Sunny outlook for Sentosa resort homes?

Source : Today - 7 Aug 2008

Analysts decipher clues from recent rental data

EARLY investors in Sentosa Cove homes must have possessed a large appetite for risk.

Although the idea of developing the 117-hectare Sentosa Cove into an idyllic waterfront enclave was mooted as early as the ’80s, the first land parcel was sold to the private sector for development only in 2003. As such, the rental market in Sentosa Cove was non-existent at the launch of earlier projects. Earlier investors had to bet their money solely based on their outlook for this exclusive marina community.

The situation is different today. Five years on, 99.6 per cent of parcels in Sentosa Cove have been successfully sold to private developers and individuals. These could yield over 2,000 condominium units and 400 bungalows and terraces. Of these, an estimated 300 homes have received Temporary Occupation Permits and so the Sentosa Cove leasing market is slowly taking form.

In fact, according to the Urban Redevelopment Authority, some 51 leasing contracts were recorded for Sentosa Cove homes between January last year and April this year. The leasing market for non-landed homes appeared to be more active than for landed homes. With 46 leases recorded for The Berth by the Cove, the only completed condominium development accounted for the lion’s share of the 51 leases signed.

This translates to a 23-per cent-tenancy rate for the 200-unit development assuming that the 46 leases are signed for typical two-year terms. This is a feat given the remaining 2,200 homes under construction. Activity in Sentosa Cove peaked in the July to Sept quarter last year in which 30 leasing contracts were recorded, representing more than half of the 51 leasing contracts signed so far.

But, mirroring the larger market, Sentosa Cove’s leasing market appears to have been affected by the weak sentiments due to the ailing United States economy and global markets stemming from the sub-prime mortgage crisis. Leasing activity slowed sharply, with just10 deals concluded in the first four months of this year. Median monthly rents in The Berth by the Cove weakened to $6.89 per sq ft in April this year. So, those who bought at the launch at an average price of $8601psf enjoy rental yields of 5.5 per cent.

But as the prices of Sentosa Cove units surged in tandem with the general market, investors who purchased last year at an average price of $1,520psf have to contend with lower rental yields averaging 3.5 per cent. Nevertheless, they enjoy a higher return compared to those who recently bought freehold luxury apartments on the mainland since the latter generate yields of roughly 2.3 per cent.

If investors in The Berth by the Cove are reaping healthy returns, will the same be said of those who bought Sentosa Cove apartments still under construction? Will rental rates hold in the face of increased supply?

Investors should bear in mind that Sentosa Cove will be kept at 2,500 units in size to preserve the exclusive resort ambience. Also, some owners will occupy their own properties, further limiting the rental supply.

With Singapore’s growing status as a global city, homes in Sentosa Cove will be in demand by the rising population of expatriates opting for an oceanfront resort lifestyle. So, the investment value of Sentosa Cove homes will be preserved for a long time to come.

Tay Huey Ying is the director of research and advisory at Colliers International. Audrey Tan is a research analyst at Colliers International.