AVERAGE rents may be falling, but there are still bright spots with high yields. Real estate firm OrangeTee has named 34 residential projects with gross rental yields over 4 per cent.
Gross yield is the annual rental income divided by the project’s resale prices over the past year, so projects with higher yields may offer better returns to potential landlords. OrangeTee cited Queenstown as “a mine of rental gems”, with six of the 34 high-yielding projects found there.
The firm credited this to its “ideal location”, saying its “close proximity to major job centres and education clusters” had kept rental demand healthy.
Queenstown is in what is called the rest-of-central region, which comprises city-fringe areas such as Bishan and Toa Payoh. But it was the outside-central region that dominated the list, with 19 of the 34 projects in the suburbs.
OrangeTee said this was because property prices there were usually lower than those in the central region, which pushed up rental yields.
The report also found that smaller and older units offered better returns.
Shoebox units, defined by OrangeTee as those up to 50 sq m, had higher yields because their small size raises their rental value per square foot (psf).
Mr Wong Xian Yang, OrangeTee’s manager of research and consultancy, suggested that these units’ small size raised their rental value psf, but not their sale value psf because of property cooling measures, which have affected prices and buying demand more than rents.
“Shoebox rental demand usually comes from single young professionals or foreign students, who are on limited housing budgets and would be looking to rent in places near to their working place or school,” he said.
The highest-yielding project on the list, Suites @ Eastcoast with a yield of 5.7 per cent, had a large share of these small units, said OrangeTee.
But it cautioned buyers not to “blindly jump onto the shoebox bandwagon”, noting that such units did not always do well and buyers should consider existing demand and supply in the area.
Older projects also thrived, with 56 per cent of the 34 developments being more than 10 years old. OrangeTee said this was due to the fact that while the sale value depreciates over time, a building’s age does not always deter tenants, who also consider factors such as design, facilities and general upkeep.
The report also noted that 29 of the 34 top-yielding estates were on 99-year leaseholds.
OrangeTee said this was because they generally had a lower sale value psf than freehold properties, but not a lower rent value as tenants are “generally not concerned about the tenure of the property”.
Perhaps surprisingly, projects nearer the MRT did not necessarily command higher yields, with 20 of the 34 developments more than 400m from a station. OrangeTee suggested that a convenient location might raise rent value less than sale value.
OrangeTee said looking at rental yields could help investors filter out “mispricing” in the market, but pointed out that yields were “just one part of the return equation”.
It advised investors to look at the capital growth potential of their properties, as well as other factors affecting “rentability”, such as location, nearby amenities and general market conditions.