PROPERTY INSIGHTS

Cautiously optimistic

Singapore Quarter 1, 2012

Market Overview

Despite a slight improvement in sentiment in Q1

2012 as the European Central Bank stepped in to

ease the eurozone debt crisis and there were some

signs of improvement in the US economy, investors

and home buyers remain mindful of global economic

uncertainties, rising business costs and a weaker

property market.

Secondary home sales in Q1 were significantly

lower compared to 2011 while resale prices of non-

landed private homes continued to weaken, with

luxury and freehold condominiums in the prime

districts of 9, 10 and 11 faring the worst. Primary home

sales, however, remained strong and averaged more

than 2,000 units a month in January and February

due to investor interest in small affordable units

coupled with incentives from developers that helped

to offset the Additional Buyer’s Stamp Duty (ABSD)

measures (Figure 1).

Retail rents in Orchard/Scotts Road area fell

by 0.2% quarter-on-quarter (q-o-q) in Q1 and are

expected to ease further in light of new pipeline

supply and government measures restricting the flow

of foreign labour which will affect retailers’ capacity

to expand operations and take up new space.

Purchase demand for uncompleted suburban

homes is expected to remain healthy against the

backdrop of low interest rates. Real estate investments

and commercial rents could also prove to be more

resilient than expected if the economy bottoms out

in Q1 and picks up in H2 2012 in accordance with

economists’ projections.

Source: URA REALIS, 30 Mar, DTZ Research

Trends & Updates

Economic OverviewFollowing a blistering 14.8% growth in 2010, the

Singapore economy slowed down to a growth of

4.9% for the whole of 2011, dragged down by q-o-q

contractions in Q2 2011 and Q4 2011 as weak global

demand affected the manufacturing sector (Figure 2).

However, as the eurozone financial tension has

eased in Q1 2012 and the US economy has shown

some signs of improvement, the manufacturing

sector has exhibited nascent signs of recovery.

Most private sector economists expect the

Singapore economy to bottom out in Q1 and pick

up in H2. Nevertheless, challenges lie ahead with

expectations of a eurozone recession, weak US

recovery, slower growth in Asia and high oil prices.

The Ministry of Trade and Industry (MTI) in February

maintained its 2012 economic growth forecast of

1-3% as it expects the global economic outlook to

be subdued.

The overall unemployment rate fell to a 14-year

low of 2.0% in 2011 while interest rates remained low

and inflation high, a combination which continued to

fuel purchase demand in the property market (Figure

3). The 3-month SIBOR stood unchanged at a low of

0.38% in March.

The consumer price index (CPI) rose by 4.7% year-

on-year (y-o-y) in January-February 2012, down from

5.2% for the whole of 2011. Core inflation (excludes

private transport and accommodation costs) however

rose 3.2% in the same period compared to 2.2% in

2011. Inflation is expected to remain high, as the

government’s measures to limit the inflow of foreign

labour may lead to rising wages.

The Singapore Budget 2012 reiterated the

government’s focus to restructure the economy and

achieve productivity growth by reducing dependence

on foreign workers. The work permit dependency

ratio ceilings (DRCs) for the manufacturing and

service sectors will be lowered from July 2012, along

with the S Pass Sub-DRC (sub-quota of S Pass holders

a company can employ) for all sectors. The man-year

entitlement quota for the construction sector will be

reduced too.

Given the high inflation rate, most economists

expect the Monetary Authority of Singapore (MAS)

to maintain its policy stance in allowing the SGD

to appreciate at a modest and gradual pace in its

April review.

Source: MTI

Source: MAS, MOM

Residential

The private residential market saw mixed

performance as home buyers remain cautious of

the global economy taking a turn for the worse.

Despite the December 2011 ABSD measures,

primary home sales averaged 2,143 units per

month in January and February 2012, higher than

the 2011 monthly average sales of 1,364 units

(Figure 4). This strong showing was however

not widespread and was driven mainly by a few

popular projects such as The Hillier, Watertown,

Parc Rosewood and Guillemard Edge, which

contributed to more than half of the units sold in

January and February (Table 1).

In contrast, secondary home sales slowed to

about 500 units per month in January and February

2012, significantly lower than the monthly average

of about 1,400 units in 2011.

Resale prices of non-landed private homes

continued to weaken in Q1. Luxury and freehold

condominiums in the prime districts of 9, 10 and

11 fared the worst, with resale prices declining by

0.8% and 0.7% q-o-q respectively, affected by the

ABSD of 10% for foreigners, higher price quantum

and competition from newly completed projects.

Although resale prices of leasehold condominiums

in the suburban areas registered a slight q-o-q

increase of 0.3%, this is a moderation from the

1.0% growth in Q4 2011 (Figure 5).

A higher proportion of local buyers is expected

to dominate the market going forward as foreigners

take time to adjust to the 10% buyer’s stamp duty

they now have to pay. This will have a greater

dampening effect on sales volume and prices in the

prime areas.

Source: URA REALIS, 30 March, DTZ Research

Figure 4

Primary and secondary home sales (excluding ECs)

0

1,000

2,000

3,000

4,000

5,000

6,000

Jan

10

Mar

10

May

10

Ju

l 10

Sep

10

No

v 10

Jan

11

Mar

11

May

11

Ju

l 11

Sep

11

No

v 11

Jan

12

Primary sales Secondary salesUnits launched

Source: URA, DTZ Research

Figure 5

Average non-landed resale capital value index

Source: DTZ Research

60708090

100110120

Q1

09

Q2

09

Q3

09

Q4

09

Q1

10

Q2

10

Q3

10

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Luxury Prime FreeholdSuburban Leasehold

Capital value index

URA announced in a circular on 3 April 2012

that it will no longer accord condominium status

to developments with a mix of strata landed units

and apartments. The new guidelines take effect

for development applications submitted after 3

April. Although these are popular with foreigners

who are not eligible to purchase landed homes,

the impact is likely to be minimal as strata landed

homes usually make up only a small percentage of

such developments.

