Kf Research 4th Quarter 2008

Research

oct-dec 2008/4th quarter

real estate highlights Highlights •

The litany of setbacks experienced in 2008 points to a far from glitzy performance for Singapore’s private residential sector, at least until the dust has settled and the economy shows some signs of recovery.

•

The retail market was fairly stable for the whole of 2008, with rents and occupancy staging modest increases compared to 2007.

•

The financial meltdown, which developed into a worldwide economic crisis, caused office rentals to come under downward pressure in 2008.

•

The industrial property market, which achieved encouraging growth in the first three quarters of 2008, showed a decline in rents and prices in 4Q 2008.

•

2008 has been a disappointing year for the investment sales market in Singapore, with investment sales totaling only S$14.7 billion, only about a third, or 37%, of the investment sales in 2007.

•

A total of 852 properties were put up for auction in 2008, reflecting a 35% decrease compared to 2007.

oct-dec 2008/4th quarter

real estate highlights

Residential Property Market As the global economy appears to be coming apart at the seams, the litany of setbacks experienced in the past year have set the stage for markets grappling with what is to come. This points to a far from glitzy performance for Singapore’s private residential sector, at least until the dust has settled and the economy shows some signs of recovery. Private Residential Sector Sluggish Launch Market The private residential market was unusually quiet in 2008, in terms of both launch and

sales activity. There were only 713 private residential units launched in 4Q 2008, barely 30% of what was achieved in the last quarter. As such, the total number of units launched in 2008 was 6,100 units, below half of that in 2007, haltering the pace of growth of launches in the past three years. Based on launch activity in the last quarter of 2008, the 707 units launched during the period was 68.5% lower than the preceding quarter and the lowest quarterly figure attained since the first quarter of 2003. Of the three regions, the prime Core Central Region proved to be the most affected submarket for launches. Despite accounting for the majority of developer launches in 4Q 08, the entire 2008 saw launches in this submarket cool just as quickly as it heated up in 2007. Specifically, the prime Core Central Region accounted for 23% of all launches in 2008, a smaller proportion than the approximately 36% achieved in 2007. This was also lower than that in the mid-tier Rest of Central Region and mass Outside Central

Chart 1

Private Home Launch and Sales Volume Islandwide 45,000 40,000

No. of Units

35,000 30,000 25,000 20,000 15,000 10,000 5,000 0

2004 New Sales

2005

2006 Secondary Sales

Source: Urban Redevelopment Authority, Knight Frank Research

2

2007 New Launches

2008

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Region, which accounted for 38% and 39% of units launched in 2008 respectively. Nevertheless, some high-end properties were still launched in the fourth quarter, catering to the luxury residential market, targeting selected high-net-worth individuals who may still be unaffected by the financial crisis. These launches include 18 waterfront villas at Sandy Island in Sentosa Cove that was launched in mid-October 2008. The fall in residential project launches is largely due to dispiriting investor sentiments in 2008, which prompted developers to generally withhold the number of launches. These brought the number of private residential homes launched in 2008 to total barely above 6,000 units. This was less than half of that launched in 2007, and was also lower than the figures in 2005 and 2006, where at least 8,000 units were launched in each of these years. However, compared to previous downturns, the 6,100 units launched in 2008 was still above figures in 2003 and 1998 by 17% and 15% respectively.

Dwindling Primary Market Sales With fewer choices, developer sales activity also declined drastically in 4Q 2008 although this was actually exacerbated by a sudden deterioration of worldwide economic conditions in October 2008. URA’s statistics have also indicated that 4Q 2008 was the quarter with the least number of units sold by developers in 2008 – there were only 419 units sold by developers in 4Q 2008, way below the next highest quarter in 2008, i.e. 1Q 2008, where 762 units were sold in the primary market. This was also the lowest figure since 1Q 2003 when only 427 units were sold. In particular, there was only a meagre 131 developer sales in December 2008, and this was among the least units sold per month since such data has been made available in July 2007. In 2008, there were a total of 4,300 new sales, representing one of the lowest primary market transactions since such data was available. The mass market accounted

for the majority, or 39%, of all units sold in 2008, higher than the high-end market which accounted for 24%. The mid-tier market accounted for 34% of all units sold by developers in 2008. There were several reasons underpinning the sluggish developer sale. Besides the poor economic conditions and employment prospects which affect homebuying sentiments, this was largely due to a mismatch in the price expectations between buyers and sellers of private homes. The mismatch arises as 2008 was the year where property market sentiments drastically deteriorates and home-seekers were increasingly cautious in their home purchasing criteria, looking at mere functionality, instead of housing aspirations. Home-seekers were also hesitant to buy unless prices had factored in the risk of further price decline. However, developers have not actually re-priced projects, and generally prefer to withhold project launches to monitor the market situation.

Private Residential Projects that are Expected to be Completed in 2009 Projects

Tenure

District

Developer

Location

Units

Paradise Island

99-year

04

Ho Bee Homes Pte Ltd

Paradise Island (Sentosa Cove)

29

One-North Residences

99-year

05

Vista Development Pte Ltd

North Buona Vista Road/ One North Gateway / Slim Barrack Rise

405

Botannia

956year

05

City Developments Ltd/Leonie Court Pte Ltd

West Coast Park

493

Carabelle

956-yr

05

Sim Lian (West Coast) Pte Ltd

West Coast Way

338

Lynnsville 331

FH

05

Kim Leong Development Pte Ltd

Pasir Panjang Road

RiverGate

FH

09

CapitaLand & Hwa Hong Corporation (Riverwalk Promenade Pte Ltd)

Martin Road

545

One Jervois

FH

10

FCL Joo Chiat Place Pte Ltd

Jervois Close / Jervois Road

275

Lornie 18

FH

11

Clydesbuilt Capital Pte Ltd

Lornie Road

Casa Merah

99-year

16

Choice Homes Beta Pte Ltd

Tanah Merah Kechil Avenue

556

The Centris

99-year

22

Prime Point Realty Development Pte Ltd

Jurong West Street 64 / Jurong West Central 3

610

19

18

Source: Knight Frank Research

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oct-dec 2008/4th quarter

real estate highlights

The secondary market was not spared by the financial turmoil either when the last quarter of 2008 witnessed a decline in the number of secondary market transactions. Figures indicated that the number of transactions has decreased by approximately 55% to circa 1,200 units in 4Q 08. Showing signs of wavering, secondary market activity had gradually dwindled since the onset of financial instability in global markets, aside from the mild increase experienced in 2Q 08 when secondary market transactions crept up by 6.9%. On a yearly basis, secondary market transactions have reached around 9,300 units in 2008. Representing a steep 64.8% yoy (year-on-year) fall, this figure is also of a similar level to that of secondary market transactions in 2005, when the market was expanding at a faster pace. The start of the financial turmoil in 2008 marked the end of increasing property speculations seen in 2006 and 2007, as investors become cautious amid growing tensions in the current market. Speculative property sales persisted to decline in the fourth quarter of 2008 when the proportion of subsales islandwide registered at 12.8%. In spite of this 1.3 percent-point fall from 3Q 2008, the proportion of sub-sales in the private residential market is still substantial as it is well above the quarterly average of 3.2% between 2003 and 2006. While the proportion of subsales in the mass Outside Central Region held steady at 7.3% in 4Q 08, the mid-tier Rest of Central Region was the only sub market that saw resurgence in the proportion of sub-sales after easing slightly in 2Q 08 –

