A blip in the short-term, but demand for real estate is expected to remain intact in the long-term.
Singapore's government had recently announced that for the first time in ten years, our population decreased slightly by 0.3% from June 2019 to June 2020. This is also the first dip in 17 years since the population declined 1.5% in 2003.
This decline was predominantly due to the decrease in the non-resident population, which reached 1.64 million as of June 2020 – a decrease of 2.1%, or 35,763 people. The decline was largely due to a reduction in foreign employment in Services from June 2019 to June 2020.
By pass-type, Work Permit Holders saw the largest decrease. Work Permit Holders are semi-skilled foreign workers from approved source countries, working in Construction, Marine Shipyard and Process (CMP) sectors and non-CMP sectors such as Services and Manufacturing.
Meanwhile, we saw the citizen population growing by 0.6% or 22,251 people, to reach 3.52 million, while the permanent resident (PR) population remained stable at 0.52 million as of June 2020.
A question that someone – be it a property occupier or real estate investor – may ask is: Will that dip impact the Singapore real estate market at all?
"The medium-term demand outlook [for the office market] is positively supported by limited new supply over the next five years."
Impact on the Office market
Looking at the potential impact on the office market, our data shows that the bulk of the prime office market consists of occupiers from the Financial Services (42%), Professional Services (15%), Technology, Media, and Telecommunications (TMT) (12%) sectors, which have held up relatively well through the pandemic.
In fact, the Technology sector is still growing, with more tech giants setting up offices in Singapore.
While there is net negative absorption year-to-date as some companies give up or reduce space, we expect the rental decline in the central business district (CBD) Premium and Grade A office market to be relatively mild at 5% in 2020. The office rental market should regain its growth trajectory as the economy rebounds in 2021.
Singapore prime office market by occupier sectors: Financial Services (42%), Professional Services (15%), Technology, Media, and Telecommunications (TMT) (12%)
The medium-term demand outlook is positively supported by limited new supply over the next five years.
Rick Thomas, Executive Director and Head of Occupier Services comments, "We have recently seen some great tech occupiers such as Tencent Holdings, TikTok or ByteDance entering the Singapore market, with the intent of establishing regional headquarters in Singapore – a very strategic location offering the infrastructure and a developed financial and legal system".
Jerome Wright, Senior Director of Capital Markets and Investment Services, adds, "With Singapore's position as a regional hub for many professional and technology companies, the office rental market is set to regain its growth trajectory next year. As such, we can also expect the long-term capital growth to remain intact."
Impact on the Residential market
For Residential leasing, we can expect a sharper impact on the lower-end public housing rental market, given the departure of the semi-skilled foreign workers.
We have also observed more movements in the private housing rental market, as some expatriates in the more-affected sectors will have to leave Singapore or downgrade their residences due to salary cuts.
"Given it is likely to be a blip in the population trend, we expect the long-term demand for real estate to remain intact, as reflected in the buoyant buying of private homes since exiting the circuit breaker."
The private residential rental index declined 1.2% in Q2 2020, reversing its 1.1% increase quarter-on-quarter (QOQ) in Q1 2020. However, we foresee rents to stabilise for the rest of 2020, as the decline in foreign demand is mitigated by several factors:
- Limited new completions because of construction delays;
- Withdrawals of supply due to the 2017-2018's collective sales fever; and
- Increase in rental demand from returning overseas Singaporeans or locals due to the work-from-home trends.
The non-landed residential vacancy has remained tight at 5.6% as of June 2020, below the historical average of 8%. Given it is likely to be a blip in the population trend, we expect the long-term demand for real estate to remain intact, as reflected in the buoyant buying of private homes since exiting the circuit breaker on June 19.
Steven Tan, Senior Director of Capital Markets and Investment Services, adds, “The low-interest-rate environment will also contribute to this trend. We expect the interest rate will continue to remain low for at least 1H 2021.”
Editor's note: This blog post has been updated for relevance.
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