PROPERTY INSIGHTS

Singapore Quarter 4, 2012

Government measures to curtail demand

Market Overview
The Singapore economy grew 1.1% year-on-year (y-o-y) in Q4, bringing full-year growth to 1.2%. This was much lower than the 4.9% growth in 2011 and also lower than the Ministry of Trade and Industry (MTI)s forecast of 1.5% in November 2012. For 2013, MTI expected the Singapore economy to grow by 1-3% as external pressures remain even as regional demand remains resilient. Private housing prices continued to increase in 2012 but at a more muted pace compared to 2011. However, the price increase accelerated in Q4, leading to a new round of cooling measures on 11 January 2013. The higher stamp duties and cash outlay as well as more restrictive financing requirements are expected to reduce sales volume and impact on prices in 2013. Retail rents were unchanged in Q4, except for rents in other city areas which declined slightly. For 2012 as a whole, only rents in the suburban areas saw a small positive growth while those in Orchard/Scotts Road and other city areas fell, as retailers were cautious about taking on more space. Against the backdrop of labour shortages which will hamper retailers expansion plans and the bulk of pipeline supply in 2013 located in the suburban areas, retail rents are likely to ease slightly in 2013, even in the suburban areas where retailer demand is strong. Office rental performance was uneven in Q4 and in 2012, with rents in the Central Business District (CBD) falling while generally holding firm at the fringe. Office rents will face supply-side pressure in 2013 with a higher-than-average pipeline supply. Downward pressure on office rents will however be mitigated by continued demand from the non-financial sectors and CBD office rents are forecast to bottom sometime in 2013.

Trends & Updates

Economic Overview
Cautious economic outlook for 2013 According to advance estimates by MTI, the Singapore economy grew by 1.8% in Q4 on a quarteron-quarter (q-o-q) seasonally adjusted basis, up from a 6.3% contraction in the previous quarter (Figure 1). On a y-o-y basis, the Singapore economy grew by only 1.1% in Q4 after staying flat in Q3. This brought full-year economic growth to 1.2%, lower than MTIs growth forecast of around 1.5% in November. The slowdown in economic growth for 2012 was mainly due to a 0.2% y-o-y contraction in the manufacturing sector with weakness especially in the electronics manufacturing cluster. This anaemic growth is expected to persist as the sector continues to face challenges such as higher labour costs and weak external demand. The Singapore Purchasing Managers Index (PMI) fell for the sixth consecutive month to 48.6 in December due to further decline in new orders, new export orders and production output, indicating that the manufacturing economy remained in a declining mode (Figure 2). Non-oil domestic exports (NODX) contracted 2.5% y-o-y in November, in contrast to the 7.9% y-o-y growth in October. Given weak external demand, the MTI expects the Singapore economy to grow by 1-3% in 2013 even as domestic demand in Asia remains resilient. However if the fiscal cutback in the US or the debt crisis in the Eurozone worsens, the forecast economic growth could be lower. Inflation moderates further Amid anaemic economic growth, inflationary pressures continued to ease. The Consumer Price Index (CPI) rose 3.6% y-o-y in November, down from the 4.0% and 4.7% y-o-y increases in October and September respectively (Figure 3). Similarly, the core inflation rate (excluding costs of accommodation and private road transport) fell to 2.0% in November, lower
-20%
Figure 1

GDP growth rates

20% 10%
0%
Q4 10 Q3 11 Q4 11 Q1 12 Q2 12 Q1 11

-10%

GDP growth (y-o-y)

Source: MTI

GDP growth (q-o-q)

Figure 2

Singapore PMI and NODX

54 52 50 48 46 40% 20% 0% -20% -40%

Feb-12

Jul-12

Dec-11

Sep-12

Jan-12

May-12

PMI (LHS)
Source: SIPMM, IE Singapore *NODX and PMI gures for Dec 12 are not available.

