Rising Proposition

When it comes down to local interests, few things get in the way of our real estate preoccupation.

Covid-19 has changed many things in our lives. But the one that comes to mind for most people is how they view property — both where they live and where they work. For most of us, things have changed drastically. Few go the office daily, if at all, and we’ve had to adjust our lifestyles to accommodate — for want of a less over-used phrase — the new normal.

The ripple effect of this change in our working environment, coupled with border and travel restrictions, have greatly affected all aspects of the property market. No sector has been impervious to the shifts in demand, and the accelerated need to deliver specific goals of both buyers and sellers.

Uneven Impact

“The impact of the pandemic has been uneven across the different real estate sectors, says Moray Armstrong, Managing Director at CBRE. “Lockdowns and safe management measures have significantly reduced retail activity and accelerated e-commerce which had increased demand for logistics industrial spaces. We have seen average retail rents fall the most among the sectors – around 17 per cent over past one and a half years, while prime logistics rents have increased 8 per cent.”  

Armstrong’s views of the real estate arena come with more than ample experience in the field. With over three decades under his belt in real estate, he has been involved with Singapore property since 1998. He is now responsible for overall growth and strategy for the country’s business after assuming the Managing Director role at CBRE Singapore in 2019.

“Work-from-home regulations have reduced CBD footprint, and prompted rethink of corporate real estate strategies, Armstrong adds. “CBD Grade A office rents fell 10 per cent in 2020, albeit bottoming since Q1 2021. In turn, residential properties become in demand, and coupled with delays in construction, home prices and rents are driven up. Residential prices and rents have increased 6.4 per cent and 5 per cent since end-2019.”

Given the supply chain problems seen throughout the world, and the phenomenal increase in e-commerce, the logistic sector has seen heightened vibrancy over the last year. According to a CBRE survey of APAC logistics occupiers, four out of five anticipate an improving operating environment, with over half of respondents working to grow their facilities by over 10 per cent over the next three years.

Bullish on Logistics

“Whilst the office market and, in particular, the retail sector have faced challenges, other asset classes including logistics, data centres, R&D and medical have seen surging demand and growth,” admits Armstrong.

“CBRE business is particularly well diversified, and this has certainly helped our firm navigate through this difficult phase. Our industrial and logistics business line has been a particular standout driven by frenetic occupier demand and investors clamouring to increase exposure to the sector.

“We are very bullish on the prospects for the logistics sector. There is a worldwide increase in demand for prime logistics warehouses as e-commerce exploded during the pandemic,” he provides. “We think this segment of the market will continue to grow even as supply chains normalise. There is increased need for cold storage for food logistics and medical supplies. The life sciences sector will undoubtedly grow in importance.

“In the meantime, the logistics investment market is running hot here in Singapore with a tremendous volume of money being deployed into the sector. Our industrial and logistics investment team has transacted over S$2b of sales in the past 18 months. Perhaps, the only constraint being the lack of quality assets for sale.”  

Prospects In Residential

Certainly, the “lack of quality assets for sale” has also played a part in a property sector we hold closer to home – residentials. Since the pandemic began, prices across genres – HDB, condos, and landed homes – have seen a robust hike. The slowdown in construction, decreasing availability of new units, and work from home practices have led many to bite the bullet and commit to a new home, often at higher prices.

Despite the pandemic, home sales in 2020 was on par with 2019’s total sales as reported by CBRE. And if things go according to the trend, 2021 full-year sales will likely exceed 11,000 units, the best year since 2013’s 14,948 units. As of Q2 2021, unsold inventory remains at 19,000 units, which can be exhausted within the next two years.

“The residential market has really surprised on the upside,” continues Armstrong. “This has not been lost on developers and there has been a rush to replenish land banks which has resulted in robust bidding at government land sales and renewed collective sales interest.

“Some caution and a need for careful appraisal on projects is warranted however, with inflationary pressure across construction costs, supply chain constraints, labour shortages, whilst the low interest rate environment may not hold forever. There might then be a preference for highly attractive locations and smaller development cost outlays.”          

With the continued rise in property prices over the last year and a half, those planning to buy have been apprehensive about possible government curbs to thwart this increase. In the first nine months of 2021, the URA price index has increased by 5.1 per cent, on par with GDP growth. This rate has eased slightly since then. While there may be less risk now, the risk is real that the government may step in when they deem the price rises unsustainable.

“Residential property prices have proven resilient and whilst prices have risen, we consider that they remain aligned with economic fundamentals,” Armstrong assures. “Cooling measures over 2013 and 2018 took the heat out of market. There was less speculation and hence, both overall household debt and the financial system emerged in healthy shape.”

Upsizing and Valuation

Moray is confident that with the growth in the IT, big data and biomedical fields, Singapore remains a safe haven for homes and corporate headquarters. The entry of new economy entrepreneurs and capital from family offices has driven up the high-end market, especially Good Class Bungalows and luxury apartments.

In the first half of this year, nine GCB transactions, out of a total of 60, exceeded the $2,000 psf mark with the average GCB price at S$1,728 psf, an increase of 21.8 per cent above 2019. The total investment volume for the sector exceeded S$1.8 billion, and is on track to breach 2010’s peak of S$2.368 billion.

But palatial properties for Singapore’s one-percenters are not the only ones that has seen a boost in value. Changes in working arrangements, and the home-based schooling phenomenon have also increased demand for larger landed homes and apartments.

