How Does the Singapore Government Cope With The High Rental Demand?

Singapore’s rental price index has surged by 55% since the fourth quarter of 2020. This means that it is much more expensive to rent now compared to three years ago. However, there is a glimmer of relief as it has shown signs of stabilisation in the most recent quarter.


Source: URA

The substantial increase in rental prices can be attributed to three primary factors:

Firstly, there has been a restriction placed on re-issuing Option to Purchase (OTP) that is implemented on September 28,2020. 

Previously, developers were able to extend the option period indefinitely by re-issuing OTP once the initial OTP expires. This is done to avoid Additional Buyer Stamp Duty (ABSD) as purchasers can secure a new unit without having to immediately sell their current property. This means they can stay in their current property while waiting to collect the keys to their new unit.

After the restriction, purchasers have to sell their property immediately once they book a new unit in order to avoid ABSD. Thus, while waiting to collect their keys, they cannot stay in the property they have sold and have to find somewhere to rent. 

Thus, this contributes to the increased rental demand and consequently, increased rental prices.

Secondly, the COVID pandemic in 2020 led to delays in the completion of construction projects in Singapore. As mentioned above, this increased the duration of homebuyers having to rent while waiting to collect their keys, further reducing rental supply in the market.

Furthermore, the slowed pace of construction resulted in a reduced influx of new rental units into the market. This combination of heightened demand and diminished rental supply contributed significantly to the sharp spike in rental prices.

Lastly, the prevailing high-interest rate environment in recent years has amplified borrowing costs, diminishing the affordability of housing, leading to individuals having to opt for renting rather than buying, intensifying the demand for rental properties and subsequently propelling prices upward.

In response to the high rental demand and in a bid to prevent prices from spiralling out of control, the Singapore Government has recently unveiled strategic plans. Two pivotal measures have been introduced to address this pressing issue and we will be discussing them in this article.

Long-stay Serviced Apartments

National Development Minister Desmond Lee announced on 29 November 2023 that the Government is going to pilot a new class of serviced apartments called the long-stay serviced apartments. So what are serviced apartments? No they are not new chalets or villas in Singapore.

Here are the two types of Service Apartments summarised:

 

Service Apartment (SA)

Service Apartment II (SA2)

Definition

Self-contained apartments with kitchenettes/kitchen, and typically provide support services such as concierge, common dining areas, housekeeping and/or laundry for the residents

Strata Subdivision Allowed?

No

Min Rental Period

7 Days

3 Months

Source: URA

The existing SA, characterised by a minimum stay period of 7 days, faces significant demand from three distinct categories of individuals: tourists or short-term travellers, long-term foreign workers or students, and homeowners undergoing renovations or awaiting key collection.

In contrast, the newly introduced SA2 features a minimum stay requirement of 3 months, effectively screening out short-term visitors, especially tourists. This adjustment indicates a strategic shift in targeting SA2 units more towards homeowners and the workforce, aligning with the extended accommodation needs of these specific demographics.

These new SA2 units can be found in two sites, namely Zion Road (Parcel A) and Upper Thomson Road (Parcel A).

Source: URA

These sites are strategically situated in convenient locations near the MRT, and collectively, they will introduce a total of 535 serviced apartments into the rental market. This additional supply is expected to alleviate the rental pressure experienced in Singapore, with the aim to reduce or stabilise rental prices.

On the flip side, investors renting out their units could experience heightened competition in the market, placing additional pressure on them, especially those who are renting out 1 bedroom/2 bedroom units. 

For new launch condominiums near MRTs, 1 bedroom units are already costing around $1.2 – 1.3 million and considering the current floating interest rate at around 4.1% per annum, the monthly mortgage is around $4,300 to $4,700.

Source: I Quadrant App

Thus, landlords, in order to break even, have to price their rents at around $4,500 to $5,000/month. 

Currently, you’re able to get a decent hotel room at around $200 a night which translates to $6000/month. Considering serviced apartments are for long term stay, the rent might be slightly cheaper at $5000/month.

At the same price point of $5000/month, a potential tenant would definitely choose to rent a serviced apartment compared to a normal residential unit as there are the benefits of extra services, such as laundry, housekeeping and a concierge.

Landlords of 1 bedroom/2 bedroom units potentially have to lower their asking rent in order to attract tenants resulting in a negative cash flow. However, the real impact will only be felt 4-5 years from now as these SA2 would still need time to be constructed. 

Now, let us look at the second measure that the Government has come up with.

Higher Occupancy Cap

On December 20, 2023, the Urban Redevelopment Authority (URA) and Housing Development Board (HDB) jointly announced an increase in the occupancy cap from the existing limit of six unrelated individuals (defined as those not from the same family unit) to eight. This adjustment will be in effect from January 22, 2024, to December 31, 2026.

The changes are summarised in the tables below.

Source: URA, HDB

The changes primarily impact 4-room and larger units for HDB flats and private properties that are 90 sqm (969 sqft) and above. While this adjustment may slightly ease rental demand, it’s important to note that it is only a temporary measure lasting for three years.

One valuable insight from this announcement is the government’s establishment of a benchmark for smaller units, evident in the 90 sqm threshold. Therefore, for those considering property investments, opting for 4-room and larger units for HDB flats and properties with a size of 90 sqm or above would be a prudent choice.

What does this mean for tenants and landlords in Singapore?

While tenants can potentially enjoy lower rental prices and feel less of the pinch, landlords may see a dip in their rental yields, especially for those investing in 1-bedroom or 2-bedroom units.

The adjustments in government policies, such as the increase in occupancy caps and the introduction of SA2 also underscores the Government’s initiative in controlling rental prices and preventing it from spiralling out of control.