New serviced apartments for long-term stays are a boon for developers and a bane to private landlords
Recurring revenue
I believe that developers are interested in buying land parcels to build houses for sale or long-stay apartments for rental. These sites can provide developers with development profits as well as recurring revenue.
By selling private homes that are not yet completed, developers can receive cash flow from buyers. These buyers pay for the home based on different project milestones. This lowers financing costs, and helps boost the internal return on projects.
These benefits are important when interest rates and margins are low on real estate development projects.
Many developers, however, are not only interested in maximizing their profits, but also want to maximize their income.
It is important to have recurring revenue that can be used as a cushion for when the development profits are not there, due to market conditions or project completion dates.
After a project is completed, a developer can increase their recurring revenue by owning the serviced apartments.
Over time, an investor who has a portfolio consisting of long-stay apartments can start a brand new business. This developer can gain a competitive edge by investing in marketing, customer relationships, and property management. They will also enjoy cost savings through economies of size.
The developer can target certain groups of renters, such as elderly tenants who want higher levels of service.
The portfolio can then be sold to a public real estate investment company (Reit) for a higher valuation, or to a private investor fund.
A threat to individual owners
But private residential property owners, whether they are already in the business or are aspiring to be one, should be aware of the danger posed by long-stay serviced apartment.
Zion Road, parcel A may have many attractive features for homebuyers looking to purchase a home as an investment. Flats on the site could draw tenants due to their proximity to Havelock MRT, Great World City and Singapore River.
But there’s a catch. If you are looking to rent a house that is going to be built there, you will have to compete for the lease with the developer building hundreds of units of long-stay apartments on the same piece land. Most likely, the developer will have a greater leasing focus than individual landlords.
In the future, if there are more long-stay apartments built across the island, this housing type could take a big share of the market for private home rentals, perhaps at the expense to individual landlords.
After all, tenants would prefer to stay at professionally managed serviced apartments with a high standard of maintenance and that are fully equipped.
If more locals are renting out their homes, and more foreigners move here to work or to study, then there will be an increasing pool of tenants.
Nevertheless, it is not easy to become a residential property owner. The cost of buying an investment property can be high. For example, a Singaporean citizen will pay Additional Buyer Stamp Duty (ABSD), which is 20 percent for the purchase of a second house and 30 percent for the purchase of a third home and beyond.
This year, the residential tax rate for non-owners increased from 12 to 36% of the property’s value.
Individual landlords will have to compete with a growing pool of owners of serviced apartments and co-living spaces.
Building more long-stay serviced apartment can still help mitigate the possible slowdown in the growth of private homes for rental, should fewer people invest in homes because ABSD is high.
Renting out good-quality housing expands the options available to tenants. This is especially true for young Singaporeans and foreigners that Singapore is eager to attract. Housing options should be competitively priced to attract talent.
Policymakers can help democratise ownership by allowing many individuals to have long-term serviced apartments through vehicles such as publicly listed Reits. Idealistically, these assets should not mainly be owned by wealthy families or institutions.
As a new and exciting asset class, long-stay serviced accommodation is an excellent way to give people who want to invest and save for retirement the opportunity to own a stable property asset.
In the future, home renters in this area will have more choice. In addition to public and private homes and co-living spaces, as well as serviced apartment with a seven-day minimum stay, renters now have a choice of a new accommodation category: long-stay serviced flats with a three month minimum stay.
These new serviced apartments for long-term stays may be more suitable to some users. This includes foreigners who study or work here and locals who rent to start or who are waiting for a new home, or one which is under renovation.
If long-stay serviced flats are introduced, those who rent them out for longer periods of time, like tourists or business travellers, will not have to compete with others seeking shorter stays.
Long-term serviced apartment rates will likely be more affordable than those that require a shorter stay.
When the Zion Road parcel A 99-year leasehold housing site tender closes on April 4, it will be interesting to see how developers react.
The land parcel on the Confirmed List is estimated to be able to produce approximately 735 conventional homes, and 435 long stay serviced apartments. Site has 85,551 m2 of gross floor space. At least 20,000 m2 must be used to build long-stay serviced apartment.
Long-stay serviced flats cannot be subdivided into smaller units for sale, as is the case with existing serviced flats where a minimum stay of seven days is required.
Could developers with experience in hospitality bid aggressively to buy housing developments that contain long-stay serviced apartments?
