After two years in the doldrums, Singaporean real estate is showing signs of rebounding, buoyed by accelerating growth, as investors hunt for opportunities in Asia’s increasingly sought-after property markets.
“Singapore is starting to look interesting again,” said Benedict Lai, Asia research manager at property fund house Savills Investment Management, citing rising capital inflows.
Property investment volume in the city-state jumped by 50% last year to $14.95 billion for income-producing properties and by 44% to $6 billion for development sites, according to data provider Real Capital Analytics (see figure 1).
investment in 2017 (Click for full view)
Source: Real Capital Analytics
Since 2013, Singapore’s economic growth had been slowing from 5.1% in 2013 to 2.4% in 2016, noted Lai. Both rents and prices fell 10-20% across all the sectors during the slowdown, he added.
But a stronger economic backdrop has sparked a recovery in the occupier market that influenced a strong drive in Singapore’s investment market in 2017 when the economy grew 3.6%, he said.
“A faster recovery on the leasing front in the office sector, coupled with easing office supply in the near term, is expected to buoy rental growth further and support strong investor sentiment,” said Lai.
German insurer Allianz is certainly showing interest, amid a drive to boost its allocation to Asian property. “Singapore’s office sector is going through a correction, so we are looking to see if there are opportunities coming up,” Rush Desai, Asia-Pacific chief executive of Allianz Real Estate, the group's property investment arm, told AsianInvestor.
BOTTOMING OUT?
After two years of declining rents caused by a sluggish economy and a glut of supply, there is a belief in some quarters that the Singapore office market has hit bottom, agreed consultancy PwC in a March report, Emerging Trends in Real Estate Asia Pacific 2018.
“Office rents have firmed probably earlier than expected,” it noted, “while completion of the region’s second-biggest office deal in September 2017 [the sale of Asia Square Tower 2 for S$2.1 billion ($1.6 billion)] has now galvanised the local market and set a floor for valuations.”
Tay Hueyying, head of research for Singapore at property services firm JLL supported this view. Rents and capital values for grade A CBD offices (the most modern and well located buildings) bottomed in the first quarter of 2017 after some two years of decline and by the first quarter of this year they had recovered by 12.7% and 14.5%, respectively, she told AsianInvestor.
“We expect office rents and capital values to stay on the growth trajectory in 2018, underpinned by steady demand amid sharply tapering new completions,” said Tay.
Based on deals concluded in 2017, prime office yields were trending in the region of 3.2% to 3.5%, she added.
OFFICE RENTS ON RISE
Property services firm CBRE is also bullish on the Lion City. Singapore will lead rental growth in CBD grade A property in Asia Pacific, which will otherwise remain limited in the region, it noted in a report published in January. The property services firm said the 15 major markets it tracks in the region are set to post annual expansion of just 2%.
Singapore remains the only office market in the region displaying clear signs of faster growth, CBRE added, and limited new grade A supply until 2021 will enable existing stock to be absorbed by demand for quality buildings (see figure 2 below).
(click for full view)
CBRE forecast in January that $53 billion of private equity capital would be deployed into real estate in Asia Pacific between 2018 and 2020, with $6 billion of that set to go into Singapore. In terms of expected inflows, that puts it behind only China ($14 billion), Japan ($11 billion) and Australia ($8 billion) and ahead of Hong Kong ($4 billion).
Meanwhile, concerns are rising in some quarters about the Hong Kong property market, after years of strong price rices. As reported, BlackRock is steering clear of all types of real estate there, the US fund house's Asia-Pacific head of real estate told AsianInvestor.
Some, such as Allianz's Desai, also see Australian property as having hit the top of the market cycle.
SCEPTICS REMAIN
However, some see talk of a market bottoming in Singapore as premature, citing a lack of business confidence in the city, quite a lot of supply, and not a huge amount of expansion, PwC said in its March report.
As one fund manager quoted in the paper put it: “It’s challenging to bring foreign workers in because the government has responded to local concerns to protect jobs, and at the same time a lot of the European banks are downsizing, which hits demand for space.”
A feature on investing into Asia-Pacific real estate will appear in the upcoming April/May issue of AsianInvestor magazine.
