Ridout Road rents stir debate on valuation of black-and-white houses in property circles

THE Singapore Land Authority’s (SLA) disclosures on rents at Ridout Road have stirred debate on the valuation of the state-owned “black-and-white” houses, with some in the real estate trade raising questions on how the rents were assessed and priced.

Some have also questioned why the rent on Law Minister K Shanmugam’s house was not increased upon renewal of its lease as other tenants’ were.

Data released by the government showed that the rent that Shanmugam is paying for 26 Ridout Road was comparable to neighbouring houses in the estate, on the basis of rent per unit of gross floor area (GFA). The land area included under the lease agreement for 26 Ridout Road, however, is many times more than its neighbours.

According to review findings on the rental of the Ridout Road properties released last week, the monthly rent for 26 Ridout Road amounted to S$30.94 per square metre (psm) of GFA, or the equivalent of S$2.87 per square foot of GFA, for the 9,216 sq ft house on about 250,000 sq ft of land. The psm GFA rate paid was in line with other leases signed in the Ridout Road estate in 2018 when Shanmugam inked his tenancy, and slightly above the estate average of S$29.78 psm of GFA at the time.

Minister for Foreign Affairs Vivian Balakrishnan’s rent for 31 Ridout Road, leased in 2019, was pegged at S$23.05 psm of GFA, for the 8,872 sq ft house on almost 100,000 sq ft of land. This rate was lower than the estate average of S$29.60 psm of GFA. Senior Minister Teo Chee Hean’s report on the review into the matter said this was due to the condition of the property, noting that the rate was still comparable to other properties of average condition at the time.

Tan Keng Chiam, head of valuation and advisory services at Colliers International, explained that in real estate, factors that determine value include the size of the land and building, the condition of the building and the grounds, where the market is at that point in time, as well as factors such as functionality, design, layout, amenities, terms of use, location and orientation.

“Beyond an optimal level, there is diminishing marginal returns” to more land, Tan said. “Excess land” will have negative utility due to the cost of maintaining it and the liabilities that may come with it, he said.

Sing Tien Foo, NUS Provost’s Chair Professor at the Department of Real Estate, Business School, said: “For black-and-white bungalows, the rent is based on the utility values, and larger land area will add premiums, but will also incur higher maintenance costs. The differences may not be linear. After the optimal size, increase in land area will add smaller premiums to users, because of the diminishing marginal returns effect.”

Shanmugam had noted in his ministerial statement on Monday (Jul 3) that he did not want the additional land of 150,000 sq ft which was added to his lease, and had offered to maintain that land outside the original house boundary at his own expense. “But SLA took the position that if I wanted to maintain the surrounding land, the surrounding land had to be part of the lease,” he said.

Karamjit Singh, chief executive of Delasa, noted that comparing rents on the basis of psf GFA was relevant if the basket of black-and-white houses are of similar physical conditions and locations. “The rentals are less sensitive to the land area differences,” he added.

Analysts whom BT spoke to agreed that the rent for landed properties would not increase linearly with land area. Landed housing rents are generally priced on a curve, one analyst said. “Too large a land size could have a suppressing influence on the rents.”

Nor would the rents for state-owned “black-and-whites” be equivalent to rates for comparable privately-owned houses, due to the many limitations on the use of state-owned properties.

But as one market watcher said: “There’s a price for the GFA, but the land size relative to GFA also matters. If I rent you a 100 sq km island with a 15,000 sq ft house on it, can you just use psf GFA to assess the rent? Obviously not.”

One seasoned valuer said: “When you rent a house, what would you look for? What are the things that are important? Is it only GFA? It is a bundle of things, of which GFA is one.”

Assessing rents of landed properties with a standardised metric like GFA “is not how valuation is done”. “It’s a slap on the valuers’ face,” they said. “Valuation is both an art and a science, you have to make an adjustment” to take into account factors such as location, facing, the prestige attached to larger land plots, and “to be able to look out into the green of mature trees”.

