Singapore Quarter 1, 2022

Market commentary

Improving commercial sector lends positive start to 2022

ECONOMY

Sustained growth amid risks and uncertainty

KEY HIGHLIGHTS

GROSS DOMESTIC PRODUCT (GDP)

FIXED ASSET INVESTMENTS (FAI)

UNEMPLOYMENT RATE

CONSUMER PRICE INDEX (CORE INFLATION)

Market Commentary

• Singapore’s economy grew by 3.4% y-o-y in Q1 2022, a deceleration from the 6.1% in Q4 2021, due mainly to a moderation in growth of the manufacturing sector. The manufacturing slowdown decline reflected the lower PMI indices in recent months, although global demand for semiconductor and semiconductor equipment remained sustained.
• The services sector also rose at a slower pace of 1.4% y-o-y in Q1 2022, compared to a growth of 5.6% in Q4 2021.
• Singapore attracted S$1.7bn in FAI in Q4 2021, a decline from S$3.7bn in Q3 2021. The biomedical manufacturing cluster emerged as the leading sector during the quarter with a contribution of S$760mn of FAI.
• In April 2022, MAS tightened the monetary policy by raising the exchange rate policy band at a higher level and raising the rate of appreciation, following its off-cycle move in January 2022. Amid the geopolitical situation and supply chain disruptions, the forecast ranges for core inflation and headline inflation were both raised to 2.5-3.5% and 4.5-5.5% respectively.
• The labour market continued to recover from the impact of the COVID-19 pandemic. The unemployment rate improved to 2.4% in Q4 2021 from 2.6% in Q3 2021. Total employment rose by 40,200 in 2021, following the sharp contraction by 181,000 in 2020. In Q4 2021, total employment rose by 54,600, driven by improvements in the construction sector (+15,500) and other service industries (+9,400) bearing the brunt. The manufacturing sector also recorded its first increase in two years in Q4 2021. Similarly, the wholesale and retail trade, as well as the accommodation and food services sectors also posted employment growth following a few quarters of contraction.

Market Outlook

• As the economy moderates towards trend growth in the year ahead, certain sectors, such as construction, retail and food services, aviation and hospitality, are expected to see a recovery. The manufacturing sector will likely remain as a pillar of growth for the economy.
• As at writing, 92% of the population has completed the full vaccination regime, while 71% have received a booster shot. This will safeguard the nation against the Covid variants.
• In February 2022, MTI maintained the country’s GDP growth forecast for 2022 at 4.0% to 6.0%. Significant safe management measures were relaxed in March, while a new Vaccinated Travel Framework came into place in April. The Omicron wave has likely peaked, and we expect stronger business and consumer confidence in the months ahead. The easing of borders should help alleviate the manpower crunch to some extent. Risks are skewed to the downside, given the ongoing geopolitical uncertainties, supply chain disruptions, inflation pressures and upward pressure on interest rates.

INVESTMENT

Outperformance led by commercial sector

KEY HIGHLIGHTS

Market Commentary

• Total investment sales for Q1 2022 experienced a notable 35% increase to nearly S$9.8bn from Q4 2021, driven by strong investor confidence in deploying capital to Singapore, which seems to emerge as an attractive haven for capital markets.
• The retail sector led the investment sales in the quarter, contributing to S$3.6bn (37%), followed by the residential sector contributing to S$3.1bn (32%).
• The public investment sales market recorded nearly S$2bn from the Government Land Sales (GLS) Programme, comprising an industrial site at Jalan Papan (Plot 9) and the sale of four residential sites at Jalan Tembusu, Lentor Hills Road (Parcel A), Dairy Farm Walk and Bukit Batok West Avenue 8 (Executive Condominium).
• Despite the fresh property cooling measures, the collective sale market witnessed a total of four deals seal in the quarter, while several sites were launched or relaunched for tender, including Chuan Park Condominium and High Point.
• The largest deal in the quarter was the proposed acquisition of a 68.2% remaining interest in Jem, an integrated office and retail property in Jurong, by Lendlease Global Commercial Reit for nearly S$2.1bn from Lendlease Asian Retail Investment Fund 3 Limited (ARIF3) and Lendlease Jem Partners Fund Limited (LLJP).
• CapitaLand Integrated Commercial Trust (CICT) and CapitaLand Open End Real Estate Fund (Coref) jointly acquired a Grade-A office building at 79 Robinson Road for nearly S$1.3bn from CapitaLand Investment Limited (CLI), Mitsui & Co and Tokyo Tatemono. The transaction is expected to be completed in Q2 2022.
• The collective sale of Tanglin Shopping Centre, which has office and retail components, was awarded to Pacific Eagle Real Estate for S$868mn.
• Frasers Logistics and Commercial Trust (FLCT) divested Cross Street Exchange, a mixed-use commercial property, to an undisclosed third party for S$810.8mn.

