Singapore Quarter 2, 2022

SINGAPORE, July 2022

Market commentary

Continued real estate momentum amid headwinds

ECONOMY

Strong labour market but uncertainties abound

KEY HIGHLIGHTS

GROSS DOMESTIC PRODUCT (GDP)

FIXED ASSET INVESTMENTS (FAI)

UNEMPLOYMENT RATE

CONSUMER PRICE INDEX (CORE INFLATION)

Market Commentary

• In Q1 2022, Singapore’s economy expanded by 3.7% y-o-y, a moderation from 6.1% in the previous quarter. The quarter’s growth was led by the manufacturing, finance & insurance, and professional services sectors.
• Both goods-producing sector (6.3% y-o-y vs 13.6% y-o-y) and the services sector (4.2% y-o-y vs 4.4% y-o-y) experienced slower growth in Q1 2022 compared to Q4 2021. Apart from the Accommodation & Food Services, Real Estate, and Other Services sectors which experienced faster growth, the other sectors’ growth had decelerated.
• Singapore attracted SGD2.2bn in FAI in Q1 2022, an increase from SGD1.7bn in Q4 2021. The electronics cluster led the investment during the quarter under review, contributing SGD1.4bn (more than half) to FAI.
• Core inflation hit 2.5% in Q1 2022, the highest level recorded since Q2 2012 (2.7%). Consumer prices have been on an upward trend, including food and other goods, as well as electricity and gas.
• Amid a tight labour market and ongoing economic recovery, the unemployment rate continued declining to 2.2% in Q1 2022, which is on par with pre-pandemic levels, from 2.4% in Q4 2021. In Q1 2022, total employment rose by 46,500, led by improvements in the construction sector (+21,600) and other services industries (+10,900). In particular, the number of employed foreign workers, especially in the construction sector, had rebounded following the gradual easing of border restrictions.

Market Outlook

• In May 2022, the MTI maintained the country’s 2022 GDP growth forecast at “3.0 to 5.0%” but expected growth to come in at the lower half of the forecasted range due to significant downside risks posed by the ongoing Russia-Ukraine conflict and China’s strict lockdowns.
• With non-resident employment on track to a continual recovery, it may relieve the tight labour market. Unemployment rates are expected to remain low, though persistent supply chain disruptions and external economic risks could weigh on hiring sentiments.
• With a stabilised local epidemic situation, Singapore had lowered its Disease Outbreak Response System Condition (Dorscon) framework from orange to yellow and is progressively closer to a return to normalcy. Further easing of community and border measures occurred in April and June, which included the lifting of group size limit, removing capacity limit to allow for larger settings and nightlife establishments, as well as removing pre-departure test requirements for fully vaccinated incoming travellers.
• As Singapore braces itself for the next Covid-19 wave expected in July or August, its high vaccination rate, strong booster take-ups, and indoor mask-wearing requirements should allow it to be better prepared. As of writing, 92% of the total population has fully completed the vaccination regime, while 77% has received booster shots.

INVESTMENT

Recalibration amidst economic uncertainties

KEY HIGHLIGHTS

Market Commentary

• Following the looming threat of stagflation amidst higher interest rates and supply chain shortages, investment activity moderated as the market adjusted to a new norm. Total investment sales for Q2 2022 experienced a significant 32% q-o-q decrease after reaching a 2-year high in the previous quarter. Nonetheless, investors are maintaining momentum and recalibrating to changes in global markets.
• The residential sector led the investment sales in the quarter, contributing to $3.3bn (49%), followed by the retail sector contributing to $1.38bn (21%). The bulk of total residential sales was led by the public investment sales market.
• The public investment sales market recorded nearly $2bn from the Government Land Sales (GLS) Programme, comprising two residential sites, at Pine Grove (Parcel A) and Dunman Road.
• Caution prevailed in the public land sales segment. Both sites (Pine Grove (Parcel A) and Dunman Road) received a lower than usual number of bids, indicating that developers are cautious on the increasing economic and market risks, choosing to be strategic in their bids.
• The collective sale market remained active and maintained momentum going into the quarter with the sale of Golden Mile Complex and Lakeside Apartments. Several residential sites were recently launched or relaunched for tender.
• In the second half of 2022, we anticipate investment transaction volumes to maintain its current momentum. The easing of border restrictions and ongoing geopolitical uncertainties will see capital gravitating towards the Singapore real estate market as a safe haven.

