New supply boosts prime residential rentals

Market average expected to maintain or rise marginally despite completion of good quality developments.

Jones Lang LaSalle preliminary estimates showed that the average prime non-landed residential rental experienced a slight uplift of 1.1% q-o-q to $4.65 per sq ft per month in 3Q10 as higher rentals commanded by the new completions benefited the rentals in the existing projects. From the start of this year to August, approximately 1,520 units – coming from notable projects such as Skypark and Ardmore II where leases are transacting above market average – have been completed in districts 9, 10 and 11, according to a Jones Lang LaSalle report.

Average rentals commanded in alternative locations felt the impact of the new supply. Average rental in the popular Central districts maintained while that in the traditional East Coast districts slipped 4.3% q-o-q to $3.30 per sq ft per month.

While rentals may be boosted when good quality developments are completed, market average for prime residential properties is expected to maintain or rise marginally at best, in view of the substantial upcoming supply in the next few years. An estimated additional 14,000 units are scheduled for completion from end-2Q10 to 2015; this translates to around 2,500 units per annum on average or 1.5 times the historical 10-year average of around 1,600 units per annum.

While this may lead to oversupply concerns, Dr Chua Yang Liang, Head of Research South East Asia noted that the upcoming supply is much welcomed by the market, “The upcoming supply in the prime market is expected to raise the proportion of developments aged 10 years and below from the current 44% to 47% by 2015. With the collective sales market becoming active again, there are also opportunities in acquiring properties built more than 20 years ago – which now makes up almost a quarter of the existing stock – and redeveloping them into smaller units for attractive returns.”

A 27-year old development Meng Garden Apartment located off Killiney Road was recently sold for $137 million. Assuming that the existing 27-unit development is redeveloped to accommodate 95 apartments averaging 1,000 sq ft each, a profit margin of 10-15% may still be achievable based on a construction cost of $300 per sq ft and launch price of $2,000 per sq ft that projects in the vicinity are currently commanding.

Recently, corporate investors are also increasingly active in property purchases in the prime market, the latest being Alpha Investment Partners which acquired 23 apartments in Draycott Eight at around $2,300 per sq ft. Based on the caveats lodged retrieved on 17 September 2010, 18 companies have made property purchases in 3Q10. This is one of the highest numbers of corporate buyers recorded in a quarter (considering that the quarter’s numbers have not closed) since these investors stayed away from the local residential market in 1Q08.

The corporate buyers that are currently out in the market are typically looking at properties priced at $2,300 per sq ft and below with an investment horizon of three to five years. For those that have acquired sole ownership in projects, they are usually able to raise rentals by 10-15% for the entire development apart from the potential capital appreciation.