Brisk residential activity with economic reopening and recovery.
Key economic indicators
Based on advanced estimates released by the Ministry of Trade and Industry (MTI) on 14 Oct 2020, the Singapore economy contracted by 7.0% year-on-year (y-o-y) in 3Q 2020 following the 13.3% y-o-y decline in 2Q 2020. The two quarters marked the steepest declines in the post Global Financial Crisis period (Table 1). On a quarter-on-quarter (q-o-q) basis, the Singapore economy expanded by 7.9% in 3Q 2020, an improvement from the decline of 13.2% in 2Q 2020.
Table 1: Singapore’s Gross Domestic Product (GDP)
As Singapore moved into Phase 2 of its recovery from 19 June 2020, the majority of industries, except for the entertainment sector, had restarted operations. The manufacturing industry recorded a 2.0% y-o-y growth in 3Q 2020, a rebound as compared to -0.8% y-o-y in 2Q 2020. The construction and services producing industries also moderated to -44.7% and -8.0% y-o-y in 3Q 2020 respectively as compared to that in 2Q 2020.
Given the earlier economic contraction, inflationary pressures have eased while labour market pressures rose. Inflation declined by 0.5% in 2Q 2020, extending from the -0.1% in 1Q 2020. The unemployment rate also increased to 2.9% in 2Q 2020, from 2.4% in 1Q 2020 (Table 2).
Table 2: Inflation, unemployment rate and fixed asset investments
Singapore attracted $1.9bn in fixed asset investments (FAI) in 2Q 2020, a sharp decline from the $12.4bn reported in 1Q 2020. Both the manufacturing and services cluster saw great declines. The manufacturing cluster reported a sharp decline of 86.5% q-o-q in 2Q 2020. Within the manufacturing cluster, the chemicals, electronics and transport engineering components contracted by 90.2%, 94.4% and 77.0% on a q-o-q basis in 2Q 2020 respectively. The services cluster also trended downwards by 73.5% q-o-q in 2Q 2020.
Investor confidence improved with the stabilisation of the local Covid-19 situation and the reopening of the economy, leading to increased market activity in the investment sales market. As a result, investment sales grew by 33.8% q-o-q to nearly $2.5bn in 3Q 2020 after three consecutive quarters of decline (Figure 1).
Figure 1: Total investment sales (S$bn)
There were no significant GLS sites being awarded in 3Q 2020, resulting in no public investment sales for the second consecutive quarter. Apart from more transaction activity, there were also more transactions of higher price quantums. In 3Q 2020, six transactions surpassed the $100mn mark compared to only three deals in 2Q 2020. While the significant deals in 2Q 2020 were all from the office sector, the major transactions in 3Q 2020 were from various property sectors, with three from the industrial sector (Table 3). The buoyant demand for industrial and logistics assets arose from rising warehousing needs during the ongoing Covid-19 pandemic.
Table 3: Investment sales summary*
Sector trends and outlook
After two consecutive quarters of increase, office investment sales declined by 46.3% q-o-q to $711mn in 3Q 2020 due to lower investment activity in the sector. Two office buildings and one strata office unit were sold in the quarter. The largest deal in 3Q 2020 was the sale of Robinson Point for $500mn ($3,721 psf NLA) from Tuan Sing Holdings to a British Virgin Islands-incorporated investment holding company (Table 4). The office building was previously acquired by Tuan Sing in 2013 for $348.9mn and has undergone asset enhancement works to the main lobby, carpark lobby and loading bays. In 3Q 2020, ABI Plaza was also sold to a private fund managed by CapitaLand Fund Management for $200mn ($2,162 psf NLA) after it was put on the market by MYP since June 2020 at a guide price of above $280mn. The ABI Plaza site will benefit from the grant of bonus GFA under URA’s CBD Incentive Scheme upon redevelopment into a mixed use project.
Table 4: Key private investment sale transactions in 3Q 2020
Retail investment sales increased the most among the property sectors in 3Q 2020, recording $550mn from $43mn in 2Q 2020. There was only one (related party) transaction in 3Q 2020, which was the sale of a 50% stake in Northpoint City (South Wing) based on the property valuation of $1.1bn. Frasers Property sold 50% of its stake in the shopping mall to a division of TCC Group, whose controlling shareholders are that of Frasers Property.