the proportion of subsales in this region stood at 20.4% in 4Q 08. In contrast, it was the prime Core Central Region that lost its steam, after continuing to ease in terms of sub-sale activity . The growth years (20052007) saw an increased flurry in the prime sub-sale market, especially in 2007 when a considerable 2,535 units were transacted in the sub-sale market. Based on official figures as at 4Q 08, the number of sub-sales in 2008 for the prime sub-market accounts for a more mellowed 23% of last year’s sum. The Sail @ Marina Bay saw 98 sub-sale transactions in 2008 (compared to 317 in 2007; 199 in 2006; 544 in 2005) with the latest median sub-sale price transacted at S$1,581 psf, down 20.5% yoy.

Ebbing Foreign Interest Foreign homebuyers were relatively inactive in Singapore’s private residential market in 2008, although figures have indicated a slight climb in the share of foreigners (both PR and non-PR) that purchased both landed and non-landed private homes in 4Q 2008.

Numbers show that 277 transactions have been made by foreigners in 4Q 2008, which is barely 20% of foreign transactions made in the same period last year (4Q 2007). Numbers also indicate that for the whole of 2008, there are about 3,055 transactions made by foreigners. Nonetheless, the foreign homebuying interest is considered relatively reasonable - although the number of foreign homebuyers was smaller than the growth period between 2005 and 2007, the 3,055 sale transactions by foreigners in 2008 were well above an average of about the 2,000 sale transactions by foreigners in 2003 and 2004. Indonesians accounted for the majority of foreign homebuyers in 4Q 2008, with 25.2% of all transactions by foreigners made by them. Transactions by Malaysians also comprised a significant proportion, with 20.5% of all transactions by foreigners made by buyers from Malaysia. Over the years, these two categories of buyers have been predominant players in Singapore’s private residential market. While Malaysians were actively purchasing properties between 1998 and 2003, buyers from Indonesia have crept up in recent years and in the past four years (2004 - 2007) surpassed Malaysians, thus

Chart 2

Transactions by Foreigners Islandwide Percentage of Transaction by Foreigners

Diminishing Secondary Market Activity

30% 25.90%

25% 20%

22.36%

23.46%

18.39%

15% 10% 5% 0%

2004

2005

2006

Source: Urban Redevelopment Authority, Knight Frank Research

4

24.42%

2007

2008 (Prelim)

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Chart 3

Proportion of Foreign Homebuyers Islandwide as at 1H 2008

Australia China Hong Kong India Indonesia Malaysia Taiwan USA United Kingdom Others

According to the Urban Redevelopment Authority’s (URA) quarterly statistics, overall prices in the private residential property market have eased by 6.1% quarter-onquarter (qoq) in 4Q 2008, steeper than earlier flash estimate figures that indicated a 5.7% qoq drop. Specifically, both overall landed and non-landed properties witnessed a more pronounced fall this quarter, by 4.8% qoq and 6.3% qoq respectively. With yearly growth rates registered at –4.7% year-onyear (yoy), this was the first time in over four years that prices have reflected a slowdown in the rate of growth. As the economic crisis has surfaced to be one that would have acute effects on the economy, overall prices of private homes have waned in tandem with the weakened economic outlook.

4.3% 11.2% 0.9% 12.1% 19.0% 19.1% 1.8% 2.2% 7.5% 21.8%

Source: Urban Redevelopment Authority, Knight Frank Research

Residential Prices Took a Tumble



forming the largest group of foreign buyers in the market. In 2008 however, Malaysians made up 31.8% of all transactions by foreigners, 0.1 percentage point ahead from Indonesians. Some projects that are situated in the Southern part of Singapore were popular with foreigners in 2008. These include Caribbean at Keppel Bay where foreigners participated in about 56% or 19 out of 34 transactions. Located at Tanjong Pagar, 61% of sales transactions of apartments in the Icon in 2008 were made by foreigners. In addition, foreigners also purchased 19 of the 20 units in Pebble Bay and 13 of the 22 units at Reflections at Keppel Bay in 2008.

the cautious homebuying sentiments have become so significant that some homeseekers chose to purchase HDB resale flats. On the other hand, the decline in the performance of the private residential landed property market was more controlled. This was supported by limited supply of new quality landed homes, and lower speculative activity in 2008 when the private residential market was active. The fall in the median prices of landed residential properties was relatively lower at 4.8% qoq, compared to the 6.3% decline in the median prices of private non-landed homes. However, this was the first time over the four years that prices of landed homes registered negative growth, with median prices of semi-detached homes experiencing the largest quarterly fall of 5.3% qoq.

In terms of the non-landed market segments, all regions saw prices letting-up in the fourth quarter. It was the prime market segment (Core Central Region) that saw the largest reduction in price growth from the previous quarter when rates deteriorated further by 6.5% qoq in 4Q 2008. Similarly, private home prices in the mid-tier (Rest of Central Region) recorded a smaller fall of 6.2% qoq this quarter. On the other hand, average prices in the mass-market private home segment prices decline by a milder 5.9% qoq. Despite experiencing the slightest decline in home prices, a drop in prices reflected that buying interest for massmarket private homes has waned. Prices of mass-market homes were initially thought to be able to hold better than high-end private residential properties in 2008, as some buyers settle for mass-market private homes for lower-cost alternatives. However,

5

oct-dec 2008/4th quarter

real estate highlights

Share of units that will be completed in the year and have been sold with DPS Year

No. of current uncompleted units sold with DPS and scheduled to complete in the year

Dec 2008

413

2009

4,560

2010

2,540

2011

1,934

2012

513

2013

490

Total

10,450

Source: Knight Frank Research

Slump in Rentals Despite a general weakening in the private residential market, the leasing market was quite active in 2008. Based on preliminary figures, there were a total of 32,100 leasing deals for both landed and non-landed homes. This was just 5.1% lower than the peak in 2005, where the largest number of leasing deals was concluded. Although leasing activity sustained in 2008, these deals were concluded at a lower rental level. Based on Knight Frank’s research on non-landed property, rentals have generally decreased across the board in 2008. Rentals of luxury properties have dipped by 7.2% qoq in 4Q 2008, reflecting a 9.6% yoy decline. This was a stark contrast to the 25.6% yoy increase in rents of luxury apartments in 2007. Rents of non-landed homes outside the luxury segment fell as well, although there was a dichotomy in the performance of rents of such homes. Specifically, rents of non-landed homes in both Lower Bukit Timah and prime East Coast areas fell the most in 2008, plummeting by 27.9% yoy and 19.9% yoy respectively. The fall was partly led by a sharp escalation in 2007, where the two areas strengthened in their appeal to tenants. These include tenants who looked

