singapore office and private residential market outlook in 2015
SINGAPORE OFFICE AND PRIVATE RESIDENTIAL MARKET OUTLOOK IN 2015 By Alan Cheong, Senior Director of Savills Research
Office Market – A Look Through A Kaleidoscope Contrary to market expectations that rents will soften in anticipation of the onslaught of supply, the composite overlays of different market dynamics affecting existing and new tenants will complicate the analysis, leading to a counter intuitive outcome that we would now seek to explain. Going into 2015, newly minted CBD Grade A office supply in moving in condition is limited to Capital Green, South Beach and PS 100, totalling 1.25 million sq ft. With Equity Plaza taken off the market in March 2015, the net supply is just shy of 1 million sq ft. Take-up in a slow year like 2014 is already about 0.71 million sq ft. Setting this as the baseline for 2015 and adding 260,000 sq ft of demand from tenants moving out of Equity Plaza, demand would almost match supply for CBD Grade A office space.
The interpretation is that the office space market is fundamentally sound in 2015. For landlords, although the percentage of debt that needs to be refinanced in 2015 has increased, the fact that notwithstanding the recent marginal pickup in the Swap Offer Rates, interest rates are still low. For landlords, if the price of oil remains low, inflation in the US could still be held in check and interest rates should remain benign. However, come 2016 when visibility regarding the direction of interest rates is more clouded and given that most have more debt to refinance, their optimal strategy is actually to hold out for higher rents than fill up the building at subdued rates. This is because the tight supply situation in 2015 would enable them to squeeze the most out of the market before 2016 or 2017.
Debt Maturity By Year As % of total
2014
2015
2016
2017
2018
CCT SUN KREIT MCT CAPL KPLD
0% 0% 0% 0% 1% 1%
12% 0% 10% 22% 14% 28%
42% 14% 14% 23% 23% 3%
8% 8% 25% 15% 16% 12%
9% 36% 25% 0% 17% 27%
Source: Company reports, Daiwa
mid-2014. They will still benefit from the difference between the higher future rents and their current signed on rents, thereby reaping a virtual arbitrage. Rents may only correct in mid-2017 when the stock of new office builds is fitted out. This may mean a rising office rent market from now till 2017. We show this in a stylised diagram below.
Stylised Forecast of CBD Grade A Office Rents Rents
Even for 2016, when the physical completion is expected to spike, rents may likely rise because given the time required for interior fitting out works, the actual moving in for many of the buildings will be in 2017. In short, supply wise, the coast is clear for the next 24 months! Owing to the limited supply situation in 2015, it means that landlords are under less pressure to yield to lowering rents just to fill up the new supply coming on stream. And from a market structure perspective, one should realize that over the past decade, more Grade A office buildings have been acquired by S-REITS or institutional funds, creating a less fragmented ownership landscape. The topology of the supply side has coalesced into strong ownership blocs which brings with it the advantage of obtaining lower interest spreads over cost of funds and once funding is secured, would set the baseline for millions of square feet of Grade A office space from which the landlords will reference to. On the demand side, because Singapore is an open economy with many international accolades under its belt, the very best and novel commercial set-ups sprouting up anywhere in the world would normally find their way here. Although the banking and financial sector is still licking its wounds post Global Financial Crisis (GFC), new to market companies and those already with a presence here and in growth sectors can more than take up the slack. 2015 is a year where we would expect more new to market office tenants but who have smaller space requirements than banks and financial institutions. In summary, interpreting the office market for 2015 is not going to be as straightforward as using historical co-relations. The complex dynamics with optimal strategies that each landlord can adopt will collectively result in both asking and effective rents for new signons to not only counter-intuitively increase but instead and more poignantly increase significantly. We expect that Grade A rents to rise by 12.9% by-end-2015 over end-2014. For existing large tenants, many are embedded in long term leases renewed in 2012 to