Market Outlook

• RESIDENTIAL: With the government’s release of 14 sites for public investment sales, there is a measured increase in the private housing supply. Developers are likely to respond to pent-up demand in areas that have not seen new developments over the past years. However, developers will also likely exercise more caution in bidding for land parcels over the next few months due to an increase in ABSD to 35%, with an additional 5% ABSD that is non-remittable and to be paid upfront upon purchase of residential property.
• RETAIL: With the renewed interest and activity in retail assets, investment activity will likely remain healthy in the next half of 2022 as the easing of border restrictions continues amid a gradual recovery in tourism and retail sales.
• COMMERCIAL: At the forefront of recovery, office, retail and industrial assets are changing to adapt to current needs and trends. Older assets are becoming increasingly obsolete, and investment activity picks up in redeveloping those assets to create higher quality spaces that meet the demands of tenants seeking integration of wellness and work. However, with the increase in construction costs, investors will remain cautious and strategic, and yields are likely to start expanding.
• OFFICE: We anticipate a gradual improvement in the office leasing market as investors calibrate their portfolios, recycling capital towards commercial assets. Investment activity for strata office assets will likely be sustained amid limited supply, following URA’s imposition of restrictions on strata subdivision of commercial assets in central area.
• INDUSTRIAL: The investment demand for logistics facilities and warehouses is expected to remain strong, with supply chain risks, shortages and increasing stockpiling requirements.

RESIDENTIAL

Rising rates and headwinds to moderate price growth and sales activity

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 Q2 2022, the Property Price Index (PPI) for private residential properties rose for the ninth consecutive quarter by 3.2% q-o-q, after rising 0.7% in the previous quarter. Both landed and non-landed property prices rose by 2.9% q-o-q and 3.3% q-o-q respectively. There were four new projects launched in Q2 2022.
• Based on caveats lodged, primary and secondary sales transaction volumes rose 33% and 19% q-o-q respectively in Q2 2022. Within both the primary and secondary markets, the increase in activity was in the CCR and RCR segments. The primary sales transaction volume in the OCR segment, on the other hand, fell 17% q-o-q in Q2 2022.
• The pipeline supply for private residential homes inched up by 0.4% q-o-q as of Q1 2022. The total number of unsold units fell slightly by 4% q-o-q to 20,719 units and we expect the unsold units to be absorbed in 1.9 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 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 5% q-o-q in Q1 2022. After a slight increase in rental transactions in Apr 2022, rental transactions fell by 22% m-o-m in May 2022. The decline in Q1 2022 was broad-based across the three market segments and is likely due to the low vacancies in the market.
• In addition, the MOF imposed the application of ABSD (Trust) of 35% on the transfer of residential property into a living trust with effect from 9 May this year. The overall market impact is not likely to be significant, as most property purchases are not made via trusts. However, it may cause families to reconsider providing a conditional legacy for their children via the trust route.

Market Outlook

• Looking ahead, the tightening of the Total Debt Servicing Ratio (TDSR) to 55% could divert some demand towards more affordable homes in the suburban market segment. In addition, the fringe segment will see demand growing as Singapore progresses along economic decentralisation with improving connectivity.
• Demand will continue to be largely supported by local first-time home buyers and HDB upgraders, who are least impacted by the cooling measures. An improving job market in 2022 will further support the demand for private homes.
• 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. However, inflationary pressures, interest rate hikes and negative wealth effects from financial market weakness could cap homebuying demand. The opening up of our borders, on the other hand, will help re-inject foreign buying demand. In addition, the nation is also better prepared to face new Covid challenges, given the high vaccination rates and booster programme. Our base projection is for a moderation of primary sales to about 10,000 units for 2022 – on the back of slower overall launch activity this year.
• Price growth has gained momentum in Q2 2022. Considering the economic and geopolitical headwinds as well as rising interest rates, property price growth could reach around 8%. However, we do not expect strong pressures on developers to reduce prices, especially for projects with limited unsold inventory.