Purchase demand for uncompleted suburban

developments is expected to remain healthy with

low interest rates and high inflation. Projects that

were launched previously are being re-launched to

ride on the current buying momentum. If purchase

demand continues to remain strong at above 1,500

units a month, we do not preclude the possibility of

further government cooling measures.

RetailAgainst the backdrop of a less optimistic

macroeconomic outlook, the average gross fixed

rent of prime first-storey retail space in Orchard/

Scotts Road fell by 0.2% q-o-q to $40.10 per sq ft

per month in Q1 2012 while that of other city areas

fell by a larger 0.6% to $23.90. Prime retail space in

the suburban areas fared better with average rents

holding at $33.70.

Although rents in Orchard/Scotts Road showed

some weakness, some landlords remain selective

in picking tenants in a bid to reconfigure their

tenant mix to attract back shoppers. Landlords

are now keener to differentiate with new concepts

and tenants rather than stick to tried-and-tested

ones that have resulted in cookie-cutter shopping

centres especially in the suburban areas. With more

supply in the pipeline, it will be more challenging

for landlords to find the right formula to attract and

sustain retail spending.

Retail rents in Orchard/Scotts Road are expected

to continue to ease particularly in light of new

supply coming from the conversion of offices to

retail space at the Atrium@Orchard in 2012 and the

completion of orchardgateway and redevelopment

of 268 Orchard Road (former Yen San Building) in

2013. These projects are expected to add around

431,000 sq ft of net lettable area (NLA), which

account for 5% of the current existing stock in the

prime retail belt (Figure 6 and Table 2).

On the demand side, retailers along the Orchard/

Scotts Road belt in particular will be affected

by a moderation in tourist arrivals. In view of the

Demand for office space slowed down in Q1 as office

occupiers remained wary of market uncertainties,

taking up space only on a need-to basis and avoided

pre-committing for future spatial needs.

Leasing transactions in Q1 were limited to small

and mid-sized tenancies as most companies in need

of space chose to renew their leases or expand within

the same building to avoid capital outlay and moving

costs.

Nevertheless, pockets of new demand were noted

from companies venturing into the growing South

East Asian markets and looking to set up offices in

Singapore.

While the average gross face rent for prime

office space in Raffles Place stood at $9.80 per sq

ft per month in Q1, the rental market is noted to

have become more competitive with lower effective

rents as landlords are more ready to offer leasing

incentives in the form of longer rent holidays

ranging between two and six months.

Taking into consideration about 600,000 sq

ft of office space to be terminated in 2012, the net

increase in office space this year is estimated to be

only about 1.1 million sq ft (Figure 8).

The increase in shadow space however

underscores a looming pressure on office occupancy

rates and rents. Shadow space is excess space that

companies have leased but are looking to assign

and sublet. Islandwide office shadow space grew by

about 15.0% q-o-q to approximately 215,000 sq ft in

Q1, almost half of which can be found in the Raffles

Place area. The average office occupancy rate of

91.3% in Raffles Place would have fallen to 90% if

we account for the shadow space.

Offices

uncertainty in the global economy, the Singapore

Tourism Board (STB) expects total visitor arrivals to

grow by a slower 2-10% y-o-y in 2012, after rising

13.1% last year.

Retailers are also facing a tighter labour market

because of government policies implemented to

tighten the inflow of foreign labour. This may restrict

their capacity to expand operations and take up

new space. Beside labour constraints, retailers have

to contend with higher oil prices, which may affect

cost of goods and profitability.

Going forward, prime first-storey retail rents

in Orchard/Scotts Road are projected to fall by

2-4% in 2012-2013 (Figure 7). However, the sector

could prove to be more resilient if there is a pickup

in economic activity later in the year and tourist

arrivals grow more strongly than expected.

Figure 7

Source: DTZ Research

80

85

90

95

100

105

110

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Rental index

Figure 8

Office development pipeline including projects on awarded GLS sites

Source: URA, DTZ Research

-1,000-500

0500

1,0001,500

2,0002,5003,0003,5004,000

20

12

20

13

20

14

20

15

20

16CBD CBD Fringe/Orchard Road Decentralised Termination

sq ft (000s)

Despite a slight improvement in sentiment due to

the easing of the liquidity crunch in the eurozone this

quarter, demand for office space could fall to below

1 million sq ft for the whole of 2012 as occupiers

are likely to remain cautious as they brace for

uncertainties and rising costs. The growth in shadow

space and the upcoming completion of large scale

projects such as The Metropolis and Asia Square

Tower 2 in 2013 will further tip the demand-supply

balance, putting downward pressure on office rents

(Table 3 and Figure 9).

Average office gross rental index in Raffles Place

Table 3

Major upcoming office projects

Name of developmentEst NLA(sq ft)

Est TOPyear

The Metropolis 1,000,000 2013

Asia Square Tower 2 789,000 2013

Jem 315,000 2013

CapitaGreen 720,000 2014

Paya Lebar Square 430,000 2014

Source: URA, DTZ Research

GENERAL DISCLOSURE

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or referred to without prior approval. Any such reproduction should be credited to DTZ.

© DTZ April 2012

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