New serviced long-stay apartments are a boon to developers but a curse for private landlords
Recurring Revenue
I think that developers will be attracted to land parcels on which they can build long-stay serviced flats for rent and homes for sales. Such sites allow developers to enjoy both development profits and recurring revenues.
Developers can generate cash by selling uncompleted homes to private buyers. The payments are based on the various milestones of project development. This reduces the financing costs of projects and boosts their internal rate of returns.
These benefits are especially important when the interest rate is high and the margins of property development are slim.
Many developers also aim to increase their recurring income, as well as generating profits from the sale of properties.
A stronger recurring stream of income helps property groups to stabilize their earnings and acts as a buffer during times when profits from development are low, whether due to delays in project completions or weak markets.
A developer’s recurring income can be increased by owning a long-stay apartment after a completed project.
A developer with a portfolio that includes long-stay serviced apartment can, over time, create an entirely new business. The developer may gain a significant competitive advantage through investments in branding, marketing and customer relations, while also enjoying cost savings due to economies of scope.
If a developer is involved in the serviced apartments for long-term rent, they can place units in different developments in order to target specific groups. For example, elderly renters who seek higher service standards.
In the future, a portfolio consisting of long-stay serviced apartment can be monetized by either selling to a publicly listed real estate trust (Reit), a private investment fund or both, depending on what offers a better value.
New long-stay serviced apartment may better fit the needs of certain space users. They include foreigners, who may be studying or working, and locals, who might rent an apartment to get started, or wait until their home is finished or renovated.
When the long-stay apartments are available, those looking to rent for longer stays (such as tourists and businesses travellers) will no longer have to compete against those looking to rent for shorter periods.
Prices will likely be cheaper for apartments that have a minimum stay of a few days compared to those with longer stays.
On Apr 4, when the Zion Road, parcel A, 99-year private housing lease site closes for tendering, the appetite of developers for this type of housing will be closely monitored.
The parcel of land, which is included in the Confirmed List under the Government Land Sales Program, could yield 735 traditional homes and 435 apartments for long-term service. The site’s maximum gross floor area is 85,551 square meters (sqm), and at least 20,000 of those must be used to construct long-stay apartment buildings.
As with the existing serviced apartments, where the minimum requirement for stay is seven nights, the long-stay apartment cannot be subdivided strata to sell.
Can developers with hospitality expertise bid for sites with long-stay apartments?
Threats to individual owners
There are many advantages to renting out long-term serviced apartments.
Zion Road is a great option for those looking to buy an investment property. Due to its proximity to Havelock MRT and Great World City as well as the Singapore River, tenants may be attracted to the flats being built.
A catch exists. The developer will compete with individuals who are interested in renting out a new home on this site. It is likely that the developer’s leasing activities will outweigh those of residential landlords.
This new housing type, which is likely to grow in popularity, could potentially take over the private rental market from individual home owners.
All in all, it is possible that potential tenants prefer to stay professionally managed and maintained long-stay serviced apartment which are furnished well.
It is true that there could be a larger pool of potential renters if more people from the locality rent their homes and if more foreigners work or study in this country.
But becoming a resident landlord can be difficult. An investment property may come with hefty costs. Singaporeans pay Additional Buyer’s Tax Duty (ABSD), a 20 per cent tax, when purchasing a secondary home. This increases to 30 per cent when buying a subsequent home.
Also, this year the tax rate on non-owner occupied residential properties increased to 12 to 35 per cent of its annual value.
Adding to this, the leasing of private homes can become more challenging in the future as landlords have to compete against an increasing number of co-living space operators, and owners of serviced flats.
However, building long-stay apartments could help offset a potential slowdown in the rental of private homes, if fewer people choose to buy houses as an investment due to ABSD.
The availability of good-quality rental properties will expand the range of housing options available for tenants. These include young Singaporeans as well foreign talent, whom Singapore wants to attract. It is important that the lack of housing at affordable prices does not hamper Singapore’s efforts to attract talented individuals.
To democratise property ownership, policymakers may be able to encourage the majority of individuals to become owners of long-stay apartments by using vehicles such a publicly traded Reits. It is ideal that such assets are not owned by large institutions or wealthy families.
Ownership of long-stay apartments is an exciting, stable, and new property asset category that can be used by individuals to invest in retirement and to save.
Future home renters will be able to choose from a wider range of options. Rentals will now be able to choose from a variety of accommodations, including co-living areas, public and private houses, and serviced accommodation with a stay minimum of seven days.