6

for alternatives to the prime residential districts 9,10 and 11, as prime rents were soaring. There were also some tenants who vacated from the prime residential districts as dwellings were demolished after being sold collectively. However, this trend had almost come to an end in 2H 2008 and tenants are increasingly cautious in this weak economic environment. There has been a resistance to commit to high rentals and some tenants are also more open to well-located suburban areas. Hence, nonlanded homes in the Yishun and Yio Chu Kang areas dropped the least, by about 5% yoy.

Deferred Payment Statistics showed some relief In December, the URA released information on private housing units sold under the Deferred Payment Scheme (DPS), as there is some concern in the property market that a large number of the uncompleted homes sold under the DPS could be disposed at distress prices in 2009 and 2010. This may happen when buyers are required to pay the balance of the purchase price when

the projects are completed in 2009 and 2010. The URA provided an estimate of the number of homes which were bought with DPS and scheduled to complete from Dec 2008 to each of the years in 2013. However, the statistics pointed to a slight relief. Although this problem will heighten in 2009 and 2010, as the number of such homes that will be completed in 2009 and 2010 account for 68% all such homes to be completed from Dec 2008 to 2013, most of the units that are scheduled for completion in 2009 and 2010 were probably purchased in 2005 and 2006 at prices that are still relatively lower than today’s level or the level in 2009. Even if the property market continue to weaken in 2009, the owners of these 4,560 units bought under the DPS could either lease out the homes at relatively good returns or sell the homes at their breakeven level or with a profit. Given that the property market is expected to show some signs of stabilising or recovery in 2010, most of the owners whose homes will complete 2010 would also not be under pressure to sell at distress prices. In addition, owners who are not faced with extreme financial difficulties should be confident to hold the homes for investments as rental prospects should be more positive from 2010. Moreover, tenants usually prefer newly completed homes, especially those in Core Central Region (CCR). For residential units that are located outside the prime CCR, they are less at risk of default because a relatively higher proportion of these homes were bought for owners’ occupation.

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Public Housing Sector

14.6% in 2008, reflecting that the public housing market is still holding firm amid the uncertainty.

Keeping Afloat

The price growth of the public housing market was largely due to a shift in homebuyers’ requirements as the economy headed for greater uncertainty. Some first time homebuyers are no longer emphasizing on housing aspirations from well-designed private homes, and are contented with HDB flats which can meet basic accommodation needs. Additionally, this can be seen from a stronger demand for smaller HDB flats and a subdued demand for pricier larger flats. This can also be seen from the recent

Although the private residential market continues to be awash with less than cheery sentiments, Singapore’s public housing sector seems to be able to remain afloat amid looming economic concerns. The Housing Development Board’s (HDB) flash estimates suggest that while the increase of resale prices moderated, from 4.2% in 3Q 2008 to 1.5% growth in 4Q 2008, average resale flat prices are still some 1.9% higher than the last peak in end 1996. On a yearly basis, average resale flat prices grew by Chart 4

9,000

145

8,000

140

No. of Transactions

7,000

135

6,000 5,000

130

4,000

125

3,000

120

2,000

115

1,000 0

HDB Resale Price Index

HDB Resale Transaction Volume and Price Index

4Q07 3-room Flat

1Q08 4-room Flat

2Q08 5-room Flat

3Q08

Executive Flat

4Q08

110

HDB Resale Price Index

Source: Housing Development Board, Knight Frank Research

Chart 5

Median Resale Prices of 5-room flat $390,000

7.0%

$380,000

6.0%

$370,000

5.0%

$360,000

4.0%

$350,000

3.0%

$340,000

2.0%

$330,000

1.0%

$320,000

4Q07

1Q08

2Q08

5-room Flat Valuation Source: Housing Development Board, Knight Frank Research

3Q08 Price Change (qoq)

4Q08

0.0%

Design Build and Sell Scheme (DBSS) flat “Natura Loft” at Bishan, which attracted only 600 applicants for its 480 flats as at mid November 2008. This was notably fewer than previous launches of DBSS projects, which attracted an influx of applicants, various times more than the units available. In addition, the interest for smaller flats has extended to beyond resale flats, which formed the traditional source of supply for smaller flats as HDB has suspended building two- and three-room flats for a while. There was tremendous response for the recent 150 (from studios to three-room) flats for sale, as these 150 flats received an overwhelming 2,426 applications. Given raised caution about the short term economic outlook, demand for such smaller sized flats are expected to increase, not only for low-income families but serving also as cheaper alternatives in troubled times. In 2009, 2,000 three-room and smaller flats will be constructed and a subsequent 2,000 is allocated for 2010. Rentals of HDB flats were still on an upward climb for all flat types in 3Q 2008, except for 2-room flats, where median subletting rents fell 9.1% qoq to S$1,000 per month. The largest climb in rentals was observed in the 1-room and 5-room market where median subletting rents increased by 10.0% and 5.3% qoq respectively to S$880 and S$2,000 per month. The increase in rents of larger flats could be partly due to some tenants who were priced out of the private residential market, not because of soaring private residential rents but because the uncertain economic outlook has affected some tenants’ willingness to pay for relatively more pricey accommodation. Rental flats comprise only a small proportion of public housing flats in Singapore, and these have recently been entangled in issues surrounding the legality of some of its tenants. While such flats serve to cater to low income families, the boom times have sparked unlawful means to generate more income for some. To minimize such illegal acts, HDB has proposed to increase the stock of such rental flats from 42,800 to 49,860 by end 2011.

7

oct-dec 2008/4th quarter

real estate highlights Outlook for Private Residential Property Sector

Outlook for Public Residential Property Sector

As the global economy appears to be coming apart at the seams, the litany of setbacks experienced in the past year have set the stage for markets grappling with what is to come. This points to a far from glitzy performance for Singapore’s private residential sector, at least until the dust has settled and the economy shows some signs of recovery.

Currently, the public housing sector is well placed to provide more affordable housing alternatives, as qualms over the economy and the job security issues have turned everyone more cautious in spending.

