High-end rental rates look set to continue their downward trend, with market watchers predicting a price correction of between five and 10 per cent next year stemming from tightened budgets and an increasing supply of completed luxury homes.
This would bring rents of luxury homes to below $5 per square feet (psf) per month.
Rents of top-tier condos tracked by Savills Singapore showed a drop for a sixth consecutive quarter, bringing rents down 7.4 per cent to $4.88 psf per month in Q4, from $5.27 psf per month in the year-earlier period.
As the number of vacant units increase in tandem with the surge in project completions, investors who have bought private homes for rental investment could encounter significant risks in the months ahead, warned Savills Singapore.
The Urban Redevelopment Authority (URA) said that 91,869 new homes will be released to the market over the next five years, more than half of which have been sold.
Some major completions over the past year include Caspian (712 units), Mi Casa (457 units), Reflections (1,129 units) and The Trizon (289 units).
The vacancy rate in the Central region was 7.9 per cent in the third quarter of 2012, above the five-year average of 7.5 per cent.
Vacancy rates in the eastern and western regions of Singapore were 4.5 per cent and 4 per cent in Q3, higher than the 3.5 per cent and 3.6 per cent five-year averages, respectively.
"The emergence of shadow spaces when owners relocate into their new premises may prove to be an additional challenge for both the leasing and sales markets. If demand from population growth does not rise in tandem and interest rates start to rise, a significant rental correction cannot be discounted," Savills said in a report released on wednesday.
But it's not all gloom and doom for the rental market in the coming year.
Demand for mass-market units is rising and is expected to remain buoyant throughout 2013, in line with the tighter rental budgets of the new entrants.
"Constrained rental budgets have led tenants to search for smaller homes, either singularly or sharing, driving up rents on a per-sq-ft basis," said Savills Singapore research head Alan Cheong.
Data released by URA showed that island-wide median rents for condos and apartments (excluding executive condominiums) hit a record $3.75 psf per month in October, up 7 per cent over the previous year.
Median rates for houses, however, slipped 0.4 per cent month-on-month in October to $2.65 psf per month.
According to data compiled by Savills Singapore, the total value of all leasing transactions for the first 10 months of this year hit $208 million, surpassing the yearly totals for the period from 2000 to 2010, and the figure is expected to surpass the $218 million record set in 2011 once contributions from November and December are included.