Are investors banking on a rental recovery?

Source : Today – 25 Jun 2009

Consider this: Rentals are sliding while residential property sales continue to scale new heights in the current troubled times. With almost half of recent buyers being potential investors with private addresses, could these people be punting on a rental recovery?

If so, they may be staring at a wait of several years for the uptick.

“I don’t expect any rental recovery for the rest of this year,” said PropNex chief executive Mohamed Ismail.

ERA Asia Pacific associate director Eugene Lim concurred. “Tenant demand has nothing to do with property prices, so even though sales have gone up, the rental market is still challenging,” he said.

Some analysts are even projecting that a rental recovery will not kick in until three years later.

According to the Urban Redevelopment Authority, rentals slid 8.5 per cent in the first quarter of this year – down from 5.3 per cent in the fourth quarter of last year – as the double whammy of a weak economy and new supply hit the market.

Mr Mohamed expects second-quarter rental rates to be even more dismal than those of the first quarter. After all, rentals went up 40 per cent in the two-and-a-half years since 2006 as the property market boomed, he noted.

Still, residential property buyers continue to pile in, shrugging off predictions that rentals would continue sliding for the rest of the year. Perhaps they are not even interested in rental yields.

Said Cushman and Wakefield Singapore’s residential head Connie Looi: “Buyers are rushing in to buy because there has been a downward adjustment in prices. It’s not so much because of rental yields, which is about 3.5 per cent on average. It’s more for capital appreciation down the road.

Mr Mohamed cautioned: “Even if you buy property from an investment angle now, it’s very hard to predict what the market will be in three years”.

Some market watchers, however, are bullish on the rental market. UBS Investment Research analysts said in a report dated June 18 that they expected rents to “stay flat for the rest of the year and potentially rise 2 to 15 per cent in 2010″. They calculated that prime rents had fallen 12 per cent in the year to date.

So who should invest now? “You need to have a greater appetite for risk and greater holding power to go in now – these are investors with mid- and long-term views, about five years and beyond,” said Mr Mohamed.