Mar-12

NODX growth (y-o-y) (RHS)

Figure 3

In ation, interest rate and unemployment rate

6%

5% 4% 3% 2%
1% 0%

Q4 10

Q1 11

Q2 11

Q3 11

Q4 11

Q1 12

Q2 12

Nov-12

Dec-12
Q4 12

Jun-12

Aug-12

Apr-12

Oct-12

CPI change (y-o-y)

Source: MTI, MAS, MOM

3-month SIBOR

Overall unemployment rate

*CPI gures for Q4 12 are based on Oct and Nov. Unemployment gures for Q4 12 are not available.

than the 2.2% and 2.4% in October and September respectively. The Monetary Authority of Singapore (MAS) expected the CPI to rise slightly above 4.5% in 2012 and to come in at 3.5-4.5% in 2013.

Q3 12

Q3 12

Q4 12

Q2 11

Government intervention to be a new normal In January 2013, the government introduced the seventh round of cooling measures to cool the residential market and also imposed for the first time a Sellers Stamp Duty on industrial properties. This follows after record high transaction volumes in the private residential market as purchase demand continues to be driven by the low interest rate

environment. Liquidity was also deflected to the commercial and industrial property markets as they were not affected by any cooling measures, resulting in large price increases. We expect the government to continue to monitor the property market very closely and implement new measures aggressively if it finds sales volume and prices rising above fundamentals.

Residential
Prices rose at a slower pace in 2012 Although private housing prices rose at a slower pace for the whole of 2012 compared to 2011, the slowdown was mainly in H1 2012. The pace of growth picked up in Q3 and accelerated in Q4 for most segments. 2012 also saw a record high of 22,289 units sold for the year, mainly due to supply from the Government Land Sales (GLS) programme (Figure 4 and Table 1). Similar to 2011, the landed segment led the price growth in 2012 due to limited stock and pipeline supply. Resale prices of freehold landed homes in the prime districts of 9, 10 and 11 increased 7.3% y-o-y in 2012 with almost half of the growth in Q4 (3.9% q-o-q). Resale prices of leasehold terrace homes in the suburban areas rose by 2.5% q-o-q in Q4 and 9.7% y-o-y in 2012 which was lower than the 13.8% increase in 2011. Within the non-landed segment, resale prices of leasehold condominiums in the suburban areas increased the most by 3.4% y-o-y in 2012 which was less than half of the 8.4% y-o-y increase in 2011 (Figure 5). This was largely driven by a 2.0% q-o-q growth in Q4 2012, the strongest quarterly growth since Q4 2011. Resale prices of freehold apartments/condominiums in the prime districts of 9, 10 and 11 increased by a smaller 2.3% y-o-y in 2012, after rising by 4.9% in 2011. Most of the price growth was in H2 with Q4 registering the strongest q-o-q growth of 1.4%.
Source: DTZ Research

Figure 4

Primary and secondary home sales (excluding executive condominiums), units

5,000 4,000 3,000 2,000
1,000 0
Dec-10 Dec-11 Jun-11 Jun-12 Sep-11 Mar-12 Mar-11
Sep-12
Q2 12 Q3 12

Primary sales
Source: URA REALIS, 31 December, DTZ Research

Secondary sales

Units launched

Table 1

Selected new launches in Q4 2012 Development Skies Miltonia Eden Residences Capitol Eco Sanctuary Sky Green Aura 83
Source: URA, DTZ Research

Tenure 99 yrs 99 yrs 99 yrs FH FH

Price range ($ per sq ft) 729 1,336 2,780 3,060 740 1,290 1,202 1,733 980 1,619

Figure 5

Resale residential price indices

(Q1 2011=100) 120
110 100 90 80

Q4 09

Q3 10

Q4 10

Q3 11

Q1 11

Luxury freehold condominiums Prime freehold condominiums Suburban leasehold condominiums