Afflicted markets would contribute to price declines in the coming months. In 2009, overall average prices and rents of private residential properties are expected to fall by 15% to 25%. This would bring private home prices to about the level in the beginning of 2007. For the first half of 2009, launch and sales activity are expected to remain subdued, as the economic situation remains uncertain and banks continue to tighten credit. However, should more projects be attractively re-priced in 2009 to fit the budget of homebuyers, the number of units launched and take-up can expect to sustain or marginally improve in, as there is some latent demand from bargain hunters. However, in the short term, the highend segment is expected to continue to experience low sale volume in the primary market and prices in the secondary market would come under increasing pressure, especially for projects that are approaching completion of construction

Table 1

Rentals of Selected Private Residential (Apartment/Condominium) Units as at 4Q 2008 Locality

Monthly Rent (psf)

Districts 9, 10 and 11 (Luxury)

S$ 4.60 – S$ 5.20

Districts 9, 10 and 11 (Others)

S$ 3.80 – S$ 4.50

East Coast

S$ 2.60 – S$ 3.30

West

S$ 2.30 – S$ 2.90

Upper Bukit Timah

S$ 1.80 – S$ 2.00

Thomson, Toa Payoh, Bishan

S$ 2.50 – S$ 2.90

Yio Chu Kang, Yishun

S$ 2.00 – S$ 2.20

Source: Knight Frank Research

Table 2

Capital Values of Selected Private Residential (Apartment/Condominium) Units as at 4Q 2008 Locality

Capital Value (psf) Freehold

99-year Leasehold

Districts 9, 10 and 11 (Luxury)

S$ 2,170 – S$ 2,210

-

Districts 9, 10 and 11 (Others)

S$ 1,480 – S$ 1,630

S$ 1,370 – S$ 1,420

East Coast

S$ 1,000 – S$ 1,050

S$

840 – S$ 1,020

West

S$

760 – S$

775

S$

610 – S$

730

Upper Bukit Timah

S$

620 – S$

690

S$

560 – S$

710

Thomson, Toa Payoh, Bishan

S$

680 – S$

750

S$

610 – S$

670

Yio Chu Kang, Yishun

S$

500 – S$

570

Source: Knight Frank Research

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However, the HDB resale market will still be affected when these issues compound and thwart overall homebuying sentiments. As such, the prices of resale flats should hold in 1Q 2009, but a slight decline may follow after. Average prices of HDB resale flats may correct 7% to 13% in 2009, as the weakening economic conditions filters into the HDB market.

-

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Retail Property Market The retail market was fairly stable for the whole of 2008, with rents and occupancy staging modest increases compared to 2007. However, it should be noted that the marginal growth for the whole of 2008 was the result of the rental decline in 2H 2008, erasing most of the gains achieved in 1H 2008.

2008, when the global economic slowdown adversely affected consumers’ sentiments, resulting in a decline in prime retail rentals in 2H 2008.

Consumer Sentiments Affected Overall prime retail rentals recorded a lower-than-expected increase of 0.8% year-on-year (yoy) for the whole of 2008. The retail sector performed impressively in 1H 2008, with prime retail rentals growing by 13.9% when compared to 1H 2007. However average rentals started to fall in 2H Chart 1

Retail Sales Index at Current Price 140

16.0%

130

12.0%

120

8.0%

110

4.0%

100

0.0%

90

Mar 08

Apr 08

May 08

Retail Sales Index (Excluding Motor Vehicle) Source: Singapore Department of Statistics

Jun 08

Jul 08

Yoy change in Retail Sales Index

-4.0%

Yoy Change

Retail Sales Index (Excluding Motor Vehicle)

(Excluding Motor Vehicle)

Retail sales volume fell into negative territory as consumers cut back on discretionary spending amidst the deepening recession. Nominal retail sales, excluding motor vehicles, increased 7.9% and 3.1% yoy in September and October 2008 respectively. Stripping away price effect, real retail sales increased by only 3.8% yoy in September but declined marginally in October by 0.6% yoy. The number of foreign visitor arrivals and spending in 2008 fell short of the targets set by the Singapore Tourism Board (STB) earlier this year, despite a string of events aimed to boost visitor figures. Visitor arrivals for the whole year declined 2.0% to reach 10.1 million arrivals. Although tourist receipts set the record for highest tourist receipts by increasing 5.0% yoy to S$14.8 million, it was still short of the STB’s target of S$15.5 million. Singapore remained popular among visitors from Indonesia, China, Australia India and Malaysia who made up around half of the total visitor arrivals for 2008. Based on the latest MasterCard Worldwide Index of Consumer Confidence 4Q 2008, the level of consumer confidence in Singapore dipped in 2Q 2008 but was generally still somewhat optimistic for the next 6 months. The twice yearly survey of 13 markets including Singapore, measures consumers’ outlook toward employment, the economy, regular income, stock market and quality of life over the next 6 months. The MasterCard index for Singapore consumer confidence also fell sharply from 87.3 points for to 62.3, the lowest since 4Q 2004 but still remained higher than the historical mean of 67.6.

9

oct-dec 2008/4th quarter

real estate highlights Growth in Demand and Limited Supply in 2008 New demand for retail space in 4Q 2008 was positive, although it contracted by 140,000 sq ft in 3Q 2008. At 409,000 sq ft, this was due to encouraging take-up of newly completed retail space and relatively limited new completions. Net new retail supply also increased in 4Q 2008 by about 388,000 sq ft. A notable new completion in 4Q 2008 was Jurong Point’s extension, comprising about 215,000 sq ft of retail space. Costing about S$720 mil to develop, the extension features many new retailers, bringing the number of retailers in the mall to 450. This is double the number of retailers before the extension. Besides enhancing the retail offerings, higher-tier brands, such as Bakerzin and Avant Garde were also introduced to the mall. With healthy demand, average occupancy of retail space increased 0.8 percentage-point in 2008, to 93.6%. Occupancy of retail space also increased marginally across all areas in 2008, except in the Downtown Core, which dropped by 0.7 percentage-point to 96.3%.

The increase in occupancy was most significant for retail space in Outside Central Region, which increased by 1.4 percentagepoints in 2008, to 96.2%. The increase in occupancy for retail space Outside Central Region can be best seen from healthy occupancy of several suburban malls, including well-positioned REIT-owned malls, which achieved full occupancy. Suburban malls completed in 2008 also generally enjoyed encouraging leasing interest. These include re-positioned malls such as West Coast Plaza (formerly Ginza Plaza), which offer a more exciting shopping experience after the re-development. Meanwhile, occupancy of retail space in Rest of Central Area and Orchard Road also increased yoy by 1.1 percentage-points to 90.5% and 1.0 percentage-points to 96.7% in 2008 respectively. New demand for the whole of 2008 was 172,000 sq ft, but this is expected to be lower in 2009 as retailers become more cautious in their expansionary drives. As a number of retailers have opened multiple outlets in the same region, there may be some retailers who will consolidate business by closing the less profitable outlets when their leases expire. Net new retail supply fell in 2008 by 97,000 sq ft as some retail spaces such as Sembawang shopping centre and Meritus Mandarin Gallery were closed for additions and alterations works.

