Singapore realty market set to grow

Singapore’s residential property market, which failed to regain its sparkle in the fourth quarter of 2007, is likely to be supported by a healthier and more sustainable set of demand fundamentals in 2008, according to a new report.

Series of measures put in place by the government, such as the provision of more timely market information, injection of new supply via the land sales programme, and removal of the deferred payment scheme (DPS) will lead the market to a more steadier phase than 2007, Colliers International said in a report on Singapore.

Private home prices are expected to appreciate by up to 15 per cent in 2008, moderating from the frenzied 31 per cent growth in 2007. The residential property market failed to regain its sparkle in the last quarter after losing some of its glitter in the third quarter due to a series of unfavourable external events, such as the onset of the US sub-prime mortgage debacle, the spike in development charge rates, as well as the occurrence of the lunar seventh month where Chinese homebuyers typically shun the home sales market due to belief that it is inauspicious to purchase a home during this period.

The DPS essentially allows purchasers of uncompleted private properties the option to defer the bulk of the purchase price, including half of the initial 20 per cent down payment, to a later date such as the issue of temporary occupation permit. While the impact of the withdrawal of the DPS on demand for homes by genuine homebuyers has been minimal, the same cannot be said of its impact on speculative demand.

Sub-sale activity, which is normally used as a barometer to gauge the level of speculative demand in the residential property market, dipped by a significant 56 per cent in fourth quarter. This has affected developers’ confidence, as the robust speculative demand has been one of the main contributory factors for the steep spike in home prices seen in the last two years.

In spite of the marked slowdown in residential sales activity in the second half of 2007, the high launch volume in the first half continued to propel the whole year’s launch volume to a record high of 14,005 units, 26.5 per cent higher than 2006’s launch volume of 11,069, and 21.6 per cent higher than 1996’s high of 11,520 units. Developers’ sales also hit a high of 14,831. The office property market ended the year on a high note despite the renewed concerns over the US sub-prime mortgage crisis. New records were set in the leasing market, while rents and capital values continued to scale new heights.

OFFICE SPACE

The leasing market saw the sealing of the largest office leasing deal ever in Singapore in the last quarter – that of DBS Bank securing a 12-year lease for some 700,000 square feet of space over 22 floors of Tower III of the yet-to-be completed Marina Bay Financial Centre.

This toppled the recent record of 508,298 square feet committed by Standard Chartered Bank in the month of April last year.

With businesses showing no signs of slowing down amidst the global financial turmoil set off by the US sub-prime debacle, robust demand and avowed preference for Grade A amidst tight supply continued to raise average occupancy rates of such space to above 99 per cent across most micro-markets. In the central area, average occupancy rates of Grade A of market reached about 99.6 per cent, while those in the Raffles Place and Beach Road recorded highs of 99 per cent as of fourth quarter 2007. According to Colliers, office supply is expected to remain tight in 2008, as new supply catches up with demand. New supply is estimated at approximately 2 million square feet from new projects, additions and alterations (A&A), as well as state properties that will be leased for office use. New projects include The Central Wilkie Edge, Merrill Lynch Harbourfront, 200 Newton, Fusionopolis Phase 1, and the development to be built on the transitional office sites located on the Scotts Road. A&A projects include extension works at OUB Building, Lippo Centre and Paragon Tower.

Demand for office is likely to remain buoyant this year, supported by robust economic growth of Singapore, as well as the economies in the Asia-Pacific region. The US credit crunch will likely have a cushioning effect on Singapore’s economy, as fundamentals remain strong and the Republic remains a conducive and attractive place for business. Any possible reduction in headcount by establishments in the aftermath of the sub-prime crisis in the US, and freeing up of space is expected to be met by demand from other industries and sectors.

Office rents are, therefore, expected to continue to trend up in 2008, albeit at a much more moderate pace compared to that seen in 2007, as businesses continue to explore alternative sources of supply to contain costs while taking cognisance of the potential supply of space that will enter the market from 2010. Rents of Grade A office space are expected to rise by up to 20 per cent this year. Capital values of similar office space are also forecast to firm by the same quantum in the next 12 months.

RETAIL SPACE

Following the large retail space supply boom of some 2.73 million square feet in 2006, supply in 2007 was comparatively less bountiful, with an estimated 758,000 square feet being added. Except for retail developments such as AMK Hub in Ang Mo Kio and Square 2 in Novena, other retail projects completed in 2007 mainly comprised either ancillary retail space or entertainment developments such as Kallang Leisure Park in Kallang and e!Hub at Pasir Ris.

Buoyed by optimism in the retail sector, prime retail space rents continued to inch up in fourth quarter of 2007. Average monthly gross rents for prime ground edged up by 0.6 per cent in fourth quarter 2007, to reach $42.25 per square feet.

In 2008, the injection of new retail space is projected to total some 2.1 million square feet, thanks to upcoming shopping malls such as ION Orchard and Orchard Central in Orchard, and West Coast Plaza at West Coast Road. This comes after muted supply in 2007. Shoppers can continue to look forward to new concept stores with these new projects in the pipeline.

Overall prospects for the retail industry are expected to remain positive in 2008, with continued support from the upcoming integrated resorts in Marina Bay and Sentosa, the growing tourism industry, as well as new tourism products and events such as the Singapore Flyer. The event will take off in February and the will strengthen demand for luxury goods by wealthy shoppers and attract more foreign visitors to Singapore. A critical mass of such stores would, in turn, continue to woo shoppers from across the world, retaining the country’s reputation as a shopping destination.

However, local consumers may turn more cautious about spending in 2008 due to inflationary pressures. Already, Singapore’s inflation accelerated in December 2007 to the highest level in 25 years, with consumer prices rising by a faster-than-expected 4.4 per cent as a result of increasing oil prices, and increased costs for imported household goods, food and housing.

Weakening market sentiment as a result of the global credit crunch and a slower US economy may spill over to the retail industry, believes Colliers.

On balance, while new supply in 2008 is likely to be well taken up in view of positive sentiment among retailers, the injection of new retail space will keep rental growth in check in 2008.

Monthly gross rents of prime retail space are forecast to increase about five per cent in the course of the next 12 months.