Tuesday, August 25, 2015

Are new condo rentals a good deal for owners, tenants, or neither?

We thought we’d dig into whether leasing an apartment in a brand new condo represents a good deal for tenants, and at the same time verify whether a value investor is going to get good rental returns in the early years of their condo.

On one hand, we hear stories all the time of people getting a bargain when renting in a new development, and that seems to make sense considering there will be a flood of supply on the market (many near-identical apartments all available in a short period) and there may be inconveniences too (e.g. Ongoing construction, facilities not complete yet, etc). On the other hand - everyone loves shiny and new, right? We know in general that condos rent for less as they get older, but then where is the peak? Day 1, Year 2? Let’s look into the data to find out!

Dark Condos 

We noticed recently that the Business Times updated their “Dark Condos” infographic feature with “Still Dark Condos” These photo essays involved taking photos of new condos at night as a way to determine approximate occupancy rates.

An accompanying article in the Straits Times attempted to “shine some light” on the situation, which seemed strange considering that the condos had all and their Temporary Occupation Permit (TOP) issued for more than 18 months. Suggestions in the article include: - Today’s expats are overseas more often - Apartments might be purchased by wealthy foreigners as holiday homes - Owners choose not to lease out as rents are too low and could attract unsavoury tenants (!) - Owners prefer to keep the unit empty for an easier sale - HDB upgraders staying on to wait for better price for their flat

We don’t find any of these particularly convincing, but it’s interesting nonetheless! This gave us the idea though to dig deeper into the rental data of some slightly older condos to see if we can spot any trends once they are more than 2+ years old and lease renewals come up.

Condo Analysis 

Here are some well known condos we picked to see what trends can be found with initial leases versus renewals. 

Reflections at Keppel Bay 

“Reflections” is a gorgeous condo on the south coast which is often photographed and often talked about. The first leases were signed there in early 2012 but it took a while before all apartments were ready for tenants, so the move-in continued for over year. This is definitely one where we heard wild stories of bargain leases, followed by rents going through the roof once people heard how great it was but not many apartments were left, and then finally 2-3 years later the leases didn’t seem that bad after all. 

To get some hard data, we consulted the URA who publish lease data every month. Fortunately, the URA started publishing this data from the start of 2012, although these days they only keep the last 36 months on the site at any time. However we have the data since 2012 so could take a look at the early Reflections leases. We decided to first focus on the 2 bedroom apartments between 1000-1200 square feet, which are the most common there. Here’s the graph with our own annotations: 

This graph definitely shows a trend, as we’ve annotated. Although rent within the first 3 years averaged $5,700/month, the earliest leases were clearly below this, before shooting up almost every month before hitting a peak around a year after the first leases were signed (I.e. The peak was early 2013). 

So did the earliest renters get a bargain? Did rent shoot up after that? Did rent return to “normal” levels after that? Yes, yes and yes - or so it seems. 
To see if this was just by chance, we looked at 3 bedroom apartments between 1500 and 1800 square feet. We saw similar results: 

To check one other anecdote, we wanted to see if we could spot any trends in lease renewals 2 years after the first leases were signed (2 years is the typical lease length, especially in 2012). What we saw was really interesting: 

From the above you can see that the average monthly rent in 2014 was higher than 2012 for the first 4 months only, and after that leases signed in 2014 decreased compared to the equivalent month 2 years earlier. This would indicate that the earliest tenants probably did get a bargain in 2012 because the equivalent leases in 2014 were higher, meanwhile those who rented from 5+ months since launch perhaps overpaid, considering leases were negotiated down two years later. This decrease could also indicate a decreasing rental market in general in late 2014 though.  

Based on this Reflections data, we can draw some probable conclusions: 

1. Early tenants definitely got a great deal on rent compared to average 

2. As the number of available apartments dried up, tenants seemed willing to pay a premium 

3. After the first lease cycle, the bargain leases were negotiated up while later leases were negotiated down 

4. Although early leases went up and later ones down, the earlier ones were still cheaper than later 

We’ll draw some conclusions for landlords at the end too. 


Caspian is a cheaper condo than Reflections at Keppel Bay, which started registering leases in the last quarter of 2012. Taking a look at its 3 bedroom 1200-1300 square feet apartments (the most common size), we see a similar trend of prices in the first few months being below average: 

As Caspian started leases more than half a year after Reflections, its lease renewals would have been hit much harder by the down rental market in late 2014 than Reflections was, so let’s take a look at the data for September 2012-2013 vs the same period in 2014-2015 so far: 

It’s a little harder to draw any conclusions from this, although we can see that leases 2 years later in the late 2014 were higher than in late 2012 while the remainder averaged lower than two years earlier. But as mentioned above, by 2015 we were truly entering a downturn in rental prices so it’s hard to conclude anything for sure. 

Meadows @ Pierce 

For our final analysis, we looked for another from early 2012, so it would be less impacted by the rental downturn in 2014-2015. For Meadows, we looked at both their 1 bedroom apartments - which leased first - as well as their 1100-1300 square feet apartments that sometimes get classified in URA data as 2 bedrooms and sometimes 3 (we just use label of 3 on our graph): 

What’s interesting here is to see how the supply of apartments actually stopped after a few months. Still, the same pattern emerged where apartments are priced under average in the first few months before shooting up as availability decreases. 

Conclusions for Tenants 

We’ve only looked in to three condos here, but it seems that the data backs up anecdotes that you really can get a bargain on rent if you move into a new condo in the earliest few months. But also beware - it seems that these new condos may become overpriced for rent once supply decreases. More good news for tenants in both cases though - it would seem that when leases are renewed, the earliest ones did not completely shoot up, meanwhile the most expensive ones did seem to come back down.  

Conclusion for Landlords 

If you’ve already bought a new condo off the plan, or considering it, then this data is very important for you too. It seems clear that a new landlord has a choice: either race against the clock to fill your apartment early for a cheaper price, or hold out longer with no tenant until you can get a better price. In the case of Reflections at Keppel Bay, we saw leases for the same size apartments increase on average by hundreds of dollars a month for the first few months, which would really add up for a 24 month lease - let alone if the tenant stays longer and you don’t have to negotiate so much again.  

Also, the price at which you rent your condo out can also play an important psychological part if you’re actually planning to sell within the first two years - obviously it’s easier to get a good sale price for your condo if you can show that you’re also getting a good monthly rental. Another factor is that the extra months at the start could give you time to make capital improvements to the apartment that allow both a better rental as well as better sale price in future. 
What do you think - have we missed anything?

Rhys Arkins is the founder of Key Location, a website dedicating to giving people better data about renting Singapore condos

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