Residential investment sales constituted the bulk (31.4%) of total investment sales in 3Q 2020, a considerable increase from the 14.1% share in 2Q 2020 (Figure 2). Investment sales almost tripled q-o-q to $778mn after three consecutive quarters of decline. This was supported by the resumption of home viewings from 19 June 2020. While there were only two Good Class Bungalows (GCBs) sold in 2Q 2020, eight GCBs were sold in 3Q 2020. The largest GCB deal was a GCB on 101,550 sq ft of freehold land in Garlick Avenue for around $93mn ($916 psf land area). The site, which is reported to be purchased by Mr Goh Cheng Liang, founder of Wuthelam Holdings, is large enough to be subdivided for redevelopment into 5/6 bungalows. Apart from an active GCB market, the collective sales market also saw modest activity. After the en bloc sale of Casa Sophia in 1Q 2020, 3Q 2020 saw the second en bloc sale in 2020 with the sale of Yuen Sing Mansion for $15.2mn, lower than the reserve price of $17mn. This followed its last unsuccessful tender in 2018. Separately, a four-storey residential mixed use building at 320 Balestier Road was sold in 3Q 2020 for $18.1mn to LHN Limited, which had intentions to operate the property as a co-living space. LHN had previously developed Hmlet at Cantonment jointly with Hmlet.
The improved transaction activity in 3Q 2020 offered some glimpse of hope for the investment sales market, but there are still uncertainties given ongoing weakness in the economy. Business sentiment among local firms remain pessimistic for 4Q 2020 despite an improvement from 3Q 2020, according to the Singapore Commercial Credit Bureau’s Business Optimism Index. However, some sectors such as the professional and IT services, as well as the manufacturing and financial services sectors anticipated a slightly better outlook in 4Q 2020. As Singapore prepares for the next phase of reopening the economy, as well as more green lanes being implemented, this may provide further confidence for foreign investors whose footprints in the market have been on the rise in recent quarters.
Figure 2: Total investment sales by asset type
Key economic indicators
Based on 3Q 2020 Urban Redevelopment Authority (URA) flash estimates, private home prices continued to increase by 0.8% q-o-q, after 0.3% in 2Q 2020 (Table 5). This was driven by the landed segment, which surged by 3.8% q-o-q after staying constant in 2Q 2020.
Table 5: URA Private Residential Price Index
Private non-landed property prices held firm q-o-q in 3Q 2020 after a q-o-q growth of 0.4% in 2Q 2020, with prices in the RCR and OCR expanding by 3.3% and 1.7% q-o-q respectively. On the other hand, prices in the CCR declined by 4.9% q-o-q, a reversal from the 2.7% growth in 2Q 2020.
Housing loans value rose for the fourth consecutive quarter by 9.7% y-o-y in 2Q 2020 (Figure 3). However, on a q-o-q basis, housing loans fell by 5.0% amid the economic gloom, job uncertainties and prohibition of home viewings.
Figure 3: New housing loans limits granted
On 28 September 2020, URA prohibited developers from re-issuing options to purchase (OTP) to the same buyer of the same unit within 12 months after the expiry of the earlier OTP. Upfront agreements to buyers to re-issue OTPs were also prohibited. The move aimed to improve the reliability of developer sales figures and encourage financial prudence in home purchases amid the current economic uncertainties.
However, in the event that the purchasers may require additional time to finalise the necessary arrangements before exercising the OTP, either the purchaser or developer can apply for the extension of the validity period of the OTP up to 12 weeks from the OTP date, provided that both parties are agreeable.
New home sales volumes comprised the bulk of the private residential market in 3Q 2020 following the reopening of showflats and increase in new launches, amounting to a total of 3,670 units. New sales continued to increase for the fifth consecutive month in September 2020, reaching 1,329 units, which was 5.6% and 4.6% higher on a m-o-m and y-o-y basis respectively. This could be driven by buyers seeking stable assets in a low-interest rate environment amid volatile equity markets and economic uncertainties, as well as having more choices from the increased launches.
In 3Q 2020, there were six new launches (Table 6). Two of the projects recorded take-up rates of above 60%, aided by their competitive pricing.
Table 6: Private residential launches (excluding ECs) in 3Q 2020
Resale volume more than tripled from 951 units in 2Q 2020 to 3,149 units in 3Q 2020. This was attributed to home viewings being allowed once again. Covid-related construction delays also may have led homebuyers to consider the resale market.
Despite the Hungry Ghost Festival, total private homes sales volume in 3Q 2020 amounted to 6,819 units, a significant growth from the 2,664 units in 2Q 2020, and 18.3% higher than the 5,763 units a year ago (Figure 4).
Figure 4: Private homes sales volume (excluding ECs) and URA All Residential Price Index
Despite the border closures, demand from foreigners have improved. In 3Q 2020, foreigners purchased 225 private residential properties, which was 89% more than that in 2Q 2020 and even exceeded the 216 units in 1Q 2020.
