Here's why the 8.2% rise in lease transactions for the first 3 quarters of 2012 is very puzzling

Your guess is as good as ours.

According to Savills, with the latest Ministry of Manpower statistics showing that Employment Pass holders having declined by 700 between Dec-2011 and June-2012, the 8.2% rise in lease transactions for the first 3 quarters of this year to 37,668, must appear puzzling.

There are some reasons behind this.

• One is that the statistics are gross numbers, capturing both new leases and renewals. Also, the statistics also capture leases that broke before their due date and were subsequently re-let by the landlord. Given that a standard tenancy agreement is for two years, we have to revisit 2010 to find the size of the market. For that year, there was a net increase of 29,000 Employment Passes over 2009. If all these renewed in 2 years, it forms a strong base for 2012.
• Increasingly, there are tenants, particularly those renewal cases, taking up short term leases less than the standard 2-year tenure. These could be as short as a few months. The re-letting of the premises would therefore add to the statistics.
• Those at the least lower bound income limit for S-passes may spillover into private properties but on a multiple sharing basis.

Leasing transactions may hold steady or even rise for the remainder of 2012 and perhaps till mid-2013 as the number of people granted EPs in 2010 and 2011 had been high. As with the logic for the present moment, their lease renewals will form the base supporting a high level of lease transactions in 2013.

Rentals will also rise till perhaps 1H2013 as more small format homes get tenanted and more tenants who have more constrained rental budgets share a unit.

Nevertheless, these strong transaction numbers belie a weakness. Transactions have been rising due more to shuffling within the market, creating an increased velocity of transactions.

Come 2014, when the current flat-ish EP population have their leases due for renewal, it is unclear how many will be still be gainfully employed, or their EP renewals approved.

On top of this, there is an increasing supply of completed units. Rising vacancy rates is forecast with downward pressure on rents next year.

In the near term, these issues will not manifest itself.