Market Outlook

• RESIDENTIAL: The higher additional buyer’s stamp duty (ABSD) rates are likely to trim developers’ interest in large residential sites, since the risk of not selling all units is higher, and the associated penalties are now more punitive.
• COMMERCIAL: The fresh easing of social, workplace, event and border restrictions will instill investors’ stronger confidence in the commercial market. In addition, developers’ interest is likely to spill over to non-residential investments like the commercial sector. With the popularity of mixed-use developments, commercial-zoned sites are garnering more attention from investors since the residential components of such sites are not subjected to ABSD or Qualifying Certificate (QC) rules. Despite URA’s recent imposition of restrictions on strata subdivision to the commercial component in properties located in certain designated areas including CBD and Orchard Road corridors, any drastic impact on market sentiments is not expected as the profile of the investors of commercial developments in recent times remain mainly institutional with a mid- to long-term investment horizon.
• RETAIL: While suburban retail assets are expected to continue to be sought after, the interest in prime assets, especially strata-titled properties and units, may be renewed due to its scarcity, which may in turn spur higher transaction activity.
• OFFICE: While technology demand growth could slow temporarily in the months ahead, on the back of supply chain constraints/disruptions and the Chinese regulatory clampdown, we remain optimistic on the finance sector, especially the wealth management industry, as a key driver of office demand. With the increase of up to 75% of the workforce allowed back to the office and improving business sentiment on the back of a strong rebound in Singapore’s economic growth last year, companies may reassess their office space needs.

RESIDENTIAL

Price growth to soften in the wake of cooling measures

KEY HIGHLIGHTS

PROPERTY PRICE INDEX OF ALL PRIVATE RESIDENTIAL PROPERTIES

PRIMARY AND SECONDARY SALES TRANSACTION VOLUME

RESIDENTIAL PIPELINE SUPPLY

PRIVATE HOME RENTAL TRANSACTIONS

Market Commentary

• According to URA’s flash estimate for Q1 2022, the Property Price Index (PPI) for private residential properties rose for the eighth consecutive quarter by 0.4% q-o-q, marking a noticeably slower growth in the wake of the cooling measures. Prices for the landed properties rose by 4.0%, while the non-landed prices fell by 0.6%. Besides the impact of the cooling measures, the softer non-landed prices were also a result of the dearth of new launches during the quarter. There were two new projects launched in Q1 2022, in the RCR and CCR.
• Based on caveats lodged, new sales and secondary transaction volumes dipped 44% and 49% q-o-q respectively in Q1 2022. Within both the new sales and secondary sales market, the decline in activity was broad-based and similar across the market segments.
• The price movements across the market segments reflect the expected immediate impact of the cooling measures on investment demand. The CCR, which has the highest foreign share of demand, fell by 0.5% q-o-q. On the other hand, the suburban OCR segment continued to see prices rising by 1.9% q-o-q, albeit at a slower pace compared with 5.7% a quarter ago. Our price analysis showed that median prices were more resilient in the secondary market, rising by 0.4% q-o-q in Q1 2022, while median prices in the primary market declined by 1.7% q-o-q.
• The pipeline supply for private residential homes rose by 2.8% qoq as of Q4 2021. The total number of unsold units rose slightly by 0.3% q-o-q to 21,612 units and we expect the unsold units to be absorbed in 2 years, based on the average sales pace over the last three years. The tight supply situation will continue to lend pricing power to developers.
• Private rental transactions grew significantly by 6.6% to a record high in 2021, driven by the continual ongoing uncertainties within the construction sector, which created the demand for rental units. Rental transactions fell by 11.9% q-o-q in Q4 2021 and 39% q-o-q in Q1 2022. The marked decline in Q1 2022 was broad-based across the three market segments and is likely due to the low vacancies in the market. Some expatriates may have taken the opportunity to return to their home countries, expecting to return with ease as the border restrictions are relaxed.