Chart 2

Islandwide Demand and Supply 94.0%

50

30

93.0%

20 10 92.0%

0 -10 -20

4Q07

1Q08

New Demand

2Q08 New Supply

Source: Urban Redevelopment Authority, Knight Frank Research

10

3Q08

4Q08

Occupancy Rate

91.0%

Occupancy

Retail Space (‘000 sq m)

40

Prime Retail Rentals continue to Fall Overall prime retail rentals continued to fall in 4Q 2008, following the first decline in 3Q 2008. In the fourth quarter, the fall in overall retail rents accelerated slightly, as overall prime retail rents fell 1.6% qoq, compared to a 0.7% qoq fall in 3Q 2008. The decline in 2H 2008 have somehow offset the growth of retail rents in 1H 2008, as overall retail rents increased by only 0.8% for the whole of 2008. Prime retail rents fell the most for retail spaces in Orchard (Central) in 4Q 2008. Monthly gross rents of prime retail space in Orchard (Central) dropped by 2.9% qoq, to an average of S$47.14 psf per month. The fall was partly due to a strong growth in retail rents over the past three years, as new supply remained limited. However, as the economic conditions drastically weaken, and together with the expected completion of major new malls such as ION Orchard, Orchard Central and Somerset Central drawing near, rents of retail space in Orchard (Central) are under more pressure to correct. In addition, rents of prime retail space in Orchard (Central) were stable in 3Q 2008, amid an almost across-theboard fall in retail rentals in 3Q 2008. On a yearly basis, however, rents of retail space in Orchard (Central) still enjoyed a 3.7% increase. Similarly, rents of retail space in Marina Centre/City Hall/Bugis fell by 2.2% qoq in 4Q 2008, and this brought rents in the area to be 0.5% lower than in 2007. Although the rents of retail space in City Fringe did not actually enjoy significant increases over the past three years, rents actually fell in 4Q 2008, by 1.6% qoq in 4Q 2008. This brought rents of retail space in the area to be about 4.0% lower than the level a year ago. The fall, notwithstanding a muted growth in the previous years where property market sentiments soared, was largely because retail space in the area were mostly not conveniently located compared to those in the city centre. Some of these malls have

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Outlook

Chart 3

Prime Retail Rentals (psf pm)

Prime Retail Rentals in the Orchard Road (Central) Locality $55

16.0%

$50

12.0%

$45

8.0%

$40

4.0%

$35

0.0%

$30

4Q07

1Q08

2Q08

3Q08

Prime Retail Rentals in the

Qoq Change in

Orchard Road (Central) Locality

Prime Retail Rental

4Q08

-4.0%

Source: Knight Frank Research

Table 1

Current Rentals of Prime Shopping Centre Space Locality

Prime Monthly Gross Rentals1 (psf)

Orchard (Central)

S$ 47.10

Orchard (Fringe)

S$ 23.00

Marina Centre, City Hall, Bugis

S$ 30.00

City Fringe

S$ 23.10

Suburban

S$ 29.10

Based on pre-defined portfolio of properties; refers to prime shop space of between 400 and 800 sf typically located on ground level with good frontage; any yields implied refer only to such prime space and may not be reflective of the entire shopping centre

1

Source: Knight Frank Research

relatively low patronage, as they were located away from major activity centers and transport nodes, such as MRT stations. On the other hand, average prime rents of retail space in suburban areas were stable in 4Q 2008. It averaged $29.10 psf per month, reflecting a 0.4% yoy increase. The performance of suburban malls were fundamentally supported by shoppers in the immediate neighbourhoods, who served as ready consumer catchment. Suburban malls which were successfully re-positioned also enjoyed patronage from shoppers who live in nearby towns. For example, the successfully revamped Lot 1 Shopping Centre is popular among residents in Choa Chu Kang as well

as those in Bukit Gombak and Yew Tee. There may also be some residents who stay in towns further north along the NorthWest MRT line and choose the mall over the others as a popular hangout. Likewise, Jurong Point is a favourite with residents who stay in towns along the West Line. In addition, the economic uncertainty is also discouraging some consumers from buying luxury goods. Suburban malls, which are conveniently located and provide a wide variety of cheaper retail offerings, are appearing as more popular alternatives.

The retail property market produced encouraging results for landlords in 1H 2008, with increasing occupancy and rising rents. However, the marginal drop in retail rents during the last two quarters of 2008 have indicated that retail rents have peaked and were increasingly affected by severe economic uncertainties. Many of the leases signed in 2008 were concluded before the financial meltdown in September that year and retailers have since reassessed their operations. This will affect their considerations for leasing new retail space in 2009. Leases signed in 2009 are likely to be done at notably lower rents and the number of pre-commitments is also expected to diminish. As the overall business environment deteriorates and job uncertainty lingers, consumer sentiments will continue to be adversely affected. Shoppers will be very cautious in spending, and may prefer cheaper alternatives, even for necessities, which may impact the earnings’ of certain retailers. Air traffic volume has also been substantially reduced, with a number of airlines reducing flights in response to subdued travelling interest. In particular, some Asian airlines have also cut down on the frequency of flights. As the number of visitor arrivals in Singapore persists to decline in 2009, this will affect the takings of retailers in some quality malls, which are positioned as tourist destination shopping places. However, landlords are expected to be more understanding towards retailers’ concerns and will be increasingly realistic in asking rents. There will also be some landlords who will be more flexible during lease negotiation with tenants and these will include mall managers who strive to maintain the occupancy of the mall. Retail rentals are likely to decline by a further 8% to 12% in 2009, with suburban malls expected to be slightly more resilient during this economic downturn.

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oct-dec 2008/4th quarter

real estate highlights

Office Property Market The financial meltdown, which developed into a worldwide economic crisis, caused office rentals to come under downward pressure in 2008. Specifically, the average rent for Grade A offices have dipped by 18.8% qoq and 12.5% yoy in 4Q 08.

2008 to 1.1% in February 2009. This is a sharp decline from the 7.8% GDP growth in 2007. The MTI has also forecasted that the economy may contract by -5% to -2% in 2009. The Economic Intelligence Unit (EIU) has also forecasted the Singapore economy will contract by about 0.1% in 2009, dragged by the world economic crisis. Although Singapore and some Asian countries are felt to have increasingly re-structured their economies over the years, the region is still highly open and will not be spared from the continued worsening of global economic conditions. A recovery for Singapore’s economy is thus expected to occur after 2009, if economic conditions in the G-7 countries improve. The G-7 countries account for more than half of the world’s GDP, and with their economic recovery by 2010, the Asian and Singapore economies can hope to enjoy moderate growths of about 4% in 2011.

