Singapore residential, office and retail markets face headwinds on slow growth

By Bong Xin Ying and Amy Tan

/ EdgeProp Singapore |

July 25, 2019 12:00 AM SGT

Global growth prospects have deteriorated, with the World Bank adjusting its 2019 growth forecast from 2.9% to 2.6% on the back of a slowdown in trade and global investment. At the same time, investment risks remain amid the ongoing US-China trade tensions and concerns over a no-deal Brexit. What does this mean for the residential, office and retail property markets in Singapore?

“Real estate is highly correlated with GDP growth and I think growth prospects now are definitely mixed,” says Tricia Song, head of research at Colliers International. She was speaking at the Real Estate Developers’ Association of Singapore (Redas) Property Market Update 2019 Seminar on July 11. “The US-China trade war has cast a pall over Asia and definitely for Singapore: it’s a small and open economy, and there are more uncertainties in the outlook, so there should be some impact on that.”

In addition, existing cooling measures, coupled with lower GDP growth forecasts, are expected to dampen demand in the residential property segment.

REDAS - Low pipeline of office supply is expected until 2022

Low pipeline of office supply is expected until 2022 (Photo credit: Samuel Isaac Chua/EdgeProp Singapore)

Residential: ‘High supply and subdued demand’

Based on URA data, there are some 43,000 private housing units in the pipeline that remain unsold. There are around 24,000 vacant units and new supply in the Government Land Sales programme. Over the last five years, annual sales averaged 8,400 units.

“The current situation of high supply and subdued demand is indeed very challenging. We are somewhat comforted that the government will continue to monitor the property market closely, and stands ready to act to ensure a healthy and sustainable market,” says Chia Ngiang Hong, president of Redas.

When it comes to new launches, Selena Ling, OCBC’s head of treasury research and strategy, points out that the take-up rate of new launches still falls short. She expects prices to decline by a “low single digit” in 2019 and highlights that the market has yet to feel the impact of a large uptick of launches. Ling estimates that it will take three years or more for the unsold units to be sold.

Regina Lim, JLL’s head of capital markets research, Southeast Asia, agrees. “Take-up rate of new launches is at 12-15%. It is not something that developers are used to and it definitely doesn’t help that they have a five-year deadline to sell all the units in their projects or pay the additional buyer’s stamp duty (ABSD),” she says. “New home sales are likely to be around 7,000 to 8,000 units for 2019.”

OCBC’s Ling notes that the potential ABSD could urge more highly leveraged developers to sell their remaining units. “Mid-sized to larger developers saw net gearings increase due to significant acquisitions,” she says. “[Hence, these developers] face a higher urgency to achieve good sales by lowering prices if need be, and monetising assets in order to deleverage.”

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Office: ‘Low pipeline supply’

Meanwhile, Christine Li, Cushman & Wakefield’s head of research, Singapore and Southeast Asia, expects demand for office space to remain steady due to an increase in “office-using employment”. This is supported by three key sectors: financial and insurance services, information and communications, and business services.

“Since the overall Grade-A office rents bottomed out in 1Q2017, office rental growth has surprised us on the upside for over two years,” she says. “The limited supply in the short term has also helped to lift the pre-commitment rates and rental for the projects under construction, setting a new benchmark for brand-new projects in the CBD.”

For the Singapore office market, Li expects low pipeline supply until 2022. “This is significantly below the historical annual average absorption,” she says. Meanwhile, under the Draft Master Plan 2019, a number of sites could be redeveloped with higher plot ratios under the CBD Incentive Scheme. These sites include AXA Tower, Keppel Towers and Keppel Towers 2, International Plaza, Shenton House, SGX Centre 2, 79 Anson Road and Anson House.

While these sites qualify for the scheme, Li points out that developers may not find it financially feasible to redevelop. “On top of paying for the construction cost and differential premium, landlords will miss out on four years of rental during the development period,” she says.

Despite the low pipeline supply of office space, Li is cautious about rental growth in view of the growing consensus of a US recession in 2020. “This recession will impact local economic growth over 2020-2021, leading to rental moderation despite the low level of supply during the period,” she warns.

Retail: ‘A reimagination of services’

For the retail segment, Tay Kah Poh, executive director and head of consultancy at Knight Frank Singapore, notes that indicators point to a downward trend. “Local consumers are likely to hold back their spending amid an uncertain macroeconomic environment,” he says.

However, retail rents could pick up due to localised shortages. According to him, the upcoming supply of retail space in major shopping malls is limited after 2019. Even so, Tay estimates average occupancy for retail space this year to be between 90% and 92%.

Given the current macroeconomic uncertainty, he expects retailers to be more cautious about profit growth. “Most retailers expect the same or worsening profit growth, and even fewer expect better conditions,” he says.

According to him, the F&B sector remains the “most optimistic” while fashion is the “most pessimistic”. The retail segment also continues to be weighed down by concerns about rental, manpower and market share. Retailers are also looking at suburban locations for expansion instead of a prime shopping belt, he says.

At the same time, intensifying competition from the e-commerce industry will encourage more businesses to adopt both online and offline strategies. For instance, SingTel has unveiled Unboxed by SingTel, an unmanned pop-up store that is modular and movable. The store integrates online and offline shopping experiences by allowing customers to try out phones, sign up for mobile plans at video-assisted self-service kiosks and immediately collect their purchased devices from the in-store POPStation.

“Beyond online and offline, this is a reimagination of how services are being delivered,” he says. This is not just limited to physical store retailers but e-commerce businesses as well. He cites examples such as grocery delivery service Honestbee that has opened Habitat, a grocery and dining experience at Pasir Panjang; and food delivery service Deliveroo’s dine-in space at Alice@Mediapolis.

In the long term, Tay states that some landlords may even woo online businesses to expand their physical presence by settling for less rent. “These businesses act as crowd magnets to increase the footfall of a mall,” he says. “There will also be a shift towards ‘experiential retail’ to boost footfall and increase dwell time of customers.”

He also foresees landlords embracing placemaking or “activating community spaces to create a ‘third place’ beyond home and workplace” in order to draw customers. This concept is not new. According to Tay, HDB has been working on placemaking for the last 40 years but the private sector is just coming to terms with it.

Overall, the residential, office and retail segments are likely to face headwinds amid the global macroeconomic uncertainty. To overcome this, Redas’ Chia urges developers to work with the government to drive innovation and deliver better outcomes for the built environment and real estate industry.

“As valued partners in the real estate ecosystem, we will also continue to engage in open communication and constructive sessions with the government and stakeholders to forge a deeper understanding of the issues at hand,” he says. “We believe such two-way communication could lead to a more responsive and efficient market-oriented ecosystem.”

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