In the private residential leasing market, total rental volumes rebounded to 26,462 transactions in 3Q 2020 after a q-o-q decline in 2Q 2020 (Figure 5). Nevertheless, the rental volumes were still 2.1% lower than 3Q 2019, amid pressures on the expatriate employment market. With softening leasing demand, rents are anticipated to decline in 3Q 2020.
Figure 5: Private home rental transactions (excluding ECs)
As at 2Q 2020, there were 53,055 units in the pipeline. The bulk of the pipeline supply is slated to complete in 2022 and 2023 (Figure 6). Around 1,459 units will be expected to complete in 2H 2020. About 39% of the pipeline supply (21,113 units) have been sold while the remaining 61% (31,942 units) are unsold. Based on the three-year annual average take-up of new sale units of nearly 9,800 units, the unsold units will take around 3.3 years to be absorbed.
Figure 6: Number of private homes in the pipeline (excluding ECs)
With the recent prohibition on the re-issuance of OTPs, there could be a slight decline in new sales in 4Q 2020 as homebuyers exercise more caution. However, new sales are still expected to be supported by genuine demand by homebuyers and a steady pace of upcoming launches.
Notwithstanding current economic weaknesses, the low-interest rate environment and high liquidity is supporting end-user demand. Foreign demand is likely to pick up further as Singapore’s economy gets set to enter the next phase of reopening reopens and more green lanes are implemented. This may provide more confidence for foreign investors to acquire properties in Singapore.
As Phase 2 of Singapore’s reopening begun on 19 June 2020, retail shops started to operate and dine-in activities were allowed. However, overall retail sales are not back to pre-Covid-19 levels yet.
Many retailers have been introducing various promotions to woo shoppers back to malls as it is a challenging period. For instance, the Orchard shopping belt was packed during the National Day weekend, with long queues outside popular stores like Tangs which was offering promotions.
Besides retailers, shopping malls have also begun adopting an online presence. Marina Square collaborated with Lazada as the platform’s first shopping mall, working with its tenants to create a virtual mall on the app. Frasers Property Retail is also launching an e-commerce marketplace, Frasers eStore, offering a ‘store-to-door experience’ for tenants and consumers.
Landlords are also offering spaces to less conventional tenants. For instance, co-working operator JustCo, has taken up space in Cross Street Exchange and Marina Square. In 4Q 2020, JustCo will also be opening another outlet at The Centrepoint. To retain its members, JustCo offered rental rebates of between 15% and 30% for the month of May 2020.
The three-year moving average of retail sales (excluding motor vehicles) growth moderated to -25.4% in July 2020 from the -34.1% in June 2020. (Figure 7). The various promotions introduced by malls and retailers in Phase 2 of Singapore’s reopening helped boost retail sales.
In July 2020, the worst performing sectors were food and alcohol as well as departmental stores (Figure 8). On the other hand, supermarkets, computer and telecommunications and the furniture and household equipment sector reported y-o-y increases in retail sales. Overall, total retail sales (excluding motor vehicles) declined by 7.2% y-o-y in July 2020.
Figure 8: Retail sales index (Jul 2020), y-o-y change
The food and beverage index trended downwards by 25.7% y-o-y in July 2020, and food caterers were the hardest hit, contracting by 45.1% y-o-y (Figure 9).
Figure 9: Food and Beverage index (Jul 2020), y-o-y change
Private demand and occupancy
Based on EDMUND TIE Research, islandwide net absorption contracted further to -798,000 sq ft in 2Q 2020 from -561,000 sq ft in 1Q 2020. The occupancy rate declined by 1.9% pts q-o-q to 88.9% in 2Q 2020.
Among the various subzones in the retail sector, monthly first-storey retail rents in the Fringe/Suburban areas contracted the least by 1.0% q-o-q in 3Q 2020. Monthly rents of first-storey retail in the Fringe/Suburban areas were supported by the proximity of residential estates in these areas, as people continued to work from home as their default. Additionally, first-storey retail is more well-located and visible as compared to upper-storey retail. All other subzones reported a decline of 2.0% q-o-q in 3Q 2020 (Table 7).
Table 7: Average monthly gross rents (S$ per sq ft)
Based on EDMUND TIE Research, around 708,000 sq ft of NLA (or 202,000 sq ft per annum) is expected to be completed islandwide from 3Q 2020 to 2023. This is much lower than the three-year annual average supply of 1.0mn sq ft. Most of the supply pipeline (43.0%) is expected to complete by end-2021 (Figure 11). One of the developments that will be completed in 2021 is i12 Katong mall.