Another analyst said: “In sum, landed rents and values are hard to compare between sites.” They pointed out that for assessing capital values and sales of landed properties, comparisons are based on land area. For assessing rents, “GFA comparisons technically are better than using land area as a basis because GFA accounts for the number of storeys”.

“That said, I would think a valuation report and the adjustments made would help increase the transparency. There are many factors not captured by GFA value, such as shape of land, elevation, structure, whether there is a long driveway,” they said.

The rent charged for a property also has an impact on the annual value of the property, as assessed by the Inland Revenue Authority of Singapore (Iras) for property tax purposes. One valuer said: “All things being equal, the value of a property depends on the net operating income derived from it.”

BT has reached out to Iras on how the tax authority assesses rents and annual values for landed properties.

Eyebrows were also raised when it emerged that the rent for 26 Ridout Road was not increased when the tenancy was renewed in 2021. The rent for 31 Ridout Road was renewed at S$20,000, for S$1,000 more or 5 per cent higher than when the lease was first signed in 2019.

Responding to a question raised in Parliament on Monday, SM Teo said: “When the tenancies of the two properties were up for renewal after the initial three years, a revaluation was done to peg the rentals to the prevailing market rate, ie to mark them to market. This valuation was also based on market comparables.”

In reply to a further question, Second Minister for Law Edwin Tong pointed to the capital expenditure that Minister Shanmugam had invested in the property.

“One of the rules that SLA internally looks at and has in mind is, if it is the same tenant who made the investments renewing it at the second plus-three and the third plus-three, then you’ll take it all in. Because if you did not do that, and you simply, at every renewal… charged a higher rental because of what he has done, then no tenant would eventually take up this, and it would work against SLA,” Tong said.

Two current SLA tenants whom BT spoke to on Monday revealed that when they renewed the leases on their black-and-white bungalows recently, their rents were increased.

De Jager Roelof Willem Otto first leased a 6,340 sq ft house at Sherwood Road for two years at S$14,500 per month in July 2021, on land area of about 28,000 sq ft. He recently renewed his lease for another two years at S$20,700 – a 43 per cent premium over his previous rental.

Another tenant at Goodwood Hill said she currently pays S$21,600 a month after renewing her lease in 2022, about 11 per cent higher than her previous rent of S$19,500. The 7,300 sq ft house sits on land of close to 55,000 sq ft.

The tenant, who declined to be named, signed a three-year tenancy agreement in August 2016 with the option of renewal for another two periods of three years each.

Low Kok Leong, who is a tenant at a 3,700 sq ft black-and-white property on land of 37,000 sq ft at Yarwood Avenue, now pays a monthly rent of S$14,000. His lease, which was signed two years ago, is due to renew soon, and he is waiting for an evaluation.

A check on the State Property Information Online (SPIO) online platform showed that in the last six months, detached black-and-white houses in prime central locations were recently leased at rates higher than what Shanmugam and Balakrishnan are paying for their houses today, based on the rent psf of GFA comparison. SPIO is the SLA’s platform for the renting and purchase of state properties.

The difference partly reflects how market conditions have changed between 2018 and today. Good class bungalow (GCB) rents in the private property market picked up speed significantly from 2020, analysts said.

The Urban Development Authority’s rental index for landed properties jumped 14.5 per cent in Q1 2023, after climbing 6.3 per cent in the previous quarter. In comparison, rents for non-landed private homes rose 6.2 per cent in Q1, slower than the 7.5 per cent rise in the previous quarter.

A 5,376 sq ft black-and-white house on about 27,000 sq ft of land on Stevens Road was awarded in January 2023 at its top bid of S$30,823 or the equivalent of S$5.73 psf of GFA – double the S$2.87 psf of GFA rate charged for 26 Ridout Road in the Holland area.

In February, a house on Seton Close in the Tanglin area, with GFA of 4,629 sq ft on land of 36,706 sq ft, was awarded for S$42,800 or S$9.24 psf of GFA.

In March, a Mount Rosie Road bungalow of 7,862 sq ft on 83,066 sq ft of land was signed for S$28,650, or S$3.64 psf of GFA.