Economic Performance Although it was intuitive that the record office rents achieved in 2007 have high risk of corrections, the financial meltdown actually exacerbated the fall of office rents in 2008. Of note, Singapore’s GDP fell 4.2% in 4Q 2008, the largest fall in seven years. As a result, the Ministry of Trade and Industry (MTI) has to trim the forecast for 2008’s economic growth from 2.5% in November

Hence, the Singapore office property market which is affected by the Singapore

Chart 1

Economic Growth and Projections

Yearly Economic Growth (%)

7 6 5 4 3 2 1 0 -1

2008

2009F G7 Economies

2010F Singapore

Source: Economic Intelligence Unit, Knight Frank Research

12

2011F

2012F Asia

2013F

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The office space market experienced a turning point in 2008. In 3Q 2008, the islandwide demand for office premises was at its highest, totaling about 65.7 mil sq ft of occupied net space. Although the demand for office space expanded by 172,000 sq ft in 3Q 2008, it contracted in the following quarter by some 366,000 sq ft. This is the first contraction in demand after four and a half years of growth. In addition to a slowdown in new demand, 2008 was a year where the situation of new demand outstripping new office supply has ceased. New demand has consistently outstripped new supply since 2004, lending support to increasing occupancy. In fact, there were periods in which new demand has grossly exceeded new supply in 2006 and 2007, which encourages some users to seek alternative office space such as those in business parks, as rents were soaring amid a supply crunch. However, beginning from 1Q 2008, the level of new demand has fallen to below that of new supply, and this continues throughout the rest of the year. With the completion of Merrill Lynch Harbourfront, 700 Beach Road and the transitional office Prudential @Scotts, new supply in 3Q 2008 was about 441,320 sq ft, versus a new demand of only 165,000 sq ft – this leads to a fall of office space occupancy, from 92.2% in 2Q 2008 to 91.8%, and 91.2% at end-2008. This also reflects that islandwide occupancy has dipped 1.5 percentage-point year-to-date (ytd).

(Private and Public Sectors) 100

93.00%

80

92.50%

60

92.00%

40

91.50%

20

91.00%

0

90.50%

-20

90.00%

-40

3Q07

4Q07 New Demand

1Q08

2Q08

New Supply

3Q08

Occupancy Rate (%)

Contraction in demand signals a softer market

New Supply, New Demand and Occupancy Levels Islandwide

Office Space (‘000 sqm)

Demand and Supply

Chart 2

89.50%

Occupancy Rate

Source: Urban Redevelopment Authority, Knight Frank Research

Dichotomy in New Demand across micro office zones Of note, the drop in overall demand was caused by a sharp fall in new demand for office space in the Central Area, specifically Downtown Core. Demand for office space in Downtown Core contracted 140,000 sq ft in 3Q 2008 and a further 366,000 sq ft

in the following quarter, highlighting the results of companies who are consolidating business functions and some smallersized tenants who may have vacated as a result of business closures. Additionally, some companies have already committed to relocate to business parks, driving the occupancy of business parks to an all-time high of 93.8% at end-2008.

Chart 3

New Supply and New Demand of Office Space in Downtown Core 60 40 20 ‘000 sqm nett

economic environment, will continue to see compressions in rental values in 2009, as the business environment further deteriorates.

0 -20 -40 -60 -80

3Q07

4Q07

1Q08

New Demand

2Q08

3Q08

New Supply

Source: Urban Redevelopment Authority, Knight Frank Research

13

oct-dec 2008/4th quarter

real estate highlights However, as some companies in Downtown Core are also concerned about the suitability of alternate business locations, there has been some who are unwilling to relocate from the CBD to conventional office space in outlying areas, where either the space may not fit their requirements or the location may impact business transactions and branding. Hence, the Fringe Area, which form the outskirts of the Central Region and is considered well-located, enjoyed increases in new demand. The Fringe Area includes well-positioned towns and popular secondary business locations such as Toa Payoh, Tiong Bahru. Alexandra and Paya Lebar. New demand for office space in the Fringe Area increased 46% qoq in 2008 and averaged 161,500 sq ft per quarter in 2008, up from an average of less than 100,000 sq ft in 2007.

Pagar area and a decline of 18.7% qoq in Orchard Road. Office rentals in non-CBD locations were not spared either, as the general abatement in rentals was mirrored in these sub markets. Average rentals of office space in the Beach Road/Middle Road areas plunged by 20% qoq, the steepest rate among the non-CBD locations. The smallest fall in office rentals was experienced in the Suburban West with a 14.1% qoq drop. As the rental rates in the CBD fell, office landlords in the non-CBD areas also had to reduce the rentals to retain their tenants.

As economies continue to contend with the floundering financial situation, landlords would seek to retain rental income, as tenant retention remains a fundamental priority with the economic situation weighing heavily on the office property market. Vacancy levels however, grew in 4Q 08 with the vacancy rate of Grade A offices climbing by 0.9 percentage points to register at 2.1%. It is anticipated that landlords will thus be more willing to retain existing tenants by renewing leases at lower rents, and offering more generous lease incentives such as longer rent-free periods, resulting in smaller rental income.

Chart 4

New Supply and New Demand of Office Space in Fringe Areas 35 30 25

As the economic predicament persists, office rentals took a tumble in 4Q 08. After four years of rental escalations, the office rental market has weakened in tandem with the stagnating economic growth and deflated business confidence. In terms of rental levels, sub markets across the board have registered significant decreases in rentals. Specifically, the average rent for Grade A offices have dipped by 18.8% qoq and 12.5% yoy in 4Q 08. It was Grade A offices in the Shenton Way/Robinson Road/Tanjong Pagar areas that had the most significant decline on a quarterly basis, when rental growth registered at –21.1% qoq. The Grade A offices in the Raffles Place area followed with a drop by 19.0% qoq. Grade B offices reflected prevailing sentiments with a reduction in average rent by 19.4% qoq and 6.4% yoy. It was Grade B offices in the Raffles Place area with the greatest fall of 19.0% qoq. Despite this, Grade B offices in other areas were just as dire with a drop by 18.1% qoq in the Shenton Way/Robinson Road/Tanjong

14

15 10 5 0 -5 -10 -15

3Q07

4Q07

1Q08

2Q08

New Demand

3Q08

New Supply

Source: Urban Redevelopment Authority, Knight Frank Research Chart 5

Average Office Rentals

Rental ($psf)

Slump in Office Rentals

‘000 sqm nett

20

$20.00

4Q 2008 (Grade A)

$18.00

Raffles Place : $14.29 psf

$16.00

Suntec:

