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As Covid-19 paralysed the globe and shrank Singapore’s GDP by a post-independence high of 5.8 percent, SINGAPORE’s economy was struck hard in 2020.
Although the property market in Singapore buckled under the burden, the harm was generally less than predicted and only a fraction of that recorded during the 2008/9 Global Financial Crisis (GFC). This attests to the sound property sector dynamics of Singapore today, as well as the success of the Covid-19 government response packages in helping to hold several companies alive and promoting the need for real estate space by occupiers.
As the star player, warehouses stuck out, where demand spiked on the back of stockpiling needs and the increase in e-commerce. In 2020, total warehouse room absorption was two-and-a-half times that of 2019. As a consequence, the industrial room vacancy rate tightened from 12.0 per cent at the end of 2019 to 10.4 per cent at the end of 2020 and held rents comparatively firm.
The overall vacancy rate for Grade A CBD offices improved 2.7 percentage points in 2020 on the workplace front and pushed rents downwards. Grade A CBD office space’s average monthly gross effective rentals dropped 9.3 percent in 2020, from S$10.81 per sq ft, per month in Q419, to S$9.81 per sq ft, per month in Q420. Nonetheless, this is just a subset of the 49.1 percent decrease in rentals during the GFC in the first four quarters of the correction. It is also higher than the 12 percent decrease we expected at the onset of the April 2020 Covid-19 epidemic.
Since border closures and safe-distancing steps forced customers away, the supermarket industry carried the brunt of the pandemic. The weakened demand for retail space culminated in a 9% to 16% decline in the average monthly gross effective prime retail space rentals in 2020, with the mass market faring better than its peers in the prime and secondary sub-markets.
Resilient demand for homes rekindling collective residential market purchases
In the revenue front, the scarcity of significant trade reserves, global uncertainties and decreased realistic capacity to carry out purchases owing to the pandemic contributed to a 46 percent decrease in investment sales, from S$ 32.1 billion in 2019 to S$ 17.3 billion in 2020. Still, this is almost twice the paltry S$9.2 billion reported during the 2009 GFC, underscoring existing consumer trust in the property sector in Singapore compared to a decade ago. With the exception of some weakness in retail space capital rates, strong interest in real estate in Singapore held asset prices in 2020 relatively steady.
Private residential home prices, in fact, defied recessionary pressure and increased by 2.2% in 2020. Demand for new homes was resilient, compared to the 9,912 units they moved in 2019, with the 9,982 new home developers delivered in 2020. This is pushing down unsold inventory and reawakening the demand for residential collective land purchases, which in 2021 is expected to build traction.
Pent-up market to raise sales of property investment for 2021
Singapore’s property investment sales demand is likely to ramp up in 2021, with the economy projected to recover, combined with expectations regarding the availability of Covid-19 vaccine, the availability of sufficient liquidity and the pressure to deploy.
We expect the office assets of Singapore to remain high on the radar of investors as the low availability of pipelines supports a broader safety margin in view of the uncertainties surrounding post-Covid-19 office demand. In particular, the offices in Singapore Central Business District (CBD) inventory of the city-state is estimated to expand at a slow pace of 0.5 million sq ft on average per annum between 2021 and 2025. This is only half of the average annual net absorption of 1.0 million sq ft reported between 2010 and 2020, and the sector should be well buffered against the effects of any possible rise in the adoption of work-from-home strategies by occupiers.
The recent purchase of a 50 percent interest in OUE Bayfront – a prime commercial development in Singapore’s CBD – by Allianz Real Estate is a testimony to investors’ trust in the medium- to long-term growth prospects of the Singapore office property industry.
Given the generally short land tenure and stringent government regulations regulating their usage, investors are likely to continue to be on the lookout for retail and industrial properties, though selectively and especially for the latter.
Potential for stabilisation of workplace and retail rentals by end-2021
There is more caution in the short-term forecast for the leasing industry. Although demand for warehouse room is supposed to obtain a boost from vaccine storage requirements, provided unpredictable market opportunities in an obscure safe-distancing environment, office and retail occupants are normally expected to remain cautious with real estate needs. The likelihood of population virus outbreaks has risen in stage 3 of the reopening and could delay or even reverse the relaxing of safe-distancing laws.
That said, in the light of rent corrections, some firms may take the opportunity to step up to quality. In 2021, the increasing sectors of technology and asset management could also fuel demand for office space. There will be more insight on the effect of Covid-19 on workplaces and their designs as further tenants prepare new premises in 2021.
Support from domestic consumption can be seen in the retail market. Statistics reveal that online shopping and food & beverage revenues have dropped dramatically from their Circuit Breaker peaks of 24.9% and 44.6% in May 2020, to 14.3% and 19.3% in November 2020, respectively, as a proportion of their respective totals. This is a firm sign of the choice of Singaporeans for in-store shopping and eating. Any of the money allocated for foreign travel will appear to be channelled into domestic retail spending, with travel limits set to remain firmly in effect in 2021.
As a consequence, demand for office and retail space may be healthier in 2021 than in 2020 and encourage slightly milder decreases in rents than in 2020. We anticipate that CBD Grade A office rent will decrease by about 6%, whereas prime retail room rent could decrease by 3% to 8% in 2021. These estimates take into account the rental capacity to be stabilized by the end of 2021, focused on the progress of the Covid-19 condition, backed by the supply of vaccinations.
Warehouse rents could begin to stay steady in 2021, however, considering broad completions in the midst of sluggish demand on the basis of the volatile labor market and strict immigration policies, private residential rents could remain under strain. Due to higher prices, the Prime submarket could experience further difficulty securing tenants, however demand could be supported by tenants capitalizing on soft rents to transfer to prime areas.
The unfolding pandemic scenario and the global economy’s general instability continue to impact on the sector as a whole. For the real estate sector this year, though, some hope exists.