2H-2014
2015
2016
2017
2018
Year
Stylised Forecast of CBD Grade A Office Rents Effective Rent S$psf pm
Forecast
Q3 2014
AAA Grade 50,000 sq ft 5,000 sq ft
5,000 sq ft
12.50 12.79 8.75 10.20
A Grade 50,000 sq ft 5,000 sq ft
7.50 8.71
Non-core 50,000 sq ft 5,000 sq ft
5.94 6.56
Business Park 50,000 sq ft
End2014* End2015 4.4%
AA Grade 50,000 sq ft
Rent Growth
3.50
13.05
14.60
5.9%
16.0%
13.54
15.71
5.0%
11.8%
9.19
10.27
2.5%
11.4%
10.46
11.64
4.4%
11.8%
13.05
8.80
5.9%
11.4%
13.54
9.83
1.9%
9.0%
6.05
6.60
2.1%
8.5%
6.70
7.27
1.9%
10.4%
3.57
3.94
2.1%
10.1% 4.84
5,000 sq ft
4.30
4.39
Grade A Overall (excluding Non-core and Business Park)
9.63
9.63
*: Q-o-Q change i.e. Q4 2014 versus Q3 2014^ ^: Y-oY change i.e. Q4 2015 versus Q4 2014.
11.9%
2.6%
11.16
12.9%
Source: Savills
Private Residential – Keeping The Faith The Singapore private residential market in 2014 has been characterised by low sales volume but sticky prices. The market then expects this state of affairs to carry on into 2015 barring any tweaking of the cooling measures and toning down of the Total Debt Service Ratio (TDSR) framework. Region
CCR
RCR
-5%
0% to -3%
OCR
Prices Primary Sales Market Resale Market Rents Demand Type
0% to -3% -5% to -10% -5% to -10% -5% to -10% -5% to -10% -5% to -10% -10% to -15% End-user End-user
Opportunistic
Source: Savills
Adopting that conventional view, the following is what is expected for 2015. Buyers of CCR units are likely to be opportunistic high net worth individuals, corporates or funds, all of whom find value in significantly price discounted assets. For the RCR and OCR, buyers are likely to be those who have the wherewithal to buy even within the current TDSR framework but have thus far held back due to expectations that prices will decline. As these people already have the purchasing power, it will be a battle between holding-out and expecting prices to decline further or committing because having not spent their money in the past 18 months, their store of wealth has built up further. We believe that this group is relatively large and may be enticed to purchase even if there is only a slight discount. They are also likely to be end-users of the properties. There is an alternative viewpoint. While the market may remain soft price wise in the near term, there
is a possibility that it may rebound in time. The reason for this is that if we look at the slate of cooling measures and the TDSR framework, assuming they did not induce a change in market behaviour toward residential properties, what these did was merely raise the barriers for liquidity to flow into the market. The analogy is like a cup that was initially overflowing due to its inability to contain the constant replenishment of fluids. When the cup’s height is raised, that is analogous to the implementation of the TDSR framework, the overflowing stopped. However, if the rate of filling is the same, like when the working population got a pay rise and increased their savings over time, a moment will come when even the raised cup height will be unable to contain the liquidity and overflowing happens again at the same rate. If one accepts this analogy, buyers will return to the market. The zillion dollar question is when. It may not be that long because since the implementation of TDSR on 29th June 2013, by the first half of 2015, the workforce will have enjoyed two pay increases, one for 2014 and the other for 2015. On top of that 2 bonuses would have been paid out. The store of wealth is definitely increasing. In the meantime, the measures have been static. Barring a deflation of sentiments due to any cataclysmic event, fundamentals should prevail. Perhaps in 2015, there may be defining project that may bring about a pivotal reversal of sales volume. We believe the line of argument, that the gamut of new completions would soften rents, leading to yield compression and a potential sell off by weak holders when interest rates rise, is overly simplistic. Yes, rents are expected to remain soft but so too are interest rates in the foreseeable future. Even if yields are to compress another 50 basis points, it doesn’t mean that owners will be forced to sell. The pressure to sell will only happen if the unemployment rate goes up.
