A look at the rental yields of the property landscape in Singapore
Buying property can be an attractive investment option. There is a high probability that over a period of time, the value of the real estate that you have purchased will appreciate.
In addition to the increase in the price of your flat or condo, you will also receive a regular income stream in the form of rentals should you choose to rent it out.
Singapore’s property market is especially attractive for several reasons. The city-state has an infrastructure and facilities that are on par with the best in the world.
It is a regional financial hub and many of the world’s foremost financial institutions have a presence in Singapore.
Another reason that real estate will always command a premium in Singapore is its limited availability.
The country’s total land area is just 719 square kilometres. In view of all these factors, it is quite reasonable to assume that, in the long term, Singapore property values can only increase.
What is the rental yield that investors can expect?
Although owning property in Singapore is an attractive proposition, the amount that you can expect to receive in the form of a regular monthly income is fairly limited.
It is important to understand that owning real estate requires you to incur various expenses connected with the property. Consequently, the net amount that you receive may be very low.
As a property owner, you will be responsible for making many of these payments:
Property tax – residential property owners have to bear a tax that is based on the annual value (estimated gross annual rent) of the condo, HDB flat, or other residential property. Tax is paid on a slab basis.
Source: Internal Revenue Authority of Singapore
Income tax – Both Singapore residents and non-residents will have to pay income tax on their rental incomes. Residents are taxed on a slab basis with the lowest tax rate of 2% increasing to 20%. Non-residents are taxed at 22%.
Other expenses – There are several other costs associated with property ownership. You will need to pay insurance, repair costs, and maintenance fees.
Loan repayment – Most property buyers borrow against the security of the flat or condo that they are purchasing. Even though borrowing rates are extremely low, your mortgage payment will be the single largest expense that you will need to bear.
After factoring in all these payments, the net amount that you receive can be very low.
Gross yields vs. net yields
The gross yield that you receive is the yearly rental of your property expressed as a percentage of the total property cost. In Singapore, the gross yield that you earn will usually range from 2.5% to 5%.
The following chart provides information on gross yields in various countries.
Source: Global Property Guide
Net yields are calculated by reducing various expenses from the yearly rental and expressing the result as a percentage of the property acquisition cost. Obviously, net yields will be much lower than gross yields and could even approach 0%!
How is the Singapore rental market performing?
Unfortunately, rents in Singapore have been declining in the recent past. According to the latest government figures, the rental index for private residential properties declined by 1.2% in the third quarter of 2016. The index, which was at 106.9 at the end of the second quarter, fell to 105.6 in the following three-month period.
Source: Urban Redevelopment Authority
Rents for office space and retail space have not fared any better. Office rentals fell by 1.1% in the third quarter, while rentals for retail space declined by 1.5%.
The decline in rents has kept pace with the fall in property prices.
Is investing in property in Singapore worthwhile?
Large numbers of investors have made tremendous gains in the Singapore real estate market. In the period from 2008 to 2013, property prices rose by a staggering 80%. Those who purchased real estate eight years ago have registered significant returns.
But the last three years have witnessed a significant downturn. This has been partly due to “cooling measures” initiated by the government.
The slowing global economy and falling commodity prices have also played a part in causing Singapore’s property prices to crash.
Despite declining real estate values, an investment in this sector may still make commercial sense because of the inflows that rentals generate.
But investors should not expect much in terms of net rental yields. An investor who manages to rent out his property and earn a net yield of 1% to 2% should be considered lucky.
Even though this is a fairly low rate of return, the prospect of an increase in the value of your property can make an investment in real estate a sound decision.