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Rent rises beat capital growth in major cities

RENTAL values are rising faster than underlying house prices in many of the world’s leading cities such as Paris and Hong Kong.

An average rental growth of 2.3 per cent from June to December last year, as compared with just 1 per cent growth in capital values.

Paris overtook London as the most expensive rental market, with prices more than three times of rents in Shanghai and Mumbai, both of which are ranked cheapest on the index.

Singapore is ranked as the city with the sixth highest rental costs.

The higher rental growth over capital rises to a classic case of demand for accommodation outstripping such supply globally.

The rent hikes have been due to a congregation of demand for housing from both local and international tenants in major cities, even amid a global residential real estate market which is increasingly faced with supply constraints.

Take the case of Shanghai, a booming economy is still growing at a very healthy rate.

Foreigners seek acceptable accommodation; supply may be available, but the supply may not be in areas where the expatriates want them.

In Singapore, rental values rose by 4.4 per cent in the first half of last year and a further 5 per cent in the second half.

In contrast, capital values rose 11 per cent and 3.3 per cent in the corresponding periods.

One possible factor, for the rise in rentals in Singapore is a trend for arriving expats to opt to live in smaller units.

There is a trend of expatriates entering Singapore with tighter rental budgets and smaller families. They tend to head for smaller units rather than traditional prime, large apartment sizes, which has the effect of lifting up the rentals when measured on a dollar per sq ft basis.

The recent popularity of shoebox apartments in Singapore, which are residential units with an area of 500 sq ftand less, was another reason for the high rental growth.

It is such a small unit, there will be an effect of lifting the rental on a dollar per sq ft basis. When divided by the small built-in, the rental is pretty high.

While the Urban Redevelopment Authority had recently imposed certain restrictions to discourage the sale of such shoebox apartments, rents will remain high for now as it takes a while before the intended effects kick in.

Shoebox apartments are continually coming onto the market this year and next year. Whatever measures the Government implements will take effect only from 2014 onwards when these stop coming into the market.

The report also noted that the introduction of an additional stamp duty for overseas buyers in December last year was also likely to to drive up rental levels in Singapore.

As for rental yields, which get investors excited, the report stated that mature markets like New York, at 6.9 per cent, tended to record the highest. This was in contrast to Shanghai’s 2.3 per cent, which is the lowest on the list.

An economy’s rental yield was very much dependent on prevailing interest rates.

As long as interest rates continue to decline, the yield would fall in line with the declining interest rates. This will continue until a point when the US starts raising interest rates.

Source: The Straits Times – 20 March 2012

Jarene’s Take:

With high rental growth, capital growth and low interest rates, stable economy and government – these are the main reasons why many foreigners still see Singapore as a very attractive place to invest in, despite the stamp duties imposed on foreigners.

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