$14.00

Shenton Way : $ 9.33 psf

$12.00

Orchard Road : $11.33 psf

$10.00

Suburban

: $12.50 psf

: $ 6.52 psf

$8.00 $6.00 $4.00 $2.00 $0.00

4Q04

4Q05

4Q06

4Q07

Raffles Place Grade A

Shenton Way/Robinson Road/Tanjong Pagar Grade A

Orchard Road Grade A

Suburban Areas

Suntec/Marina/City Hall Grade A

Source: Source: Urban Redevelopment Authority, Knight Frank Research

4Q08

www.knightfrank.com

Table 1

Effective Monthly Rentals in 4Q 2008 Location

Effective Monthly Gross Rentals (psf)

CBD (Grade A) Raffles Place

S$ 13.10 – S$ 15.50

Marina Centre / City Hall

S$ 11.50 – S$ 13.50

Shenton Way / Robinson Road

S$ 8.50 – S$ 10.20

Orchard Road

S$ 10.70 – S$ 12.00

Non-CBD Beach Road / Middle Road

S$

7.40 – S$ 8.90

Suburban (North)

S$

6.90 – S$ 7.90

Suburban (East)

S$

5.40 – S$ 6.30

Suburban (West)

S$

5.90 – S$ 6.80

Source: Knight Frank Research

Outlook The Singapore office property market experienced the turning points in rentals and occupancy rates in 2008, as the tumultuous financial crisis proved that the record office rents achieved in 2007 were unsustainable. Going into 2009, the performance of the office property market will continue to deteriorate, as economic conditions worsen and businesses have to strive to reduce operating costs. The first hit will be office space in central locations as some companies put their expansion plans on hold while others face the prospects of corporate downsizing. There are also some tenants who committed at high rentals in 2006 and 2007 and are hoping to alleviate the stress in occupancy costs. As it will be difficult to prematurely terminate leases, some tenants who had to consolidate business functions will try to sublet their excess office space even at lower rentals. This would result in the former tenants having to make up for the shortfall in rents. Additionally,

the recession may cause some business closures, resulting in an increase in vacant business space. This will be aggravated by an increase in potential supply in Downtown Core, beginning from 2009. On a positive note, the sombre economic conditions will encourage office space providers to be more flexible towards occupiers’ business concerns. There will be more room for negotiation, even for quality office buildings. These include office buildings owned by institutional investors such as REITs and property funds, which have to maintain the occupancy of the buildings as part of asset management objectives. In other words, office landlords will be more realistic and willing to accept lower office rentals in order to retain existing tenants or attract new ones. As a result, it is expected that prime office rentals would continue to slide by 15% to 25% in the next six months, while rents of office space in suburban places will fall lesser, by 10% to 15% in the same period. The decline in rentals of price office space could accelerate if foreign financial institutions, which contributed to the boom in office demand between 2004 and 2008 were to down-size in this financial crisis. The corrections of office rentals should be viewed as active measures by landlords to adjust to changing market conditions, which can result in raising the competitiveness of doing business in Singapore. There has been increasing concern during the last property market boom that Singapore is losing its attraction for international firms as business costs, driven by soaring office rentals, increased. With the competitive element in place, this will attract foreign companies seeking business opportunities in Asia and complement strategic directives for Singapore’s future growth.

15

oct-dec 2008/4th quarter

real estate highlights

Industrial Property Market The industrial property market, which achieved encouraging growth in the first three quarters of 2008, showed a decline in rents and prices in 4Q 2008. This was also the first drop after rents and prices of industrial properties achieved consecutive quarterly growth since 2006. Performance of Manufacturing Sector The slowdown of the industrial property market was partly due to shrinking manufacturing output in 4Q 2008. Total manufacturing output fell 12.6% year-onyear (yoy) in October 2008, and 7.5% yoy in November. This decline in October and November was due to a drop in global

demand for numerous industrial outputs as global economic conditions drastically worsened from October. In addition, while the contraction of total manufacturing output in October was due to a cyclical drop in biomedical output, a resurgence in biomedical output in November did not contribute to an increase in total manufacturing output in that month. This means that overall manufacturing output shrunk amid the economic recession. The slowdown in total manufacturing output was exacerbated by a contraction in electronics manufacturing. Total output from the electronics cluster fell 16% yoy in October and November 2008. In addition, biomedical output fell by a sharp 30.5% in October 2008, after it surged 43.3% yoy in September. Although the fall of biomedical output was often caused by the volatility of the biomedical industry, where manufacturing facilities were periodically shut down for maintenance when production

Chart 1

Industrial Production Index 12.0%

120

110

4.0% 0.0%

100

-4.0% -8.0%

90

-12.0% 80

4Q07

1Q08 Industrial Production Index

Source: Singapore Department of Statistics

16

2Q08

3Q08 Yoy Change in Index

4Q08

-16.0%

Yoy Change

Industrial Production Index

8.0%

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After falling to 49.5 in September, the Purchasing Manager Index (PMI) continued to fall to 45.8 in October and 44.3 in November. At 44.3, this was a record low since the PMI was launched in January 1999. The Singapore’s Purchasing Manager Index (PMI) gives an outlook about forthcoming factory output, where a reading above 50 would be an expansion and a reading below 50 will indicate a contraction in upcoming factory output. Singapore’s PMI has been modeled on the established US PMI, which is currently showing significant contractions. The US PMI also recorded the steepest drop in the past 26 years to hit 36.2 points in November.

Demand and Supply The stock of factory space, comprising single-user and multiple-user factory space, as well as business parks totaled 307 million sq ft in 3Q 2008. Meantwhile, new demand for factory space totaled 3.7 million sq ft, reflecting a 38% qoq increase. As this new demand was 30% more than the 2.86 million sq ft of new supply, this resulted in a 0.3 percentage-point increase in the occupancy of factory space in 3Q 2008. As such, factory space enjoyed a 93.4% occupancy in 3Q

Demand and Supply of Factory Space (Private and Public Sector) 500

95.0%

450 94.0%

400 350

93.0%

300 250

92.0%

200 150

Occupancy Rate

However, the output from transport engineering and general manufacturing remained stable in October and November 2008. The former achieved an 8% yoy growth, while general manufacturing output remained stable. These two clusters have also generally experienced consecutive monthly growths in output in 2008.

Chart 2

Floor Space (‘000 sq ft)

switches from one product to another, the biomedical output in October was relatively very low. It was the lowest monthly output since June 2006. Collectively, biomedical output in October and November 2008 was about 8% lower than the same period a year ago.

