Discarding conventional mindsets on property usage

By Ong Kah Seng

/ R'ST Research, The Edge Property |

September 27, 2015 10:00 AM SGT

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It used to be that properties, whether residential or commercial, were bought with a fairly clear intention: either for investment or for the owner’s occupation. That was the general trend in property buying until 2010.

However, from around 2010 to 2013, there was a big rush by the man in the street to purchase a property, owing to low interest rates, which meant parking money in properties seemed to be the best option. Concomitantly, developers rapidly launched residential, strata factory and strata retail projects with impressive designs to attract buyers.

Suburban condominiums were among the properties that were snapped up from 2010 to 2013. Some HDB upgraders were more concerned about grabbing their dream property and left the decision of whether to lease out their HDB flat or private apartment until the property was built. Such buyers may risk buying the wrong product types — for instance, the house they buy has weak leasing demand.

There is generally low leasing interest in condos in suburban areas, as these areas are still considered by expatriates and foreign professionals to be generally inaccessible. Also, islandwide, 13,150 private residential units were completed in 2013. The number rose to 19,941 units in 2014 and a total of 21,563 units are expected to be completed in 2015.

On a more positive note, however, buyers of suburban condos that were completed recently seem to better understand these leasing challenges. The majority of owners of newly completed condos are adjusting and making the best of their circumstances. Increasingly, owners are jettisoning the traditional mindset that a residential property must be used either fully for the owners’ occupation or for renting out. Some are even open to leaving the completed condo vacant and getting the most benefits out of their new property.

Private condos bought by HDB dwellers used for weekend stays

The most notable type of suburban condos that is increasingly left vacant voluntarily is the smaller-sized units. A significant number of small-sized condo units were launched by developers from 2011 to 2013 in suburban areas, in part to achieve a higher psf price for the project, owing to high land costs, which affect the development’s break-even price. Smaller units typically have higher psf selling prices. They also satisfy the demand from singles, who thought HDB resale flats were quite old and their prices high. There were, however, some HDB flat buyers who bought small-format suburban condos (shoebox and two-bedroom units) from developers from 2011 to 2013. When their properties were completed from 2014, they found the unit too small for their whole family to live in. They did not wish to rent out the unit at low rents, as the rents would not justify the costs associated with the usual wear and tear when a unit is rented out. These HDB flat owners also generally felt that renting out a brand-new condo in the first two years after its completion would be “letting themselves down”.

They are increasingly open to using the unit for weekend stays, hosting friends and enjoying access to the condo facilities, while they continue living in their nearby HDB flat. There will definitely be a growing trend of HDB flat owners voluntarily leaving their small condo units vacant. Moreover, most HDB upgraders would have bought suburban condos within the vicinity of their flats, so they can easily commute between the flat and the condo.

However, after a while, say, a year, these HDB flat owners will lease the condo unit, at lower rents to attract tenants.

Moving part of the family to the new condo

Another trend among HDB flat owners who bought two-bedroom private condo units nearby is to move three or four out of five family members into the new condo, with one member (for example, the father) continuing to occupy a room in the HDB flat and subletting the spare rooms. Two-bedroom condo units have generally shrunk in size over the years, and may not meet the requirements of a family of four or five members. Such creative arrangements can optimise the use of the two properties (which are near each other) for the HDB upgrader, although it means that the family is fragmented.

Those who bought ECs insufficient for the entire family will have to adjust

Buyers of executive condominiums (ECs) will have to sell their HDB flats after the completion of the ECs. For a family of four or five, a two-bedroom EC may be insufficient. Those who bought smaller-sized ECs are generally couples or families with limited budget.

This problem may worsen around 2016 and 2017. This is because prices of ECs sold by developers have been increasing since 2010 and reached a high in 2013. The average EC launch price was $700 psf in 2010 and rose to $750 psf by 1H2013. After the total debt servicing ratio (TDSR) framework was implemented, demand shifted from condos to ECs in 2H2013, and new EC launch prices increased to an average of $800 psf in 2H2013 and 2014. For families who bought an EC from 2013, they might be forced to take a smaller unit, so they will find the EC insufficient for the entire family when it is completed.

Those who bought new ECs from 2013 will expect the project to be completed from 2016. Such families may come up with creative strategies, such as having one or two adult family members renting a room in a nearby HDB flat or condo. Alternatively, one of the parents will put up more often at his or her elderly parent’s nearby flat.

