Reasons to abandon the long-term serviced apartment model

Reasons to abandon the long-term serviced apartment model

Property groups' lacklustre interest may be explained by uncertainty about user demand.

October 7, 2024

CONDOsingapore.com

Does this group of real estate players lack adventure? It appears that a lot of organisations are ignoring the new SA2 category of long-term serviced apartments.

Unlike other serviced apartments, where the minimum rental period is seven days, SA2 apartments must be rented out for lodging purposes for a minimum of three months. It is not permitted to stratify SA2 or regular serviced apartments.

Since the announcement of the pilot program last year, three sites have been launched thus far. Responses to the state's three land tenders for SA2-component sites, which all closed this year, have been ambivalent.

In April, the sole bidder, a joint venture between City Developments Ltd (CDL) and Mitsui Fudosan, was given a 99-year leasehold site on Zion Road that could accommodate an estimated 1,170 residential units, including 435 long-stay serviced apartments, for S$1.1 billion.

When the tender closed in June, no bids were received for the 99-year leasehold Upper Thomson Road (Parcel A) site, which is planned for the construction of homes, including SA2 units.

A Frasers Property-led group submitted the only bid in the bidding for a 60-year leasehold Media Circle site for the construction of long-term serviced apartments with a first-story commercial space, which closed on September 19. The Urban Redevelopment Authority announced on October 3 that it would not be awarding this site because the S$120 million bid, or roughly S$461 per square foot per plot ratio (psf ppr), was deemed to be too low.

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It's possible that developers don't like sites that have both SA2 and standard homes because buyers might be concerned that long-term serviced apartments will reduce the demand for standard housing units in the development.

Media Circle SA2 site

However, the results of the tender for the 520 serviced apartments that could be built on the mostly SA2 site at Media Circle indicate that many property groups are not interested in SA2.

The Buona Vista neighbourhood, where the Media Circle SA2 site is located, is home to both academic institutions and businesses in the technology and life sciences industries. Many organisations with experience in the hospitality industry, however, did not submit bids for the site. One might have anticipated that The Ascott Ltd., a significant player in the serviced residence market and a subsidiary of CapitaLand Investment, would bid in conjunction with partners. It avoided the site, though, as did other major players with hospitality capabilities like Wing Tai, UOL Group, CDL, and Far East Organisation.

Land with lease terms of 60 and 99 years is worth 80 percent and 96 percent of freehold land, respectively, according to the Singapore Land Authority's table that displays leasehold values as a percentage of freehold value.

Using the aforementioned, the bid price of S$461 psf ppr for the 60-year leasehold land at the Media Circle SA2 site would be equivalent to roughly S$553 psf ppr if the land lease was for 99 years.

This price is significantly less than S$1,191 per square foot per person for a 99-year leasehold property at Media Circle that was sold to Qingjian Realty and Forsea Residence in February and was intended for residential use with a first-story commercial space.

Furthermore, a developer of a 60-year leasehold SA2 project could theoretically sell the finished structure to a listed or unlisted property fund, which might be less concerned with the property's shorter land lease and more focused on yield. The proposed purchase of the hospitality asset Lyf Funan, which has a roughly 54-year land lease left, was recently announced by CapitaLand Ascott Trust.

Demand from users for SA2

Uncertainty regarding user demand for long-stay serviced apartments may be the ultimate cause of the weak demand for sites with SA2 components.

For roughly comparable units, long-stay serviced apartments are likely priced in the middle of the range between more expensive standard serviced apartments and less expensive private residences.

A private residence must be rented for a minimum of three months, while a HDB flat must be rented for a minimum of six months.

For financial reasons, would foreign workers or students who require housing for a few months or longer choose a private or HDB residence over a SA2 unit? Due to financial concerns, locals who are remodelling their homes or awaiting the key to a new residence might also steer clear of long-term serviced apartments.

However, people who are looking for accommodation for less than three months or who aren't sure if they need lodging for more or less than three months will find that standard serviced apartments are a better option. For instance, booking a three-month stay in a long-stay serviced apartment could turn out to be expensive if one only stays for two months.

Without a doubt, the government ought to experiment with novel concepts, like SA2, to aid in addressing housing needs. However, it might be time to discontinue selling websites that contain SA2 components and test alternative policy changes or fresh concepts if the SA2 experiment produces unimpressive results.

Fulfilling the needs for rental housing

Given the high Additional Buyer's Stamp Duty (ABSD) that is applied to Singaporean citizens and permanent residents who purchase multiple homes, as well as non-permanent resident foreigners who purchase any home, there may be a smaller pool of new buyers buying private homes to lease out. Meanwhile, new HDB homes designated as Plus or Prime are subject to strict rental restrictions.

Lowering ABSD rates for different homebuyer groups or permitting new home developers to keep some units for lease for a few years after completion without facing clawback of upfront ABSD are two ideas to increase the supply of private rental housing.

Perhaps HDB should actively construct and oversee new public housing units that are available for both foreign and local tenants. This can go far beyond what it currently does, which is to rent homes to lower-income Singaporean households without family support or other housing options and to provide short-term housing for newlywed couples while their HDB flat is being completed.

It's important to meet the rental housing needs of both locals and visitors from other countries who come to work and study here. However, in order to guarantee a wide selection of rental housing, move away from SA2 and experiment with other concepts.