Singapore Quarter 1, 2019
Q1 2019 SNAPSHOT
Singapore’s economy grew by 1.2 per cent in Q1 2019, lower than the 1.3 per cent growth in Q4 2018. The moderated growth in Q1 2019 was largely due to the contraction in manufacturing amid global trade tensions and an electronics slowdown. While the growth of the services sector was maintained at 1.5 per cent y-o-y in Q1 2019, the construction sector expanded by 2.9 per cent y-o-y in Q1 2019, a turnaround compared to the 1.2 per cent y-o-y contraction in Q4 2018.
Non-landed private home sales volume continued to decline for the third consecutive quarter by 1.0 per cent q-o-q to 3,390 units. The rate of decline has slowed, compared to the 20.5 per cent q-o-q fall in Q3 2018 after the cooling measures. According to Urban Redevelopment Authority, the price index of private non-landed residential properties fell by 1.1 per cent in Q1 2019. Non-landed rentals rose by 1.1 per cent q-o-q in Q1 2019, partly due to the lower number of completions since Q1 2018, except for Q4 2018.
Islandwide retail net absorption fell by more than 98.0 per cent q-o-q to just 5,000 sq ft in Q1 2019. Likewise, net supply of retail space fell by about 78.0 per cent q-o-q to 189,000 sq ft as there were lesser completions in Q1 2019. Monthly gross rents of first-storey retail space in Orchard/Scotts Road and Other City Areas increased by 0.5 per cent q-o-q to $36.00 to $39.00 psf and $16.10 to $21.10 psf respectively in Q1 2019. Similarly, monthly rents of first-storey retail space in Suburban Areas trended upwards by 0.5 per cent q-o-q to $25.20 to $31.20 psf in Q1 2019.
Islandwide office occupancy rate increased from 92.4 per cent in Q4 2018 to 93.5 per cent in Q1 2019, with occupancy rate in the CBD rising the most to 94.7 per cent. The average gross monthly rents in the CBD increased by 1.5 to 3.5 per cent q-o-q in Q1 2019. Monthly rents in Marina Bay increased by 3.5 per cent q-o-q to $11.90 psf in Q1 2019, while rents of Grade A offices in Raffles Place rose by 2.5 per cent q-o-q to $10.25 psf per month.
TRENDS & UPDATES
Government policies and the economy
- Despite global economic headwinds and a slowing local economy, the unemployment rate for residents remained unchanged at 3.0 per cent in Q1 2019. In addition, the number of retrenchments stayed flat at 2,500 in Q1 2019 compared to the previous quarter (Ministry of Manpower, 2019).
- Development Charge (DC) rates for the non-landed residential use group were adjusted downwards by an average of 5.5 per cent for the period 1 March 2019 to 31 August 2019.
- Released in March 2019, the Strategic Development Incentive (SDI) Scheme encourages the redevelopment of existing older office buildings in the central business district (CBD), that meets certain planning requirements, to mixed-use developments, including hotel and residential uses to revitalise the CBD. This will increase the number of residential units in the CBD over the medium- to longer-term.
- Since the cooling measures in July 2018, the residential en bloc market remained muted with no sales in Q1 2019. In addition, larger en bloc sites such as Mandarin Gardens and Dairy Farm have failed as they could not achieve the mandatory 80.0 per cent owners’ consent.
- Accordingly, the only residential/residential mixed-use sites sold in Q1 2019 were listed under the Government Land Sales (GLS) Programme – Kampong Java Road and an integrated mixed-use site in Pasir Ris Central (Table 1).
- Furthermore, two other GLS sites were awarded in early April at Middle Road (RCR) for nearly $492m or $1,458 per square foot per plot ratio (psf ppr) to Wing Tai Holdings and at Sims Drive (RCR) for$383.5m or $732 psf ppr to Hong Leong Holdings and City Developments Limited.
Sales volume, prices, completed supply and rents
- Although sales volume continued to decline for the third consecutive quarter by 1.0 per cent quarter-on-quarter (q-o-q), the rate of decline has slowed compared to the 20.5 per cent q-o-q fall in Q3 2018 after the cooling measures. Furthermore, the number of new sales has outpaced resales, as both the number of new projects and units launched have increased from nine to 13 projects, and 13.4 per cent q-o-q respectively in Q1 2019 (Figure 1).
- The price index of private non-landed residential properties fell by 1.1 per cent in Q1 2019. This was the first decline since Q3 2017. Our analysis showed that median prices in the OCR were steady while there were falls between 1.5 and 5.0 per cent in the RCR and Core Central Region (CCR) vis-à-vis Q4 2018. The price decline in the RCR and OCR was underpinned by lower unit prices (including $psf) for both new and resale units. However, for new sales, the lower prices were largely reflective of the lower $psf of units sold during Q1 2019 compared to the previous quarter.