That is not the likely scenario and in turn, the argument of falling rents leading to a wave of force selling is not a likely scenario either. The following chart shows a high degree of co-relation between the URA Property Price Index for completed non-landed properties and the Employment rate. 99%
250
98%
200
98%
150
97%
100
97%
50 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
On the other hand, the recent relationship between prices of completed non-landed properties and the spread between the yield of a luxurious non-landed property and the Singapore Government 10-year bond is trivial. 1.4%
250
1.2%
200
1.0%
150
0.8%
100
0.6%
96%
50
96%
0
0.4% 0.2%
2009
2010
2011
2012
2013
Completed Non-Landed PPI (LHS)
Completed Non-Landed PPI (LHS)
Employment Rate (RHS)
Completed Non-Landed CCR PPI (LHS)
Source: Savills, URA Department of Statistics
0.0%
Yield Spread (Luxury Yields to 10-yr Govt Bond) (RHS) Source: Savills, URA, Department of Statistics
In summary, the Singapore private residential market is expected to remain soft in 2015 with primary launches holding prices better than those in the resale market. Rents are expected to continue to decline due to the slew of new completions and limited budgets amongst overseas nationals working here. Corporate belt tightening and organisational revamps may result in less family units arriving. Small format homes, HDB flats and individual rooms in private developments may be the more lettable unit types both now and in 2015. Although yields are expected to compress further, prices may not react to this because the better driver of prices appear to be other economic factors like the unemployment rate which is still expected to remain low in 2015. While we believe the market in 2015 continues to mull over the TDSR and the slate of cooling measures, the amount of household liquidity building up in the backdrop could rouse buyers and surprise everyone on the upside.
Please contact us for further information Alan Cheong Senior Director, Singapore +65 6415 3641 [email protected]
Savills (Singapore) Pte Ltd, EA Licence No. L3009688B Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 500 offi ces and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.
Office Market – A Look Through A Kaleidoscope Contrary to market expectations that rents will soften in anticipation of the onslaught of supply, the composite overlays of different market dynamics affecting existing and new tenants will complicate the analysis, leading to a counter intuitive outcome that we would now seek to explain. Going into 2015, newly minted CBD Grade A office supply in moving in condition is limited to Capital Green, South Beach and PS 100, totalling 1.25 million sq ft. With Equity Plaza taken off the market in March 2015, the net supply is just shy of 1 million sq ft. Take-up in a slow year like 2014 is already about 0.71 million sq ft. Setting this as the baseline for 2015 and adding 260,000 sq ft of demand from tenants moving out of Equity Plaza, demand would almost match supply for CBD Grade A office space.
The interpretation is that the office space market is fundamentally sound in 2015. For landlords, although the percentage of debt that needs to be refinanced in 2015 has increased, the fact that notwithstanding the recent marginal pickup in the Swap Offer Rates, interest rates are still low. For landlords, if the price of oil remains low, inflation in the US could still be held in check and interest rates should remain benign. However, come 2016 when visibility regarding the direction of interest rates is more clouded and given that most have more debt to refinance, their optimal strategy is actually to hold out for higher rents than fill up the building at subdued rates. This is because the tight supply situation in 2015 would enable them to squeeze the most out of the market before 2016 or 2017.
Debt Maturity By Year As % of total
2014
2015
2016
2017
2018
CCT SUN KREIT MCT CAPL KPLD
0% 0% 0% 0% 1% 1%
12% 0% 10% 22% 14% 28%
42% 14% 14% 23% 23% 3%
8% 8% 25% 15% 16% 12%
9% 36% 25% 0% 17% 27%
Source: Company reports, Daiwa
mid-2014. They will still benefit from the difference between the higher future rents and their current signed on rents, thereby reaping a virtual arbitrage. Rents may only correct in mid-2017 when the stock of new office builds is fitted out. This may mean a rising office rent market from now till 2017. We show this in a stylised diagram below.
