July 27, 2018
- Go to comments on Office properties
- Go to comments on Retail properties
Comments from Ms. Tricia Song, Head of Research for Singapore, Colliers International:
Private home prices continued to rise in Q2 2018, climbing by 3.4% from Q1 – unchanged from the flash estimates released earlier this month. This was the fourth consecutive quarter of price growth following four years of decline. In particular, home values picked up rapidly in the first half of 2018 - up by a cumulative 7.4% - driven by growing market confidence, a spate of new launches and healthy housing demand.
However, the pace of price increase will likely be tamed in the latter half of 2018 after fresh cooling measures kicked in on July 06. The new measures are expected to dampen home sales as the higher additional buyer’s stamp duty (ABSD) could curtail investment demand from both locals and foreigners, and the lower loan-to-value (LTV) limits could also weigh on buying interest.
Prices in the landed segment increased 4.1% QOQ, accelerating from the 1.9% QOQ growth in Q1, which brought cumulative increase to 7.9% since Q2 2017. However, prices are still 7.9% below their Q3 2013 peak.
The cooling measures will likely slow down demand in the landed segment, given the absolute quantum is usually large (over SGD3 million), and the 5ppt increase in ABSD (for investment properties) and 5ppt decrease in LTV could mean a 10% incremental cash outlay. Upgraders would also need to factor in more time if they have to sell their existing property to avoid the incremental ABSD.
Meanwhile, private non-landed home prices which rose by 3.2% in Q2 are now 1.9% below a Q3 2013 peak. Rest of Central Region (RCR) led the charge in price growth in Q2, followed by Outside Central Region (OCR), and Core Central Region (CCR).
Prices of prime private homes rose marginally by 0.9% in Q2 after increasing 5.5% in the previous quarter. Prices in CCR are now 8.0% above the trough in Q2 2017, and 3.7% below their peak in Q1 2013. The moderation in price growth was due to a higher base set by New Futura and Wallich Residence in Q1. In Q2, the only new launches in CCR were Grange 120 which sold 41 units at a median price of SGD3,165 psf and One Draycott which sold one unit at SGD2,599psf.
We believe the new cooling measures will likely impact demand in the CCR the most as foreigners and investors tend to account for a larger share of demand in this segment. We expect developers to hold off planned launches, and offer some incentives to woo buyers. However, in general, we do not expect steep discounts given that the developers have strong holding power and there is no urgency to offload units.
Prices in the Rest of Central Region (RCR) rose for the sixth consecutive quarter. They increased 5.6% QOQ in Q2, faster than the 1.2% QOQ in Q1, and brought the cumulative increase to 8.9% since Q4 2016. Prices in RCR are 4.6% below their peak in Q2 2013.
The sharper price growth in the last quarter was mainly due to the higher prices transacted at bumper launches during the quarter. In particular, Amber 45 sold 86 units at a median price of SGD2,378 psf, Park Place Residences at PLQ (Phase 2) sold 187 units at a median price of SGD2,045 psf, and Margaret Ville sold 121 units at a median price of SGD1,873 psf. These psf prices are estimated to be 13-25% above comparable projects, but buyers are still attracted due to either limited supply in the locality and/or attractive project attributes such as being part of an integrated development, or boasting unblocked views or efficient layouts.
Near-term launches in RCR include Daintree Residences and Jadescape, which are arguably in less competitive locations and developers feel confident of the pent-up demand. However, we believe price expectations will be tempered by the cooling measures and unlikely to rise in the near-term.
Home values in OCR also grew at a slow pace in Q2 at 3.0% compared with the 5.6% increase in Q1. The growth slowed down sequentially as The Tapestry launch in Tampines set benchmark prices in Q1. In Q2, several project launches could have contributed to the price increase, including Twin Vew which sold 446 units at a median price of SGD1,383 psf, Affinity at Serangoon which sold 104 units at SGD1,586 psf and The Garden Residences which sold 66 units at SGD1,662 psf.
We believe OCR prices could be the most resilient among the three regions in the wake of the new cooling measures as first-time buyers and upgraders – who are less affected by the fresh measures – typically make up the bulk of buyers in the mass market segment. However, the benchmark prices set by some of the new launches could drive potential buyers to the resale market or towards the RCR market. Planned launches may have to trim their pricing expectations.
Supply pipeline and rents: supportive in near term
During Q2 2018, 1,327 private homes obtained Temporary Occupation Permit (TOP), compared to 1,977 units in Q1 and 4,249 units in Q4. URA estimates another 6,626 units to be completed in H2 2018, bringing full year completions to 9,930, a sharp drop of 40% from 2017’s 16,449 units and more than halved from 2016’s historical high of 20,803 units. URA expects 8,124, 3,079 and 10,852 private home completions in 2019, 2020, and 2021 respectively, which are below historical average completions. However, completions could rise sharply to 22,783 units in 2022, from the bumper en bloc transactions from 2016-mid 2018.
The private residential rental market has firmly turned the corner with a broad-based recovery across all market segments. The overall private residential rental index rose for the second consecutive quarter, up 1.0% QOQ, accelerating from a 0.3% rise in Q1. Rents have lagged prices by two quarters, and are still 12.2% below their peak in Q3 2013.
For the non-landed segment, vacancy rate improved to 7.6% in Q2 from 8.0% in Q1 and 8.7% in Q4. The peak vacancy was 10.4% in Q2 2016. Given the easing supply going forward, we expect occupancy to continue to improve and rents could recover by another 2% in H2 2018, and 5% in 2019, barring any external shocks.
