eligible for full ABSD remission when purchasing a new property without selling their existing home, subject to meeting various conditions. One such condition is that the first home must be sold within six months from the date of purchase of the second property for completed property or the issue date of the Temporary Occupation Permit (TOP)/Certificate of Statutory Completion (CSC), whichever comes earlier if the home was uncompleted during the time of purchase.

In order to avoid being under time pressure to sell their existing home, some married couples may decide to sell their owner-occupied home first and rent in the interim before purchasing a replacement home. Additionally, many foreigners who are highly skilled and can afford to buy homes in Singapore may choose to rent instead due to uncertainties over the length of their stay and the 30% ABSD that applies to non-permanent resident foreigners who want to purchase a home in Singapore. As of mid-2022, Singapore citizens and permanent residents make up almost two-thirds of the total labor force of 3.75 million.

The competitiveness of home rentals is crucial, as multinational companies may consider home leasing expenses when deciding where to expand their operations and recruit talent. Additionally, high home rentals may discourage young individuals in the region from pursuing higher education and job opportunities in Singapore. Consequently, Singapore's capacity to attract global talent and young people, who enhance the economy and the city's liveliness, may be impacted by high home rentals.

However, it might be preferable to allow market forces to determine home rentals. Tenants have various options when it comes to choosing locations, unit sizes, housing type, and renting an entire unit or a room. In the long run, it might be worthwhile to explore developing a build-to-rent (BTR) segment in the private housing market. BTR housing has been a successful investment asset class in several other regions. The government could offer sites for BTR housing projects, with the purchaser required to develop the units solely for lease, not strata sale. Additionally, BTR housing developers may be exempt from paying ABSD.

Offering a thriving build-to-rent (BTR) sector would provide renters with greater options and professionally managed rental properties. While BTR property developers may push rents, they can also offer a high-quality experience to renters. When BTR developments compete with one another and other landlords, it benefits renters as they can enjoy strong products and competitive rates. In addition, Singapore's capital markets may benefit over time if investors are able to invest in listed BTR trusts.

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