Figure 11: Retail development pipeline
Moving forward, we expect the retail market to remain subdued and demand for retail space will continue to slow. The retail market may still be weak in Orchard/Scotts Road due to the dearth of tourist arrivals. Similarly, in the Other City Areas, the retail market is impacted adversely as employees are still working from home as a default. As employees gradually return to their offices, we expect retail sales in the CBD area to pick up. However, retail in the Orchard/Scotts Road subzone will remain weighed down due to the restrictions on foreign visitors into the country.
The Covid-19 pandemic will accelerate transformation in the retail scene. With the presence of more firms offering an omnichannel approach, retailers will need to ensure complementary online and offline offerings. In addition, we also see greater use of retail spaces being converted to office use due to the slowing demand.
Office demand and occupancy rates
Based on EDMUND TIE research, net absorption remained in the contractionary zone of -374,000 sq ft in 3Q 2020. The islandwide office occupancy rate contracted by 0.3% points q-o-q to 92.5% in 3Q 2020 (Figure 12). The decline was largely due to the contraction of office space demand in the CBD, where the occupancy rate declined by 1.1% points to 92.0% in 3Q 2020. The majority of employees continued to work from home as a default in 3Q 2020.
Figure 12: Office occupancy rates* and q-o-q % point change (in arrows) in 3Q 2020
The technology and financial sectors were some of the sectors that supported demand in 3Q 2020 (Table 8). Sun Life has set up a new office in Singapore in One Raffles Quay North Tower. It was also reported that technology and e-commerce giant Amazon had leased around 90,000 sq ft on three levels at Asia Square Tower 1.
Table 8: Key tenant movements in 3Q 2020
Monthly rents in the various subzones of the office sector showed q-o-q declines in 3Q 2020 (Table 9). Within the CBD, premium grade buildings in Shenton Way/Robinson Road/Tanjong Pagar were generally more resilient as compared to other subzones, recording a 1.5% q-o-q contraction in 3Q 2020 as the buildings there were newer and had more efficient floor plates. Monthly rents of office buildings in the Decentralised areas held steady in general as rents were already relatively competitive.
Table 9: Average monthly gross office rents (S$ per sq ft)
Based on EDMUND TIE Research, there is approximately 3.8mn sq ft of new office space estimated to be completed from 3Q 2020 to 2024 (Figure 13). Most of the office developments will be completed in 2022 (49.7% or 1.9mn sq ft). Additionally, more than half of the supply pipeline will be in CBD, followed by 26.9% in CBD fringe. In the CBD, Afro-Asia I-Mark is estimated to complete by end of the 2020 and currently has a 62% pre-commitment rate, with Delivery Hero and The Great Room leasing space. Besides Afro-Asia I-Mark, the additions/alterations to existing HSBC building will complete in 2021, with WeWork taking up the entire office space.
Figure 13: Office development pipeline
Looking ahead, we expect a decline in overall office rents for the rest of 2020 and continued weakness in early 2021. Companies are considering a variety of work arrangements in view of the Covid-19 pandemic. Demand for office space is still broadly intact though tenants are generally asking for shorter leases. Landlords are likely to be more flexible on lease terms and other fit-out incentives.
The growth of technology companies will continue, as businesses are increasingly adopting greater telecommunications tools and improving their processes. In the co-working market, we may see more mergers or consolidation in co-working firms as the market becomes increasingly saturated, especially in the CBD.
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.
The market data and information herein contained (“Information”) is the product or service of a third party not affiliated to Citibank Singapore Limited (“CSL”) or its related entities. None of the Information represent the opinion of, counsel from, recommendation or endorsement by CSL, its related entities and their respective officers, employees, directors and agents (collectively, the “CSL Group”).
The Information is provided for general information and/or educational purposes only. No part of the Information may be reproduced without the prior written permission of CSL.
NO WARRANTY The Information is provided “as is”, without warranty of any kind, it has not been independently verified by CSL Group and use of the Information is at your sole risk. The CSL Group shall not be liable and expressly disclaim liability for any error or omission in the content of the Information, or for any actions taken by you or any third party, in reliance thereon. The Information is not guaranteed to be error-free, or to be relied upon for investment purposes, and the CSL Group makes no representation or warranty as to the accuracy, truth, adequacy, timeliness or completeness, fitness for purpose, title, non infringement of third party rights or continued availability of the information.
LIMITATION OF LIABILITY To the maximum extent permitted by law, the CSL Group shall not be liable for any loss or damage of any kind whatsoever (including, without limitation, any special, consequential, incidental or indirect damages, or damages for loss of profits, business interruption, and any and all forms of loss or damage, regardless of the form of action or the basis of the claim, whether or not foreseeable) arising out of the use of the information (provided in any medium), even if any member of the CSL Group, has been advised of the possibility of such loss or damage.