Why aren’t rental yields rising along with property prices?

All eyes are on Singapore’s real estate prices as the market picks up, and investors start to get curious on how rents relate to them. One thing for certain is that real estate prices do not always have a direct relationship with rentals in Singapore. For instance, as property prices recover, the private rental market continues to remain weak.

In this article, we seek to explore the relationship between property prices and rentals, and the reasons behind the decline in rental yield in recent years.

Private properties prices vs rentals

Following the URA property price index’s (PPI) reversal from its downtrend in 3Q2017, private home prices has continued to gain momentum into 1Q2018. On the other hand, the private residential rental index fell 0.9% quarter-on-quarter (q-o-q) in 4Q2017, after a period of stabilisation in the previous quarter.

One possible reason for this is because unlike cities like Hong Kong – widely regarded as another one of Asia’s most important financial centres – Singapore’s rental market is very much driven by foreign demand, given that over 80% of Singaporeans own a HDB flat.

In comparison, Hong Kong’s rental market is increasingly being driven by a mix of local and PRC tenants, often senior staff from funds and brokerages. Locals are being driven into the leasing market by sky high prices and the limited availability of larger newly completed apartments on Hong Kong Island, Savills Hong Kong says in its recent Residential Leasing Briefing report.

As of 2017, it is estimated that home ownership amongst Hong Kong’s population of 7.347 million stands only at about 49.20%, according to data by Trading Economics.

Understanding the dynamics of the rental market landscape helps provide insight into connections between demand and supply, where the hot commodities are, and where there could be room for negotiation.

Why have rentals been falling?

1) Falling foreign demand

We already know that foreign demand is an important driver in Singapore’s rental market. In previous years, the amalgam of slowing economic growth, weakening oil and gas sector, and the tightening of foreign worker policy have created a dampening effect on rentals.

Ministry of Manpower (MOM) showed that the total foreign workforce in Singapore fell from 1.393 million in December 2016 to 1.368 million in December 2017. Further, the qualifying salary for foreigners to be hired on Employment Pass (EP) was raised from $3,300 to $3,600 from January 2017. An EP allows foreign professionals, managers and executives to work in Singapore." Figures from the Ministry of Manpower (MOM) showed that the total foreign workforce in Singapore fell from 1.393 million in December 2016 to 1.368 million in December 2017. Further, the qualifying salary for foreigners to be hired on Employment Pass (EP) was raised from $3,300 to $3,600 from January 2017. An EP allows foreign professionals, managers and executives to work in Singapore.

Incidentally, the number of foreign professionals on EP fell from 192,300 in December 2016 to 187,700 in December 2017.

2) Diversification of expatriate roles:

It’s not just the tightening inflow of foreigners, many expatriates in Singapore today have also diversified beyond management roles and are no longer receiving lucrative packages, says Desmond Sim, CBRE’s head of Singapore and Southeast Asia research.

Sim explains: “Expatriate demand has been core to the rental market here, and this demand has traditionally encircled high-end properties within prime districts 9, 10 and 11.

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Why aren’t rental yields rising along with property prices?

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