Market Outlook

• We expect price growth to moderate with the imposition of the latest cooling measures to promote housing affordability and curb market exuberance. However, we do not expect strong pressures on developers to reduce prices, especially for projects with limited unsold inventory.
• Looking ahead, the tightening of the Total Debt Servicing Ratio (TDSR) could divert some demand towards suburban homes, which are more affordable. We also expect some rotation of demand from RCR to OCR in 2022, given the strong price increases in RCR in 2021.
• Demand will continue to be largely supported by local first-time home buyers and HDB upgraders, who are least impacted by the cooling measures. Stable economic prospects and an improving job market in 2022 will further support the demand for private homes.
• However, we expect sales momentum to slow, on the back of fewer units from new launches in 2022. Developers will likely exercise more caution in bidding for land parcels over the next few months. We expect a recovery in launch and sales activity in H2 2022, if the collective sales market stabilises.
• While the cooling measures will dampen sales momentum, the overall market remains supported by a robust labour market, ongoing economic growth, and healthy demand-supply dynamics in the property market. The nation is also better prepared to face new Covid challenges, given the high vaccination rates and booster programme. Our base projection is a slight correction of the primary sales to about 11,000 – 12,000 units for 2022.
• With the VTL and resumption of air travel bringing more expatriates, foreign workers, and students back to Singapore, we foresee rental demand to strengthen in 2022. However, as the shortage of manpower in the construction sector is gradually resolved, demand for short-term rentals could decline. The completion of new projects could slow the rate of rental increases.

RETAIL

Brighter prospects with fresh easing of COVID measures

KEY HIGHLIGHTS

AVERAGE RETAIL RENTAL (SGD/sq ft)

SUPPLY OF RETAIL SPACES (SQ M)

RETAIL OCCUPANCY RATES

Market Commentary

• Based on EDMUND TIE Research, islandwide net absorption fell slightly from 355,000 sq ft in Q3 2021 to 269,000 sq ft in Q4 2021. The overall occupancy rate remained constant at 91.9% in Q4 2021.
• The occupancy rate for the Fringe/Suburban Area improved by 0.1% points to 93.9% in Q4 2021, the sixth quarter of consecutive increase since the start of the COVID-19 pandemic.
• In Q1 2022, rents for Fringe/Suburban continued to outperform and rose by 1.3% q-o-q, compared to a slower growth of 0.5% q-o-q in Orchard/Scotts Road and marginal growth in rental rates of 0.3% in Other City Areas.
• Retail openings in Q1 2022 included Japanese furniture brand Nitori Retail’s first Singapore store at Courts Nojima at The Hereen, Uniqlo at Ang Mo Kio Avenue 3, and Pepper Lunch GO! at 313@Somerset. Retail closures included Dunkin’ Donuts temporarily closing all their outlets in Singapore, Isetan at Parkway Parade, and Marks & Spencer at 313@Somerset.
• The 3-month moving average of y-o-y change in retail sales (excluding motor vehicles) has risen from 6.8% in October 2021 to 9.6% in January 2022. Retail sales for Petrol Service Stations, Wearing Apparel & Footwear and Watches & Jewellery experienced the greatest improvement y-o-y in Q4 2021. The majority of the retail trade categories experienced a positive growth except for Minimarts & Convenience Stores, Others and Optical Goods & Books, which were the only three categories that experienced losses.
• For the food and beverage services index for Q4 2021, Restaurants was the sole component that reported a decline of 5.3% y-o-y due to the dining restrictions. Food Caterers recorded the greatest improvement, increasing by 42.2% y-o-y in Q4 2021 followed by Cafes, Food Courts & Other Eating Places which rose by 4.2% y-o-y.