- Non-landed rentals rose by 1.1 per cent q-o-q in Q1 2019 amid falling vacancy rates since Q4 2017. This is partly due to the lower number of unit completions since Q1 2018, except for Q4 2018 (Figure 2).
Demand analysis and buyer profile
- While total non-landed sales volume fell by 1.0 per cent in Q1 2019, the increase in new project launches had somewhat shifted buyers’ preference towards new sales with resale volume declining over the same period.
- The dominant unit price range for new and resale units continued to be under $1.5m, especially for SCs and SPRs. As such, the RCR and OCR remained as the top selling market segments.
- Sales volume of foreigners’ home purchases declined some 5.2 per cent q-o-q in Q1 2019, with Chinese buyers falling by more than 40.0 per cent, likely due to the Chinese New Year holiday period. Consequently, the sale of units priced above $2m decreased, while units priced between $1m to $2m saw an uplift. The CCR continued to be the more sought-after location by foreigners.
- Buyers with Housing & Development Board (HDB) addresses continued to be the most price-sensitive group with sales volume plummeting 68.0 per cent q-o-q (although this may be ‘skewed’ as the number of unknown addresses grew by 51.1 per cent over the same period), as the cooling measures took its toll on this group of buyers.
- There were six new project launches totaling almost 4,500 units. This represents nearly 23.0 per cent of the total anticipated 20,000 units that may be launched this year (Table 2).
- The sell-down rates of these new launches varied from 10.0 to 14.0 per cent, with launches in the CCR achieving higher rates.
- Despite current global headwinds, slowing local and global economies, the private non-landed residential market appears to remain relatively resilient, although sales volume and prices are expected to moderate.
- Buyers will continue to have a wide range of options to choose from as we expect more new project launches. On the other hand, developers are mindful that new launches remain competitively priced.
- Accordingly, new sales unit volume in 2019 is forecasted to maintain within the range of 8,000 to 10,000 units, with prices expected to hold relatively steady barring policy and economic shocks.
Key economic indicators
- Retail sales index (excluding motor vehicles) fell 2.3 per cent year-on-year (y-o-y) in Q1 2019, larger than 0.4 per cent contraction in Q4 2018 (Figure 3). In March 2019, retail sales in most segments fell y-o-y, with optical goods & books, food retailers, and computer and telecommunications equipment amongst the worst performers declining by 4.9 to 6.4 per cent y-o-y. Only sectors such as medical goods and toiletries saw some modest gains. Online sales accounted for 5.3 per cent of total sales.
- Based on the recent business expectations of the services sector for the period of April to September 2019, the outlook for retail trade and food and beverage (F&B) segments are less optimistic, especially so for department stores and supermarkets industries (Figure 4).
- International visitor arrivals increased by 4.7 per cent quarter-on-quarter (q-o-q) and 1.0 per cent year-on-year (y-o-y) in Q1 2019, with the top three countries being China (20.5 per cent), Indonesia (15.5 per cent) and India (6.4 per cent). This was in line with the Singapore Tourism Board’s forecast of 1.0 to 3.0 per cent growth for 2019.
- While there were no transactions valued above $100m in Q4 2018, there were two retail transactions in Q1 2019 totalling $630m. This comprised the sale of Liang Court to CapitaLand and City Developments Ltd for $400m or $894 per square foot (psf) net lettable area (NLA) and Rivervale Mall to SC Capital Partners for $230m or $2,833 psf NLA.
Further sales activities took place in April 2019 – Chinatown Point and Marina Square (mixed-use developments) were transacted.
Private demand, occupancy and supply
Islandwide net absorption fell by more than 98.0 per cent q-o-q to just 5,000 sq ft in Q1 2019.
Likewise, net supply fell by about 78.0 per cent q-o-q as there were lesser completions in Q1 2019.
Orchard/Scotts Road (OSR)
- Occupancy rate declined by 1.0 percentage point q-o-q to 93.9 per cent in Q1 2019 (Table 3).
- As the F&B segment was highly competitive, several brands closed their operations in Q1 2019 including Pablo Cheese Tart (Wisma Atria) and Chili’s (Tanglin Mall).
Other City Areas (OCA)
- Net absorption contracted by 16,000 sq ft in Q1 2019 vis-à-vis 102,000 sq ft in Q4 2018.
- Retail remains challenging, especially during after working hours and weekends when foot traffic drops significantly vis-à-vis during working days.
- In Q1 2019, vacancy rates in the downtown and Singapore River areas remained above double digits at 10.2 per cent and 13.6 per cent respectively. Bookstore retailer, Kinokuniya, will be closing its 13,000 sq ft store in Liang Court in April 2019.
Suburban Areas (SA)
- Net demand and supply for retail spaces slowed in Q1 2019 with the occupancy rate down marginally.
- Malls located in prime locations with the right tenant mix and near transportation nodes, continued to perform relatively well.
