Singapore real estate is expected to retain its lustre in 2020 amid times of uncertainties, with the possibility of some property sectors outdoing 2019’s performance. That assessment by Colliers Research was recently shared with key real estate industry players at a Colliers Breakfast Talk held in conjunction with the launch of the Singapore Market Outlook 2020 report on 21 January.

Broadly, the more benign economic outlook in Singapore this year (relative to 2019), the favourable interest rate environment, and the US-China trade truce - which helps to mitigate some uncertainty – would help to support the real estate market in 2020. 

Tricia Song, Head of Research for Singapore at Colliers International, noted, “In 2020, we expect office, hotel and residential sectors to post mild growth in 2020 on favorable demand-supply dynamics. Meanwhile, the industrial and retail property sectors should continue to stabilise after years of consolidation, while the office sector takes a breather after a strong 26% rental growth over three years. In the capital market, while valuations are high, office and hotels would still offer the best risk-reward proposition on the mid- to long-term horizon.”

In a poll of the attendees at the event, about one-third of them cited US-China trade tensions as the biggest risk in the next 12 months. This was followed by geopolitical risks and the economic slowdown in China. The new coronavirus - which has since spread to numerous countries from the epicentre of the outbreak in Wuhan - did not rank highly as a key risk among the participants then, but this would likely have changed after the number of cases started to spike towards the end of January.
   


On the coronavirus outbreak, Ms. Song said it would present some near-term downside risk, particularly for tourism-related sectors. However, the long-term growth drivers for the tourism sector in Singapore remain largely intact. In addition, it is probably still too early to determine the impact of the outbreak on Singapore’s economy.

In terms of the real estate sectors that the attendees would likely invest in this year, office and hotel properties emerged as top picks – in line with Colliers Research’s projection.

What does history say about the Year of the Rat?

If history is anything to go by, the Year of the Rat could present bright prospects in the real estate sector. Analysing key real estate indicators, Ms. Song said the past Rat years – 2008, 1996, and 1984 - tended to coincide with market peaks where property prices and capital values have been elevated (see Fig. 1). 

Office, for example, saw several significant buildings being transacted at high capital values at compressed cap rates. For instance, 71 Robinson Road was transacted in April 2008 at a then-record price of SGD3,125 per square foot. 

“Interestingly, we noticed that recent Rat years have seen performance peaked for several property segments. This was then followed by a correction in the subsequent year. Going by that trend, 2020 should be a relatively good year for Singapore real estate, barring any unforeseen external shocks or severe downturn. Then it begs the question whether we would see a correction next year? We do not necessarily think so as the market conditions are different now,” Ms. Song explained. 

Figure 1


Different market conditions in 2020
Notwithstanding the novel coronavirus outbreak, which is still an evolving situation, the factors that are supportive of the market today were largely absent in the past Rat years. They include the lower-for-longer interest rates, loose monetary policy, increased institutional allocation to Asia, and investors’ willingness to sell into a stronger market, which will help liquidity. 

According to a recent report by PWC and the Urban Land Institute, Singapore now offers the best real estate investment prospects in the Asia Pacific region. The Emerging Trends in Real Estate Asia Pacific 2020 report noted that market confidence and sentiment for Singaporean assets has rebounded.

In addition, Ms. Song said the Singapore government has rolled out a myriad of initiatives to transform industries, create new growth areas, spur the adoption of technology, rejuvenate the city centre, and inject more vibrancy to the tourism sector. Taken together, these initiatives will provide opportunities to various real estate sector stakeholders, such as developers, institutional investors, as well as occupiers. 

Turning to the occupier segment, Ms. Song shared that the last two Rat years in 2008 and 1996 have witnessed sharp spikes in office rents in the Central Region (see Fig. 2). For instance, the rents at Republic Plaza and 6 Battery Road reportedly hit record highs of SGD21 and SGD20 per square foot per month (psf pm) in the first quarter of 2008. Thereafter, rents softened in the wake of the Asian Financial Crisis in 1997 and Global Financial Crisis, following the collapse of investment firm Lehman Brothers in September 2008.

Figure 2
 

Data analysed by Colliers Research showed that CBD Grade A office rents climbed by 7% year-on-year (YOY) for the whole of 2019 - this follows the 15% increase posted in 2018 and 2.3% growth in 2017. Rental growth is expected to continue in 2020, with 1% YOY increase. However, the anticipation of higher supply of new office space in 2022 could snap the growth streak next year, as rents are projected to decline by 4% YOY in 2021. 

“Singapore is still an attractive occupier market in Colliers’ view; over a five-year period from 2020-2024, average rent is expected to grow 3.3% per annum. Generally, we believe the slower pace of rental growth will help occupiers, as they re-evaluate their space needs and financial objectives in a rapidly evolving business environment,” Ms. Song said. 

On the real estate investment front, Colliers Research expects sales to improve across multiple property segments in 2020. Transaction volumes could come in at SGD31 billion in 2020 - up 6% YOY – driven predominantly by the office, retail, hospitality, and industrial property sectors.


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