Q4 12

Q2 10

Q2 11

Q4 11

Q1 10

Q1 12

Dec 12

Luxury home prices stabilised in H2 2012 Following the imposition of the Additional Buyers Stamp Duty (ABSD) in December 2011, resale prices in the luxury segment declined by 1.3% y-o-y in 2012 after posting a 1.0% growth in 2011. However, the fall was mainly in H1 2012 and prices have stabilised in H2 as buyers returned to the market to look for value. There are also signs of Chinese interest returning to the luxury segment as the Chinese economy has improved. The number of Chinese buyers who bought private non-landed homes which cost more than $5m has increased

significantly from 14 in H1 2012 to 13 in Q3 and 20 in Q4 based on preliminary data. Near-term shock to sales volume The government announced on 11 January 2013 the seventh round of cooling measures, which included raising the ABSD, lowering the Loan-toValue (LTV) limits and increasing the minimum cash downpayment. The higher upfront costs higher stamp duties and cash outlay as well as stricter financing requirements are expected to reduce sales volume and impact on prices in 2013.

Retail
Divergent movements in rents and prices Rental values of prime retail space in Orchard/ Scotts Road and the suburban areas remained unchanged in Q4, except for those in the other city areas which declined slightly. For the entire year of 2012, only rents in suburban areas posted positive growth of 0.2% while those in Orchard/Scotts Road and other city areas fell by 0.2% and 1.5% respectively (Figure 6). In contrast, prices continued to rise as interest in retail property assets remained strong due to low interest rates. The average capital value of prime resale retail units in Orchard/Scotts Road and the suburban areas rose 1.7% and 3.6% q-o-q respectively in Q4. For the whole of 2012, the average capital value of prime resale retail units in Orchard/ Scotts Road and the suburban areas rose 11.2% and 9.6% respectively. As a result, the average yield of prime retail space in Orchard/Scotts Road fell to a historical low of 4.5% in Q4 2012 from 5.0% in Q4 2011. Labour costs a major strain on retailers
Figure 6

Average prime retail gross rental i ndex in Orchard/Scotts Road

(Q1 2011=100) 115
110

105 100 95
90

85
Q4 04 Q4 05 Q4 06 Q4 07 Q4 08 Q4 09 Q4 10 Q4 11 Q4 12 Q4 13 Q4 14

Source: DTZ Research

6.1% y-o-y in Q3, following the 3.8% and 4.0% y-o-y increases in Q1 and Q2 respectively. The retail sector is expected to continue to grapple with labour crunch and higher operating costs as the government focuses on restructuring and reducing the countrys dependence on foreign labour. With the difficulty in recruiting staff and the strong Singapore dollar, retailers are increasingly finding Singapore a less cost-effective place to set up presence in the region. Some of them have begun exploring options to expand operations in other countries which offer cheaper labour and rents, and a huge domestic demand base.

expansion plans According to the latest Economic Survey of Singapore, the overall unit labour cost shot up by

Bulk of pipeline supply in 2013 The average annual pipeline supply of 0.8 million sq ft (NLA) in the next five years is less than the annual net supply of around 1.5 million sq ft (NLA) in the past five years (Figure 7). However, the pipeline is not evenly spread; the bulk of the pipeline supply is expected to be completed in 2013 and 2014. In addition, almost 80% of the new supply in 2013 will be in the suburban areas. Major shopping centres expected to be completed in 2013 are orchardgateway, Westgate and Bedok Mall (Table 2). We expect retail rents in the Orchard/ Scotts Road and suburban areas to ease slightly in 2013 as some cannibalisation of retailer demand is envisaged in the face of labour shortages which will curtail expansion plans.

Figure 7

Retail development pipeline including projects on awarded GLS sites, sq ft (million)

2.0 1.5 1.0 0.5

0.0

2013

2014

2015
Other city areas

2016

2017

Orchard/Scotts Rd
Source: URA, DTZ Research

Suburban areas

Table 2

Upcoming major retail projects Name of development Westgate JEM Bedok Mall Paya Lebar Square orchardgateway Redevelopment of former Yen San Building Sports Hub
Source: URA, DTZ Research

Area Suburban areas Suburban areas Suburban areas Suburban areas Orchard/Scotts Road Orchard/Scotts Road