Newly married couples who bought smaller-sized ECs from developers are unlikely to face such a situation. Those who do may sell the unit after the minimum occupation period of five years.

Exciting flexible uses and opportunities for new commercial properties

The general challenge for new strata malls remains: the lack of a central owner to control the tenant mix to achieve compatibility in retail offerings. However, all is not lost, as we can expect strata malls, especially the newly completed projects, to court retailers who are more flexible in their offerings. This may benefit first-time retailers with innovative concepts, unlike at mega single-owner malls, where such budding retailers have to wait for management approval to accommodate them.

The property managers of strata-titled buildings usually specialise in the maintenance and upkeep of the building rather than mall management, as this is such a niche area that few developers undertake retail development and management.

New strata mall or mixed-use developments may even consider getting the consent of all the shopowners to outsource the management of the mall to a seasoned mall manager (and not merely property manager). This could be an opportunity for a new form of higher-level property management: The mall manager will be in charge of reviewing retailers’ trades and resolving challenges faced by retailers occupying the strata lots, but such mall management expertise has so far been restricted to single-owner malls. This can give rise to higher-level, more challenging mall management opportunities for conventional property managers, in that some property managers may wish to branch out into mall management — learning and adopting the efficient mall management strategies practised by real estate investment trusts and single-owner malls. However, this will be quite utopian, as the actual situation in a strata mall is “every shop has an owner with his vested and even conflicting interest”.

With strata offices being completed in suburban areas, we can expect more tenants to move from the older offices. The owners of older strata offices may wish to rent them out to some non-profit organisations or trades that require only a small, functional space in the suburbs, and for a limited period, such as a year. The landlords will earn some intangible benefits, as they are acquiring goodwill by leasing to businesses or organisations that require some help.

New industrial properties will see more interesting tenant profiles

Newly completed strata factory projects are experiencing leasing headwinds, as they were targeting high rentals of about $3 psf a month — way higher than the average rental of $2 psf a month for factory space. The high targeted rental was due to the higher purchase price, as these newly completed projects were launched from 2010 to 2012, when there was keen investor interest in factory space.

However, most industrialists are very cost-sensitive, and there is no demand for a modern factory space with extra features. Functionality and cost-efficient (older) space offered at $2 psf a month or lower seems to be better received by industrialists. Owners of newly completed factories may wish to consider renting them at a discount to first-time industrialists, who typically need a small space and require only one or two years of lease, because that is the period in which they either make it or fail in their venture.

Owners of new industrial units who cannot find tenants may wish to rent them to start-ups that are in the same production trade to co-share a unit. They can even share machinery or operations. Although there is always rivalry among businesses in the same trade, new businesses will require some exchange, guidance and synergy among themselves. Perhaps some industrialists who co-share a unit may eventually merge to achieve economies of scale. Owners of older factories that face weak leasing demand are expected to go for en bloc sales if possible, or increasingly, appeal for a change of use to warehouse and personal storage, since demand for personal storage is growing steadily. This is because newly completed homes have shrunk in size and retailers that are rationalising will quit renting costly retail space and require more storage space.

Exciting times ahead as owners strive to survive property headwinds

We should not view the situation of private condo and EC owners turning creative in living strategies as an entirely negative one. While, in some instances, a family of five may have to split, with three or four members moving into the completed condo, it illustrates property owners’ flexibility in coping with the interim situation. The only negative aspect is that this defeats the wider objective of the state in consistently striving to enable families to live comfortably in well-planned homes.

However, if such new living patterns become popular, it may be harder to determine the actual use of a property, since owner occupation and leasing decisions are not clear-cut. The residential property vacancy numbers released are based on observing the utility consumption of the unit, and partial vacancy may need a more stringent definition, and may be harder to account for.

Housing and properties have an entrenched relevance for the masses, but the meaning of ownership has evolved over the decades, which saw most Singapore households owning a home. There is also increasing pride in owning a private property, and the owner’s satisfaction is not entirely measured by monetary returns.

This is very likely a new era in which we can see owners making interesting decisions on the best use of their property. Owners who hold their property long term are likely to be more flexible in the use of their property, under the current market conditions, in living out their property dream.

Ong Kah Seng is director of R’ST Research. He can be reached at kahseng.ong@ rstresearch.com.sg

This article appeared in The Edge Property Pullout of Issue 70 (September 28) of The Edge Singapore.

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