RETAIL

Brightening retail climate with endemic COVID

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 reversed from 269,000 sq ft in Q4 2021 to -129,000 sq ft in Q1 2022. As a result, the overall occupancy rate dropped by 0.2% pts to 91.7% in Q1 2022.
• The occupancy rate for Other City Areas saw a significant decrease of 0.7% pts to 87.9% in Q1 2022. However, other areas saw no change from the previous quarter.
• In Q2 2022, rents for Fringe/Suburban (first storey) continued to outperform, rising by 1.8% q-o-q and rents for Orchard/Scotts Road (first storey) rose by 1.2% as well. In comparison, rental rents saw marginal growth of 0.5% in Other City Areas (first storey).
• Leasing demand in Fringe/Suburban Areas remained buoyant. Retail openings in Q2 2022 included Japanese retail chain Daiso, expanding its presence in Singapore with a flagship store at Jurong Point shopping mall in May, alongside two other planned new branch openings. Suntec City and Vivocity both saw the opening of new F&B outlets, notably, Matchaya in Suntec City and Ben & Jerry’s and Fragrance in Vivocity. However, in older retail malls such as Bras Basah Complex and Beauty World Centre, retail closures include stores like Knowledge Book Centre.
• The 3-month moving average of y-o-y change in retail sales (excluding motor vehicles) maintained at 9.8% from January 2022 to April 2022. Retail sales for department stores bounced back to 31.6% in April, with retail sales in Food & Alcohol, Wearing apparel & footwear reaching retail sales of 35.6% and 46.6% respectively.
• For the food and beverage services index for Q2 2022, there is an overall 11.3% increase, with all components seeing improvements from previous months. Food Caterers recorded the greatest improvement, increasing by 77.7% y-o-y in Q2 2022 followed by Restaurants which rose by 17.1% y-o-y.

Market Outlook

• Notwithstanding the easing of pandemic restrictions, there is a growing demand for retailers to incorporate digital experiences into their physical stores. Similarly, digitally native brands plan for their expansion into physical stores to provide a holistic retail experience for consumers adjusting to the new endemic norm.
• As people are able to gather in larger groups, the retail sector will see increased footfall in F&B stores and shopping malls. However, with ongoing economic uncertainties from the Russia-Ukraine conflict, slowing growth and rising inflation, the strength of consumer spending is expected to be capped.
• With Singapore moving ahead with greater easing of pandemic restrictions and border restrictions, the retail climate is gradually brightening. The enhancement of older retail assets will also help to revitalise the sector. On the back of firming leasing demand and a recovering retail sector, demand is expected to pick up, with suburban retail rents growing at 8% and other areas at between 3-5%.

OFFICE

Robust demand for quality office spaces

KEY HIGHLIGHTS

Average monthly gross rents (SGD/sq ft)

SUPPLY – Singapore OFFICE SUPPLY (sq ft)

OCCUPANCY RATE OF PRIME CBD OFFICE SPACES

OFFICE SUPPLY PIPELINE (2022-2025) (sq ft)

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.
• There is robust demand for premium spaces in Marina Bay, and occupancy rates for Raffles Place and Grade A office spaces in Shenton Way/Robinson Road/ Tanjong Pagar remained stable. The overall occupancy rate for office spaces in the CBD maintained at 93.8% in Q2 2022.
• With limited supply of quality spaces, there is a rise in rental rates across all subzones of the office sector in Q2 2022, albeit to various extents. In the CBD, premium rents at Marina Bay rose by 1.7% q-o-q and reached a 2-year high, while Grade A rents at Shenton Way/Robinson Road/Tanjong Pagar followed closely with a 1.2% q-o-q increase. In Non-CBD, rents across different subzones improved by 0.5%-0.9% q-o-q, while office rents in the decentralised rose by 0.8% q-o-q in Q2 2022.
• The major leasing deal in Q2 2022 is the reported take-up by Amazon of 369,000 sq ft of space at Central Boulevard Towers.

Market Outlook

• The office market has gained traction with the growth in the technology and the finance sectors, especially the wealth management industry as a key driver of office demand.
• Office leasing demand growth will gain momentum as firms define their hybrid work arrangements and have greater certainty on their space requirements. Tenants have shown preference for landlords and developments that caters to a core-flex working environment that allows for flexibility in leasing spaces at different stages of growth.
• Between the older assets and different levels of quality, the gap continues to widen as newer assets adjust to meet current needs beyond a traditional office of the past. As such, vacancy and rents continue to see a widening gap between different grades of office assets.
• Despite recent headwinds facing the technology sector, the outlook of office assets remains positive, with the expectation of increasing rents and occupancy rates, especially in prime CBD office spaces.

GENERAL DISCLOSURE

DISCLAIMER - EDMUND TIE & COMPANY
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 July 2022
Source: Edmund Tie & Company. Reproduced with permission.

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