Developers dangle rental guarantees to attract buyers

Novena Regency. Developers keen to offload hard-to-sell property are bringing back rental guarantees as a way to entice reluctant buyers without having to slash prices. -- PHOTO: SLP REALTY
Novena Regency. Developers keen to offload hard-to-sell property are bringing back rental guarantees as a way to entice reluctant buyers without having to slash prices. -- PHOTO: SLP REALTY

Developers keen to offload hard-to-sell property are bringing back rental guarantees as a way to entice reluctant buyers without having to slash prices.

Some shop units at the mixed-development Novena Regency offer a 4 per cent guarantee, a recent newspaper advertisement showed.

The Straits Times understands that some shop units at Icon @ Pasir Panjang, also a mixed development, will soon have a rental guarantee tacked on too.

A rental guarantee means the developer is giving a buyer the certainty of rental income for a predetermined period, usually two years. This saves the buyer from having to look for a tenant, particularly in the coming few years when economic uncertainty and a rising supply of homes and shop space may drive up vacancy rates.

"This could mark the start of the return of rental guarantees," said SLP International research head Nicholas Mak. With guarantees, a developer can attract investors to buy units without having to lower prices significantly.

"It's a response to market conditions where sales are slowing at a certain price level," he said.

The rental guarantee at the freehold Novena Regency is valid for two years after the project is completed, expected to be in 2017.

But agents said it is offered only for five ground-floor retail units ranging from 269 sq ft to 280 sq ft in size, and on sale for more than $7,000 per sq ft (psf). Two of them have been sold, they said.

Developed by Fragrance Realty and launched in April, the project has sold 18 out of 45 retail units.

A 4 per cent rental guarantee for a $7,000 psf shop unit would work out to at least $280 psf per year or $23 psf per month.

CBRE executive director Jeremy Lake said it is hard to assess whether this rent is higher than expected as shop rents vary widely based on size, location in the development and other factors.

At Icon @ Pasir Panjang, developed by Fragrance Realty, a 5 per cent rental guarantee valid for two years after completion will be offered for some retail units. It has 31 such units, with about 20 sold. The selling price for shops there starts at around $3,000 psf and goes up to around $5,500 psf.

Knight Frank research head Alice Tan said there is a time lag for owners of strata retail units to find tenants. "Rental guarantee is a viable incentive to provide cash flow for investors and business operators during this initial period... They can then take advantage of potentially higher rental income in the medium term when the development establishes itself."

But Savills Singapore research head Alan Cheong cautioned that the rental guarantee could already be built into the selling price and guarantees tend to be more prevalent among projects buyers are unfamiliar with, like overseas ones.

Rental guarantees have been offered for some residential projects in the past. Market watchers told The Straits Times that Far East Organization's The Clift at Tanjong Pagar had a rental guarantee a few years ago. The developer is not offering any rental guarantee now.

melissat@sph.com.sg