Stylised Forecast of CBD Grade A Office Rents Rents
Even for 2016, when the physical completion is expected to spike, rents may likely rise because given the time required for interior fitting out works, the actual moving in for many of the buildings will be in 2017. In short, supply wise, the coast is clear for the next 24 months! Owing to the limited supply situation in 2015, it means that landlords are under less pressure to yield to lowering rents just to fill up the new supply coming on stream. And from a market structure perspective, one should realize that over the past decade, more Grade A office buildings have been acquired by S-REITS or institutional funds, creating a less fragmented ownership landscape. The topology of the supply side has coalesced into strong ownership blocs which brings with it the advantage of obtaining lower interest spreads over cost of funds and once funding is secured, would set the baseline for millions of square feet of Grade A office space from which the landlords will reference to. On the demand side, because Singapore is an open economy with many international accolades under its belt, the very best and novel commercial set-ups sprouting up anywhere in the world would normally find their way here. Although the banking and financial sector is still licking its wounds post Global Financial Crisis (GFC), new to market companies and those already with a presence here and in growth sectors can more than take up the slack. 2015 is a year where we would expect more new to market office tenants but who have smaller space requirements than banks and financial institutions. In summary, interpreting the office market for 2015 is not going to be as straightforward as using historical co-relations. The complex dynamics with optimal strategies that each landlord can adopt will collectively result in both asking and effective rents for new signons to not only counter-intuitively increase but instead and more poignantly increase significantly. We expect that Grade A rents to rise by 12.9% by-end-2015 over end-2014. For existing large tenants, many are embedded in long term leases renewed in 2012 to
2H-2014
2015
2016
2017
2018
Year
Stylised Forecast of CBD Grade A Office Rents Effective Rent S$psf pm
Forecast
Q3 2014
AAA Grade 50,000 sq ft 5,000 sq ft
5,000 sq ft
12.50 12.79 8.75 10.20
A Grade 50,000 sq ft 5,000 sq ft
7.50 8.71
Non-core 50,000 sq ft 5,000 sq ft
5.94 6.56
Business Park 50,000 sq ft
End2014* End2015 4.4%
AA Grade 50,000 sq ft
Rent Growth
3.50
13.05
14.60
5.9%
16.0%
13.54
15.71
5.0%
11.8%
9.19
10.27
2.5%
11.4%
10.46
11.64
4.4%
11.8%
13.05
8.80
5.9%
11.4%
13.54
9.83
1.9%
9.0%
6.05
6.60
2.1%
8.5%
6.70
7.27
1.9%
10.4%
3.57
3.94
2.1%
10.1% 4.84
5,000 sq ft
4.30
4.39
Grade A Overall (excluding Non-core and Business Park)
9.63
9.63
*: Q-o-Q change i.e. Q4 2014 versus Q3 2014^ ^: Y-oY change i.e. Q4 2015 versus Q4 2014.