Est NLA Est TOP (sq ft) Year 426,000 2013 331,000 2013 220,000 2013 95,000 2014

180,000 2013 124,000 2014

Asia Square Tower 2 Other city areas Other city areas

27,000

2013

250,000 2014

Offices
Dichotomy in office rents
Figure 8

The office sector performed better than expected in 2012, particularly outside the CBD as demand from non-financial sectors was strong. This saw average rents falling in the CBD but holding firm at the fringe areas. Within the CBD, average gross face rents in Marina Bay which consists of only premium-grade buildings declined by 2.3% q-o-q to $10.50 per sq ft per month in Q4. On a y-o-y basis, rents in Marina Bay fell the most by 12.5%. In Raffles Place, average gross face rents registered a smaller fall of 0.5% q-o-q and 4.8% y-o-y in Q4 to $9.33 per sq ft per month, supported by renewal activity or tenants expanding within the same building. Elsewhere in

O ce rental indices
(Q1 2011=100) 240 200 160 120
80

40 0

Q4 02

Q4 09

Q4 10

Q4 04

Q4 05

Q4 06

Q4 12

Raes Place
Source: DTZ Research

Shenton Way/Robinson Rd/Cecil St

the CBD, average gross face rents in Shenton Way/ Robinson Road/Cecil Street were unchanged q-o-q but registered a decline of 6.5% y-o-y to $7.25 per sq ft per month in Q4 (Figure 8).

Q4 11

Q4 08

Q4 13

Q4 14

Q4 03

Q4 07

The rental decline in Marina Bay was higher than other parts of the CBD due to the continuous completion of new buildings. The completion of MBFC Tower 3 in 2012 added 1.3 million sq ft of office space, resulting in Marina Bay having the lowest average occupancy rate of 88.5% amongst all areas. This was exacerbated by lower demand from financial and insurance firms, as they were more cautious about taking on more space in light of the global economic slowdown. In contrast to the CBD, rents at the fringe were more resilient in 2012, largely supported by a more diversified tenant profile, high occupancy rates and the lack of new supply. With the exception of Marina Centre and Orchard Road where rents fell by 1.1% y-o-y, average gross face rents in other CBD fringe areas such as Beach Road/North Bridge Road, Bras Basah Road/Selegie Road and Anson Road/Tanjong Pagar held firm in 2012. 2012 demand higher than past six-year annual average Apart from Marina Bay, average office occupancy levels elsewhere were above 90% as demand held up better than expected in 2012. Net absorption for the whole of 2012 was an estimated 1.6 million sq ft, higher than the past six-year annual average of 1.5 million sq ft. While this was lower than 2011s net absorption of 2.2 million sq ft, it was more than the increase in supply of about 1.0 million sq ft in 2012. The increase in supply was the lowest since 2008, as an estimated 807,000 sq ft of office space was

Figure 9

O ce development pipeline including projects on awarded GLS sites, sq ft (million)

3.5
3.0

2.5 2.0 1.5 1.0 0.5

0.0 -0.5

2013 CBD

2014 CBD Fringe

2015

2016

2017

-1.0

Decentralised

Termination

Source: URA, DTZ Research

terminated. Office buildings which were removed from the stock in 2012 for redevelopment included UIC Building, Marina House and Midlink Plaza. Going forward, an estimated 9.3 million sq ft of office space is expected to be completed between 2013 and 2017, translating to an average of 1.9 million sq ft per annum (Figure 9). The pipeline supply is not even however and about 26%, or 2.5 million sq ft, is expected to come on-stream in 2013. Besides Asia Square Tower 2 in the CBD, other major offices due to be completed in 2013 include The Metropolis and Jem in the decentralised areas. Office rents to bottom sometime this year Rents in the CBD will continue to face downward pressure due to the high level of pipeline supply. However, this will be mitigated by the nascent recovery in the Chinese, US and regional economics and continued demand from the non-financial sectors. Therefore, average CBD office rents are expected to bottom sometime in 2013.

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This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. DTZ January 2013

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