Market Outlook

• We expect the fresh easing of social, event and border restrictions to improve retail sentiment and boost consumer confidence, which will further improve retail sales.
• In particular, the increased dining capacity to 10 fully vaccinated people is a welcome move for the F&B sector, though the current requirement for safe distancing of 1m between tables means that eating outlets are still not be able to operate at full capacity.
• As a result of URA’s recent imposition of restrictions on strata subdivision to the commercial component in properties located in certain designated areas, including CBD and Orchard Road corridors, demand and occupancy of prime retail assets may keep steady or even improve amid the limited supply of existing strata malls.
• The latest strata policy change may also improve the tenant diversity of malls and allows for more effective control of the mall’s positioning under single ownership, which may drive higher footfall and spending. As a result, malls in the designated areas may enjoy lower vacancy rates and command higher rents over time.
• As Singapore further reopens its borders with the lifting of most restrictions for fully vaccinated visitors, the anticipated return of more tourists will inject greater optimism for the recovery of the retail sector, especially in the Central Area.

OFFICE

Riding on the back-to-office momentum

KEY HIGHLIGHTS

Average monthly gross rents (SGD/sq ft)

SUPPLY – Singapore OFFICE SUPPLY (sq ft)

OCCUPANCY RATE OF PRIME CBD OFFICE SPACES

Market Commentary

• Based on EDMUND TIE Research statistics, overall net absorption islandwide fell from 515,000 sq ft in Q4 2021 to around 265,000 sq ft in Q1 2022. The leasing demand for prime office spaces in the central area moderated as corporates held back on their real estate needs amid the new Omicron wave during the quarter. Nonetheless, robust demand for premium spaces in Raffles Place and Grade A office spaces in Shenton Way/Robinson Road/ Tanjong Pagar brought about higher occupancies, while other segments saw some softening. The overall occupancy rate for office spaces in the CBD rose by 0.7 percentage points to 93.6% in Q1 2022, which was a similar rate of increase compared to the previous quarter.
• The limited supply of quality spaces continued to support rental growth across all subzones of the office sector in Q1 2022, albeit to various extents. In the CBD, premium rents at Marina Bay and Grade A rents at Raffles Place experienced the strongest uptick. Grade B rents at Shenton Way/Robinson Road/Tanjong Pagar have also risen for the first time by 0.6% since Q1 2020. In non-CBD, rents across different subzones improved by 0.2%-0.5% q-o-q, while office rents in the decentralised rose by a modest 0.1%-0.2% qoq in Q1 2022.
• Some of the major leasing deals in Q1 2022 included KPMG taking up around 100,000 sq ft in Asia Square Tower 2 and Sony Music’s flagship regional headquarters at Duo Tower. The upcoming Guoco Midtown had also secured more tenants in the quarter.

Market Outlook

• Following URA’s recent imposition of restrictions on strata subdivision to the commercial component in properties located in certain designated areas, including CBD and Orchard Road corridors, rents and prices of strata units are expected to rise due to scarcity in future supply.
• While the growth in demand for the technology sector could slow temporarily in the months ahead due to the supply chain constraints/disruptions and the Chinese regulatory clampdown, we remain optimistic on the finance sector, especially the wealth management industry, as a key driver of office demand.
• With up to 75% of workforce allowed back to the office and improved business sentiment driven by the strong rebound in Singapore’s economic growth last year, companies are reassessing their office space needs. To accommodate future growth plans, adopt the hybrid working models, and address the employees’ evolving requirements, companies might be looking for expansion in the current buildings or new spaces.
• Barring the emergence of new Covid-19 variants, we expect the restrictions in the workplace may ease further by the end of the year, which may allow all employees to return to the office. Amid a tight supply pipeline, office demand will continue to strengthen, especially for good quality and sustainable spaces.

GENERAL DISCLOSURE

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This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, Edmund Tie & Company can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to Edmund Tie & Company.

© Edmund Tie & Company April 2022
Source: Edmund Tie & Company. Reproduced with permission.

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