11.9%
2.6%
11.16
12.9%
Source: Savills
Private Residential – Keeping The Faith The Singapore private residential market in 2014 has been characterised by low sales volume but sticky prices. The market then expects this state of affairs to carry on into 2015 barring any tweaking of the cooling measures and toning down of the Total Debt Service Ratio (TDSR) framework. Region
CCR
RCR
-5%
0% to -3%
OCR
Prices Primary Sales Market Resale Market Rents Demand Type
0% to -3% -5% to -10% -5% to -10% -5% to -10% -5% to -10% -5% to -10% -10% to -15% End-user End-user
Opportunistic
Source: Savills
Adopting that conventional view, the following is what is expected for 2015. Buyers of CCR units are likely to be opportunistic high net worth individuals, corporates or funds, all of whom find value in significantly price discounted assets. For the RCR and OCR, buyers are likely to be those who have the wherewithal to buy even within the current TDSR framework but have thus far held back due to expectations that prices will decline. As these people already have the purchasing power, it will be a battle between holding-out and expecting prices to decline further or committing because having not spent their money in the past 18 months, their store of wealth has built up further. We believe that this group is relatively large and may be enticed to purchase even if there is only a slight discount. They are also likely to be end-users of the properties. There is an alternative viewpoint. While the market may remain soft price wise in the near term, there
is a possibility that it may rebound in time. The reason for this is that if we look at the slate of cooling measures and the TDSR framework, assuming they did not induce a change in market behaviour toward residential properties, what these did was merely raise the barriers for liquidity to flow into the market. The analogy is like a cup that was initially overflowing due to its inability to contain the constant replenishment of fluids. When the cup’s height is raised, that is analogous to the implementation of the TDSR framework, the overflowing stopped. However, if the rate of filling is the same, like when the working population got a pay rise and increased their savings over time, a moment will come when even the raised cup height will be unable to contain the liquidity and overflowing happens again at the same rate. If one accepts this analogy, buyers will return to the market. The zillion dollar question is when. It may not be that long because since the implementation of TDSR on 29th June 2013, by the first half of 2015, the workforce will have enjoyed two pay increases, one for 2014 and the other for 2015. On top of that 2 bonuses would have been paid out. The store of wealth is definitely increasing. In the meantime, the measures have been static. Barring a deflation of sentiments due to any cataclysmic event, fundamentals should prevail. Perhaps in 2015, there may be defining project that may bring about a pivotal reversal of sales volume. We believe the line of argument, that the gamut of new completions would soften rents, leading to yield compression and a potential sell off by weak holders when interest rates rise, is overly simplistic. Yes, rents are expected to remain soft but so too are interest rates in the foreseeable future. Even if yields are to compress another 50 basis points, it doesn’t mean that owners will be forced to sell. The pressure to sell will only happen if the unemployment rate goes up.
That is not the likely scenario and in turn, the argument of falling rents leading to a wave of force selling is not a likely scenario either. The following chart shows a high degree of co-relation between the URA Property Price Index for completed non-landed properties and the Employment rate. 99%
250
98%
200
98%
150
97%
100
97%
50 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
On the other hand, the recent relationship between prices of completed non-landed properties and the spread between the yield of a luxurious non-landed property and the Singapore Government 10-year bond is trivial. 1.4%
250
1.2%
200
1.0%
150
0.8%
100
0.6%
96%
50
96%
0
0.4% 0.2%
2009
2010
2011
2012
2013
Completed Non-Landed PPI (LHS)
Completed Non-Landed PPI (LHS)
Employment Rate (RHS)
Completed Non-Landed CCR PPI (LHS)
Source: Savills, URA Department of Statistics
0.0%
Yield Spread (Luxury Yields to 10-yr Govt Bond) (RHS) Source: Savills, URA, Department of Statistics
In summary, the Singapore private residential market is expected to remain soft in 2015 with primary launches holding prices better than those in the resale market. Rents are expected to continue to decline due to the slew of new completions and limited budgets amongst overseas nationals working here. Corporate belt tightening and organisational revamps may result in less family units arriving. Small format homes, HDB flats and individual rooms in private developments may be the more lettable unit types both now and in 2015. Although yields are expected to compress further, prices may not react to this because the better driver of prices appear to be other economic factors like the unemployment rate which is still expected to remain low in 2015. While we believe the market in 2015 continues to mull over the TDSR and the slate of cooling measures, the amount of household liquidity building up in the backdrop could rouse buyers and surprise everyone on the upside.
Please contact us for further information Alan Cheong Senior Director, Singapore +65 6415 3641 [email protected]
Savills (Singapore) Pte Ltd, EA Licence No. L3009688B Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 500 offi ces and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.