“We’re seeing a lot of upsizing in motion, and homes with balconies and an additional study have attracted both buyers and tenants,” explains the Scotsman. “Condominiums with lower density and greenery have also enjoyed high occupancy, whilst amenities such as business centres are in vogue. Accessibility to outdoor recreation opportunities is a plus – Sentosa has performed well by way of example.”

Sentosa can be a yardstick of foreign money coming into the Singapore property market, given its special status. Just in the first half of this year alone, 13 Sentosa Cove bungalows were sold to a total tune of S$219.07m, a 67.4 per cent increase over the previous six months. Average per square foot price also increased from S$1,709 to S$1,783. Sentosa apartments also saw an increase in transactions – from 43 units in the whole of 2020 to 67 units in the H1 2021 alone – including a similar increase in per square foot levels to an average of S$1,562 in the first half of this year.

“Currently, interest rates are low, and rents are rising, investment property may look promising,” Moray attests. “However, prices have moved up more than rents over the past years, so rental yield is also low. Buyers should be selective, choose projects with good locational attributes such as those near to business hubs for the rental catchment, near amenities for convenience, and near transport links for connectivity. In Singapore, properties near popular primary schools are also a draw for families.  Projects near the future major infrastructural developments such as Jurong Innovation District or Southern Waterfront could also offer upside.” 

Office Outlook

Perhaps the one property sector that has been affected most by the pandemic is the corporate office market. Walking through the CBD these days feels just short of being in a set of a post-apocalyptic movie. With the Singapore government flip-flopping on rules regarding restrictions on those who show up in person at work, and the general concern with COVID safety, most companies have put in place a work-from-home policy that is fast being entrenched as the default.

But sounding the office real estate death knell may be a little bit premature, as far as CBRE is concerned at least. And there are signs of resilience that may shine on better days ahead.

“The office market held up better than might have been anticipated in the face of the pandemic,” he explains. “Rents corrected a modest 10 per cent from the start of 2020, as underlying vacancy levels did not increase to any great degree.

“We are increasingly optimistic about the medium-term outlook for offices in Singapore. The supply pipeline tapers over the next few years and with a number of dated office buildings are being redeveloped. Availability of space will likely reduce. Meantime, occupier demand from the technology, life sciences, asset management and private wealth is tracking positively. On the flip side, there is some downsizing activity, particularly amongst the consumer banks, but such released office space has found ample takers. Big tech and China tech in particular is a game changer for Singapore, and the expansion plans in motion are pretty extraordinary. 

“The rental market is at the inflexion point. We can see significant rent upside over the next two to three years.  

“The office investment market is always a good barometer for underlying market direction, and we are seeing strong buying interest in Singapore from multiple sources – notably institutional capital, core funds, opportunistic investors and family offices.”

According to CBRE Research, Grade A office valuations has dropped by 3.3 per cent compared to pre-COVID, a far cry from the disaster that many seem to expected. This resilience may be attributed to the view that office assets in Singapore is prized for the country’s geopolitical stability, pro-business policies, and the country being one of the world’s most innovative in attracting multinational corporations.

While office rental is showing some signs that it may recover sooner rather than later, retail real estate is undergoing a transformational change that will continue for some time. E-commerce, restrictions to access for the vaccinated, and a general evolutionary change in how people shop will render challenges for bricks and mortar stores going forward. CBRE Singapore reports that e-commerce penetration rose 26 per cent during the full-lock down period in May 2020, but has since stabilised at around 13 to 14 per cent, compared to pre-COVID’s 7 to 8 per cent. That said, the property company’s MD feels that investors shouldn’t ignore this piece of the pie totally.

Flexibility and Mobility

"Physical retail will remain relevant and important,” proclaims Armstrong. “People fundamentally want to have fun, crave distraction, and are looking to be entertained. Shopping is a social activity often combined with an excuse for a nice meal with friends and family. The suburban retail market has been resilient in terms of footfall and sales. Tourist-oriented retail locations and office-worker-dependent downtown shopping locations will have a longer road to recovery, but we can see grounds for improving conditions by, say late 2022 to 2023. I suspect that when we emerge post-pandemic, there will be a strong revival in the shopping malls.”

The prognosis for the different sectors in real estate, both in Singapore and around the region, may be spotty and inconsistent, but there is one certainty – that it will not be the same as before.

“The entire real estate sector is changing at a faster pace than at any time in my 35 years in the industry,” professes Armstrong. “The difference right now is that there are so many factors that are bearing on the build environment that all the players in the market are having to adjust. Many trends were in motion before COVID-19 and the impact of the pandemic has been to accelerate change. There is a blurring of building use types. Location remains important, but users of space are also searching for amenity, community, wellness, and increasingly, they are demanding real sustainability credentials.

“It’s a really dynamic time to be working in property. Change brings massive opportunity. Providers of ageing office space will need to reposition and upgrade.  Sustainability will be a front and foremost consideration. Occupiers will need careful and thoughtful guidance on creating the workplaces of the future. Newer concepts such as co-working will evolve and grow. Expect exciting new retailer entrants to emerge – with many Asian brands at the forefront. The insatiable appetite for data centres is set to continue.  As this goes on, industrial and logistics space has suddenly become one of the hottest investment classes. The list could go on.

“Game changer or not, when faced with crises, be it in the past or now, it has become apparent that in uncertain times, flexibility and mobility are key components in remaining resilient. For my part, I am learning more now than at any point in my career.”

Shot on location at MARQUIS QSQUARE 
6 Raffles Boulevard, #02-08/09 and #02-38/39, Marina Square 
Tel: 6883 0119, E-mail: qsquare@marquis.com.sg