Dim Sum Chat with Mr Alan Cheong of Savills, Singapore : Outlook discussion on Singapore residential, office and retail sectors for 2017/18

We recently caught up wih Mr Alan Cheong, Senior Director of Research & Consultancy, Savills Singapore. Join us as we discuss about Singapore property. For private residential, where are home prices headed, does Alan agree with the market consensus of a huge oversupply, and why new launches tend to be more resilient than resale market? For offices, how are offices navigating the downturn, and what is Alan’s forecasting model telling us about when rents could hit the trough ? For retail,  what are the softer F&B activities telling us about local retail scene, and why is budget air travels competing away demand for local shopping?

 

  1. For Singapore residential market, there is a consensus view that we are in midst of oversupply. Would you agree, and what is your outlook (with respect to private sales, price trend, rent and tenancy in the next 2-3 years) and why?

Rents

The perception of oversupply arose because we were coming from a state of undersupply back in the latter half of the last decade to the early part of this decade. For non-landed properties, as we came from a period of becoming used to vacancy levels that ranged from the low 5% to around the low 7% levels for the period 2009-2013, a move towards the 10% levels that we are witnessing now for Q2 and Q3/2016 would appear to be alarming. However, the market should also realize that when vacancy levels were in the 5-7% range, rents were on the uptrend. From Q2/2009 to Q3/2013, non-landed property rents rose 27.5% or at an annual compound rate of 5.9%. During that same period, core inflation was growing at a compound rate of about 1.9% pa. Clearly, with vacancy levels in the 5-7% range, rents were rising much faster than core consumer prices which then implies that that range is above the natural vacancy levels for our non-landed private residential market.

From Q4/2013 to Q3/2016, islandwide non-landed property rents have fallen 10.2% or a compounded 2.5% pa which overall core inflation rose by a compounded rate of 1.1% pa. During this period, the vacancy levels for non-landed private residential properties ranged from the low 7% to mid-10% levels. This signals that now we have gone from a case of being a tight market to one that has excess slack. However, the recent undershooting of rents vis-a-vis core inflation rate, though disconcerting, is not as bad as the case when it was overshooting in the prior period.

For the next 12 months, we expect rents to remain soft but not fall through the roof because of a benign interest rate environment. After 2017, as the supply from new completions start to peter off, rents will find a base. However, it would probably be growing at anaemic levels of 1-2% pa for 2018. For 2019, much will depend on the state of the global economy and how Singapore positions itself for this next economic cycle.

Prices

Unlike rents which react more readily to economic fundamentals and immigration policies working through the vacancy rate indicator, in a regime after the Global Financial Crisis (GFC), low interest rates and copious liquidity tend to drive prices rather than the traditional drivers of real estate prices. For the next 3 years, we will see that new sale prices by developments will remain firm to exhibiting marginal upside. The annual price for new sale prices is expected at 0 to 2% for the period 2017 to 2019 with a greater likelihood of witnessing higher price increases towards the end of this period. The main reason for our view is the relatively high land prices that developments have bid in government land sales.

For resale or secondary transactions, economic headwinds may work to marginally dampen prices as generally speaking, owners of residential properties in today’s context have less holding and marketing power than developers.

 

  1. Which segments could be first to bottom – mass market, mid-end or high-end ?

For new sale prices, we believe that there is no difference between the high-end, mid-tier or mass market because the production cost by developers, in particular land cost, has been high. For the secondary or resale market, we believe that the CCR had already stirred beginning in the 2 quarter of this year. The next that we expect to follow will be the RCR. The OCR will follow suite. For the next one year, for resale prices, we expect the recovery to be jagged with alternating quarters of price increase followed by a mild decrease. It is perhaps only from 2018 onwards that, should the global economy recover, then resale prices for all three segments may start moving up together, albeit at a more sedentary pace than the previous upturn in the real estate cycle.

 

  1. There seems to be revival of en-bloc transactions in the market. What does this mean, and why? (because not enough GLS land?)

The revival is due to the need of developers who in the past 5 years have developed and completed their projects and now need to replenish their landbank. Part of the reason is that there is not enough confirmed sites on the GLS program. We believe that that is only a partial answer because developers could also trigger sites on the reserve list but they did not. The main reason we believe that en-bloc transactions are returning is that developers can negotiate a reasonable price for these properties rather than go all out to win at a tender. However, the number of successful en bloc deals coming through this and next year, though better in terms of numbers compared to the 2014 and 2015 period, is still small. The main reason is that many sellers are still holding onto or close to peak cycle asking prices.

 

  1. On Singapore office, what is your outlook on rents in the next 2-3 years and why ? (you may talk from demand and supply perspective)

The 5-year historical net annual take up in the CBD for Grade A office buildings was 1.2 million sq ft. Moving forward till 2020, the average net take up per annum is likely to only fare around 750,000 sq ft. The supply coming on stream between H2/2016 to 2020 is about 6 million sq ft. This means that vacancy levels are expected to increase and although we forecast that vacancy levels are expected to rise towards the 10% level by late-2017, rents, though likely to soften, will not collapse. Again like the case for the private residential sector, this cycle round, landlords holding power is stronger than before. The rental market for Grade A CBD offices is expected to build a base from the year 2018 onwards. However, the rental recovery will be at a sedentary pace as there is still the past year’s supply that needs to be filled.

 

  1. What are your views on decentralization of offices in Jurong and Paya Lebar? What are the critical success factors?

At the moment, I think that the play on Jurong offices is still very much a conceptual. Most multinational office users be it new to market or those already with a presence here are generally keen to locate in the CBD or the established business parks in Changi and One-North. However, for Paya Lebar, because of the relative accessibility of the area to the CBD and to the airport, it has a much better chance of taking off as a new decentralisation zone. The Jurong district will take at least a decade to see some potential fruits.

 

  1. On Singapore retail, what is your outlook on rents in the next 2-3 years and why?  (you may talk from demand and supply perspective)

What ails retail is not only online competition but also the lack of pace of our economy. The latter is  now entering a phase where slack is emerging in the labour market and this will affect consumers’ willingness to spend or their spending power. This lack of demand is in our view a stronger reason for the decline in the fortunes of retailers than the supply issue. The pipeline of supply  is not really that big an issue if landlords are willing to adjust their rents to keep pace with demand. In the tough retail environment that we have today, there are still successful retailers taking advantage of this softening of rents to expand. Over the next 2-3 years, asking rents for retail space, be it Orchard or suburban malls, are expected to fall 5-10% pa.

 

  1. Are you more worried about city or suburban malls , and why?

The market has this notion that suburban malls are more resilient than those along Orchard Road. However, our third quarter retail rental price index showed that on a QoQ basis, suburban mall rents fell 2% whilst those along Orchard Road remained firm. If this behaviour continues for another 2 more quarters or even if suburban rents fall in tandem with Orchard Road ones, it may debunk this myth that somehow caught out imagination that suburban malls have a captive market in the heartlands which those in the downtown area do not have, thereby implying that they will be perform relatively better.

In short, I think there is no difference between city and suburban malls. For the moment, it appears that the slow economy is affecting all malls and that is because whether you are located on Orchard Road or in the suburbs, you tenants derive their businesses from patrons that are commonly affected by the economy.

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