Developers sold 2,366 private homes in Q2, up 49.7% QOQ from 1,581 private homes in Q1- this brought H1 2018 sales to 3,947 units, down 34.6% from 6,039 private homes in H1 2017. For the whole of 2018, we project a full -year developer take-up of 8,500-9,000 units (excluding Executive Condos), 15-20% lower than last year's 10,566 units. We expect some developers to delay launches as they re-strategise after the new measures were implemented.
Colliers expect average home prices to likely hold relatively steady from this point, after rising by 7.4% in the first six months of this year. Barring further measures or external shocks, prices could be supported by a benign supply outlook over the next three years. Already, vacancy and rents are improving. With rents looking up, we are unlikely to see distress selling in the near-term.
Developers are not likely to slash prices substantially for projects that are already launched in general. For projects that have yet to hit the market, developers will likely trim their average selling prices from their original intended aggressive pricing taking into account the new measures.
We believe developers will be watching closely the demand and price trends of upcoming projects – Daintree Residences being the first to be launched after the July 06 measures – for cues on how they should adjust their pricing strategy and pace out their launches in the months to come.
Comments from Mr. Duncan White, Head of Office Services, Colliers International:
Sales prices and rents of office properties continued to recover in Q2 2018, thanks to stronger demand for space from a broad range of sectors, as well as improved investment sales, and more positive business sentiment and upbeat economic outlook.
In Q2 2018, URA’s Office Rental Index for the Central Region rose for the fourth consecutive quarter. Rents grew 1.6% QOQ, marking a slight deceleration from the two preceding upticks of 2.6% QOQ recorded in Q4 2017 and Q1 2018, as the market recovery momentarily slowed following the rapid rise since Q2 2017.
Overall the statistics allude to a strong cumulative rental recovery of nearly 10% (+9.4% YOY) for office space in the Central Region, a year since the market bottom in Q2 2017. In tandem, island-wide vacancy as tracked by URA declined by 0.3ppt QOQ to 12.2% during Q2 2018, as leasing transactions picked up pace amid expectations of escalating market rents.
Office sales prices registered healthy growth on the back of the twinned improving sentiment in both the office leasing and investment markets. URA’s Office Price Index for the Central Region rose at an accelerated clip of 1.9% QOQ as compared to 1.3% QOQ in the preceding period and surpassing the 1.6% QOQ rental increment in the same quarter.
Several CBD office developments were transacted en-bloc at robust pricing levels during Q2 2018, signaling bullish sentiment amongst landlords and investors. Recent punitive ABSD measures on the residential sector may also continue to fuel a shift in investor interest towards the commercial sector.
Given the fast pace of recovery, we reaffirm that Singapore’s firm economic momentum, bolstered by synchronized growth across the office sectors should elevate office rents rapidly over the remainder of 2018 and continue into 2019. We expect vacancy to continue tightening as the supply pipeline remains muted over the rest of 2018 and 2019, and hence advise occupiers to conduct early portfolio planning and bring forward impending lease reviews. Notably, the front-loaded recovery sentiment is being felt most keenly in the CBD, where we expect prime office rents to transact approximately 20% higher than 2017’s market bottom rates by the end of 2019. We expect the rest of the market to follow in the same recovery fashion, as long as the demand growth continues at the same or increased pace.
Comments from Ms. Tricia Song, Head of Research for Singapore, Colliers International:
URA’s retail real estate indices for Q2 2018 spelt an overall trend of landlords maximizing store occupancy, with reduced rental rates being conceded. URA’s Retail Rental Index for the Central Region fell by 1.1% QOQ, undoing the sector’s first uptick in three years (+0.1% QOQ) seen during the preceding quarter (Q1 2018). URA’s Retail Price Index for the Central Region also fell in tandem, declining by 1.3% QOQ; more than reversing the previous quarter’s marginal growth of 0.1% QOQ.
Meanwhile, island-wide retail vacancy decreased by 0.2ppt QOQ to 7.3% in Q2 2018. On a YOY basis, vacancy has fallen by 0.8ppt since Q2 2017. The retail sector appears to be steadily trending down towards sub-7% vacancy levels from the market tops exceeding 8% during 2016-2017.
The retail vacancy contraction in tandem with a sustained rental decline are telling of the sector’s re-balancing act as retail landlords trade off historically high rents for more stabilized occupancy amidst challenging market conditions. As of Q2 2018, Central Region retail rents as tracked by URA’s Rental Index have recorded a total running decline of 17.1% since the most recent rental peak in Q4 2014.
Landlords may still be recalibrating rents and occupancy levels in the quarters ahead to find the right balance with their tenant mix. We believe this market transition is a structurally efficient dynamic fully aligned with the interests of both landlords and retailers, as ‘bricks and mortar’ retail pivots towards a new normal of integrated online-offline shopping lifestyles.
Overall, we expect the overall retail property market to stabilise over 2018 and 2019 as rental declines have edged down each year over the past two years. For the whole of 2017, rentals of retail space in the Central Region fell by 4.7%, a substantial drawdown from the decrease of 8.3% recorded in 2016.
Ground floor retail rents in prime shopping centres along Orchard Road should lead the recovery, rising 1% to 3% YOY in 2018. For the Regional Centres, select shopping malls should outperform, particularly those in suburban locations with significant catchment areas.