- This was evident with Singapore’s largest retail REIT, CapitaLand Mall Trust’s Q1 2019 results which reported 2.0 per cent increase in shopper traffic, 1.2 per cent rental reversions, and 0.4 per cent decline of tenants’ sales psf. Malls that were well-connected to MRT stations and have diverse retail offerings reported higher gross revenues of 2.0 to 5.0 per cent. For e.g., Bedok Mall, Tampines Mall and Junction 8.
- Other notable expansions included Japanese discount chain Don Don Donki, which opened its third and largest outlet in City Square Mall in Q1 2019.
While the average gross rental rates in the OSR remained largely stable, rents in the OCA and SA were mixed (Table 4). Well-located malls with the right tenant mix have performed relatively well compared to some strata malls, as well as older and less accessible malls, which are likely to continue struggling with falling foot traffic and sales.
From Q2 2019 to 2022, some 1.5m sq ft of retail NLA is expected to come on stream, with more than 65.0 per cent or 1.0m sq ft expected to complete from Q2 to Q4 2019. Funan (OCA) (325,000 sq ft NLA) will be the largest retail development which is expected to open in mid-2019 followed by Paya Lebar Quarter Mall (SA) (313,000 sq ft NLA) by late 2019 (Figure 5).
With continuing local and global economic headwinds and consumer confidence remaining pessimistic, the retail sector is expected to remain challenging and susceptible to a fast-changing economic and consumer environment. While rents are expected to remain stable for the prime retail space, there remain significant risks for the sector in terms of tightening labour market (with the recent revised foreign workers quota), rising costs and weak sales. Additionally, the official opening of Jewel Changi Airport in April 2019 with over 280 shops and eateries (where 25.0 per cent are new-to-market brands and new-concept stores), may have some impact on footfall and sales of neighbourhood malls in the East Region.
However, well-managed and well-located malls are expected to perform relatively well, with the limited supply pipeline from 2020 onwards likely to provide some support to rental levels. Hence, rental growth is expected to be tepid and likely to range from -2.0 to 2.0 per cent in 2019.
Recent advance estimates point to a slowing Singapore economy, with gross domestic product (GDP) growth at 1.3 per cent year-on-year (y-o-y) in Q1 2019 compared to 1.9 per cent y-o-y in Q4 2018. The manufacturing sector contracted 1.9 per cent y-o-y, while growth was mainly supported by the construction, information and communications and business services sectors in Q1 2019 (Table 5).
Key changes to Government policies during Q1 2019 that may have some impact on the office sector included:
- Development charge rates for commercial use have increased by 9.8 per cent on average from 1 March to 31 August 2019;
- Introduction of the CBD incentive scheme (CIS) on 27 March 2019, which provides bonus gross floor area (GFA) for office buildings older than 20 years to be redeveloped to mixed-use developments (e.g. residential, office and hotel uses). This may have a medium- to longer-term impact on office supply within the CBD, as well as increasing Grade A office rents when these redevelopments commence.
- Office investment sales value (valued above $30m) fell in Q1 2019 with four transactions totaling $803m, down more than 60.0 per cent q-o-q. The largest was Manulife Centre which was transacted at $555.5m (or $2,305 psf).
- However, there has been a consolidation/merger of major developers and REITs such as CapitaLand with Ascendas-Singbridge and OUE Commercial REIT with OUE Hospitality Trust. This is expected to continue as developers and REITs seek to diversify and improve operational efficiencies through scale.
Office occupancy and rents for Q1 2019
- Islandwide occupancy rate increased from 92.4 per cent in Q4 2018 to 93.5 per cent in Q1 2019, with occupancy rate in the CBD rising the most to 94.7 per cent (Figure 6). On the contrary, occupancy rate in the city fringe fell marginally by 0.4 percentage points. This was partly driven by rising vacancies of older office buildings as well as strata-owned buildings.
- Average gross monthly rents in the CBD increased by 1.5 to 3.5 per cent quarter-on-quarter (q-o-q) in Q1 2019 (Table 6).
- Demand in the CBD was underpinned by co-working operators, business services and technology firms such as INVNT (marketing and advertising), CenturyLink Technology, QiO Technologies and IQVIA which have opened their Asia Pacific offices in Singapore (Table 7).
- The only major completed office development in Q1 2019 was 18 Robinson with 194,000 sq ft NLA, while Funan is expected to complete by Q2 2019 and 9 Penang Road in Q4 2019 (Figure 7). New supply continues to be limited, particularly in the CBD. With the CIS and Government’s decentralisation strategy, it is likely that this will exacerbate office supply in the medium- to longer term.
Despite the continued global headwinds and a slowing Singapore economy, the office sector is expected to remain relatively positive, largely due to limited new office supply from now till 2022, especially in the CBD. Accordingly, rental rates are projected to rise between 5.0 to 8.0 per cent in 2019 barring economic shocks.
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Source: Edmund Tie & Company. Reproduced with permission.
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