Saturday, August 18, 2012

Developers dangling rental guarantees as a draw

Straits Times: Sat, Aug 18

SOME developers are turning to rental guarantees as a carrot to attract buyers for properties in Singapore and emerging markets in the region.

As competition hots up, these schemes are used to sweeten deals, with some helping investors to secure tenants and ensure they get a minimum predetermined yield.

But some experts warn that buyers need to examine the details carefully before signing up - and realise that a rental guarantee may already be built into the price.

They add that these enticements can amount to an indirect discount and are often dangled for overseas projects to attract investors to emerging and unfamiliar markets.

But the offer is also made during times of market weakness by developers convinced of a property's long-term potential.

They believe this will entice buyers to bite, as an alternative to lowering prices, which might depress the value of a project.

For instance, in April, some of the remaining unsold units at Paterson Suites by Bukit Sembawang Estates were marketed with offers that effectively meant lower prices for buyers.

In advertisements, buyers were offered a guaranteed rental yield of 5 per cent a year for four years for the freehold project in Paterson Road, completed in 2010.

This works out to $300,000 a year - or $25,000 per month - for four years, on a $6 million apartment. Under the guarantee, if the rental received falls below $25,000 a month, the developer will top up the difference.

Owner-occupiers were given an outright 10 per cent discount on the purchase price.

Experts say that this approach could be a response to the lacklustre high-end market, which has seen anaemic volumes and prices languishing below their peaks.

But investors would be attracted to the offer, as it lets them borrow money cheaply at present low interest rates of about 1 per cent, but rake in returns of 5 per cent.

Across the Causeway, a commercial project, Terminal Pahlawan in Malacca, was advertised in The Straits Times earlier this month with a guaranteed rental return of 7 per cent in the first year and 8 per cent in the second.

Another property, D'Inspire Residence in Iskandar, offered a 14 per cent return over two years.

Consultancy Ascendant Assets director Getty Goh said these guarantees give buyers some level of confidence and reassurance.

But he draws a clear distinction between the transparency and regulation of the Singapore market and those of emerging markets such as Vietnam and Cambodia.

"If developers start offering rental guarantees for Singapore projects, it would reflect the slow take-up of units as a result of cooling market sentiments, rather than Singapore being an unfamiliar market," he added.

But he said such deals might not sit well with earlier buyers who paid a higher price.

International Property Advisor (IPA) chief executive Ku Swee Yong also cautioned that developers might price the cost of the rental guarantee offer into the selling price of a project.

"This is commonly done, especially for overseas properties because they may be too far away for Singapore buyers to check on the prices out there," he added.

Buyers also need to know the specifics of the rental guarantee, said Mr Colin Tan, research head at Chesterton Suntec International.

They need to know whether the guaranteed return will be given as a lump-sum payment or if the unit needs to be leased out first. Buyers need to be wary of problems that might arise in these details, he noted.

IPA's Mr Ku added: "Just review the deal and make sure it is financially pleasing to you.

"Otherwise, all the bells and whistles and embellishments are useless if the product is overpriced, or worse, of poor quality."

Retiree Lim Hwee Leng, in her 50s, bought a three-bedroom unit at D'Inspire Residence. She was attracted by the good location and offer of a 14 per cent rental guarantee over two years. The rental guarantee was deducted straight from the selling price.

She has one other investment property - in Johor - and does her research before any purchase.

"For other properties, the rental is not guaranteed, they just give you an expected rental, so there is still a risk there," she said.

"I go to Malaysia quite often, so I know that this project is in a good location, as it is within walking distance of the malls there... Home prices in Johor are also still affordable."

Martin Koh | 86666 944 | R020968Z
Sherry Tang | 9844 4400 | R020241C
Senior Sales Director
DTZ Debenham Tie Leung (SEA) Pte Ltd (L3006301G)

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