91.0%

100 50 0

3Q07

4Q07 New Demand

1Q08

2Q08

New Supply

3Q08

90.0%

Occupancy Rate

Source: Urban Redevelopment Authority, Knight Frank Research

2008, the highest since 3Q 1997, near the beginning of the Asian Financial Crisis. This increased occupancy was partly backed by an increasing demand for business parks, where high office rents and the office space crunch led to firms occupying business parks for approved back-end business functions. The occupancy of business parks surged a sharp 4 percentage-points in 3Q 2008, to 93.7%. This brings occupancy of business parks to a record high. The increased occupancy was due to a growth in demand by 452,000 sq ft, while no new supply was added to the market. Total new demand for warehouse space continued to increase in 3Q 2008, from 1.16 million sq ft in 2Q 2008 to 1.36 mil sq ft in 3Q 2008. Against only about 893,400 sq ft of new warehouse supply, the occupancy of warehouse space rose 0.8 percentage-point to 92.8%. The growth of the warehouse industrial property market was partly due to Singapore’s efforts to develop into a global logistics hub, as well as warehouse rents which are still considered low and remain affordable for most users.

Government Land Sales Programme Two industrial sites were sold by URA in 4Q 2008. The first site, located at Ubi Ave 4, was awarded to Sim Lian for S$26.3 million, reflecting S$85.05 psf ppr. This site measures 134,655 sq ft and is zoned for light and clean industrial use. This was close to another neighbouring site which Sim Lian bought in April 2008, for S$23.9 million (S$88.75 psf ppr). Another site, at Kallang Pudding Road, attracted only one bidder when the tender closed in early October. The single bid by Orion-Four Development amounted to S$10.8 million or about S$70 psf ppr for the 61,800 sf site. In mid December, JTC also announced the award of the 60-year leasehold 4.7 ha site, Changi Business Park (CBP), for the development of an integrated Business Park facility with retail facilities and a hotel. The tender was awarded to Ascendas Frasers Pte Ltd, a joint venture between Ascendas and Frasers Centrepoint Limited. Assuming that the retail and hotel components were

17

oct-dec 2008/4th quarter

real estate highlights fully developed to 506,000 sq ft, this will mean that 758,950 sq ft of business park space will be completed in CBP.

Industrial Rents and Capital Values

A total of five industrial sites were tendered and sold by the URA (Urban Redevelopment Authority) in 2008 for a total sum of $107.6 million. Altogether, they could potentially yield 1.4 million sq ft of industrial space. As the economic environment deteriorated in 2008, developers’ interests to acquire land parcels also declined. In January 2008, when the tender closed for the first of the five sites, 12 developers submitted their bids. However, the number of bids fell to 4 when the second tender closed in March 2008. By October 2008, when the major stock markets around the world were badly battered, the tender for the last of the five industrial sites attracted only one bid.

Average rents and capital values of industrial properties fell in 4Q 2008, after consecutive quarterly growth since 2006. Rents of conventional industrial space generally slid 4.1% qoq in 4Q 2008, following a flat rental growth in 3Q 2008. For the whole of 2008, average rents of conventional industrial space decreased by about 1.9% yoy. Among the major industrial areas, Macpherson/Paya Lebar, Kaki Bukit, Admiralty and Ang Mo Kio, the fall in 4Q 2008 was most significant in Kaki Bukit (7% qoq fall) and Ang Mo Kio (5% qoq drop).

The Government has also suspended the Confirmed List for the sale of industrial sites. This means that the Reserve List will be the main source of sites to be sold. Under the Reserve List, a site will only be offered for public tender if the government receives an application from a developer who commits to bid for the site at a price which is deemed acceptable. While there will be 8 sites totaling 15 ha of land area which are available in the Reserve List, it is very unlikely that these sites will be triggered as the economy in 2009 is expected to worsen.

Similarly, the capital values of conventional industrial space fell in 4Q 2008 as buyers became more cautious. Capital values of conventional industrial space dropped 2.1% qoq, averaging about $239 psf. The fall was also after growth in capital values of conventional industrial space came to a standstill in 3Q 2008. On the whole, capital values of conventional industrial space increased by a marginal 1.5% yoy in 2008. Rents of high-tech industrial space continued to decline in 4Q 2008. It fell 4.9%

qoq in 4Q 2008, to average $3.90 psf per month. This fall has brought monthly rents of high-tech industrial space to below the $4.00 psf level. The fall showed that the recovery of high-tech rents was short-lived as high-tech rents only managed to exceed $4.00 psf in 1H 2008. However, rents of high-tech industrial space in 2008 were still about 10% higher than that in 2007. If the economic condition continues to weaken, the demand for space from knowledgebased industrialists and office users would likely to continue to decrease. There may be possibilities for the rents of high-tech space to fall to below $3.00 psf in 2009. Rents of high-tech industrial space has always been lower than $3.00 psf unitil 2007, where the last property market boom in 2007 raised average rents of high-tech industrial space to above $3.00 psf. Likewise, rents in business parks fell 5.5% qoq in 4Q 2008, to average $4.30 psf per month. The fall was caused by a deterioration in business sentiments, which affects the interest for business park space. Nevertheless, rents of business parks in 2008 was still some 16% higher than in 2007.

Table 1

Rentals and Capital Values of Sample Factory/Warehouse (Upper Floors) and Business Park Space in 3Q 2008 Locality

Monthly Gross Rentals (psf)

Capital Values (psf)

Conventional Industrial Space MacPherson / Paya Lebar

S$ 1.80 – S$ 2.10

S$ 190 – S$ 335

Kaki Bukit

S$ 1.25 – S$ 1.45

S$ 125 – S$ 345 (60-year leasehold)

Admiralty

S$ 1.05 – S$ 1.35

S$ 120 – S$ 280 (60-year leasehold)

S$ 3.50 – S$ 3.90

N.A.

S$ 4.00 – S$ 4.60

N.A.

High-tech Factory Space Islandwide Business Park Space Islandwide Source: Knight Frank Research

18

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Chart 3

Factory Space Rentals 12.0%

$1.60

10.0% 8.0% 6.0%

$1.40

4.0%

$1.30

2.0% 0.0%

$1.20

-2.0%

$1.10 $1.00

Qoq Change

Rentals psf

$1.50

-4.0% 4Q07

1Q08

2Q08

Rentals (psf)

3Q08

4Q08

-6.0%

decline by between 10% and 15% yoy. In the last couple of years, business parks have enjoyed spillover of business space demand due to the limited supply of office space and soaring office rentals especially within the CBD area. However, with the expected completion of more office space and a continued moderation of office rentals, prices and rents of business parks may suffer in the coming months. Businesses that were previously enticed by alternative space in business parks would instead chose to remain in their current location as cost savings of relocation might not be significant, if any.

Qoq Change in Rentals

Source: Knight Frank Research

Outlook 2008 has been a year of mixed performance for the industrial property market. In the first half of the year, rents and prices continued to increase amid the growing economic uncertainty, but the increase was short-lived. The global financial turbulence has started to reduce demand for industrial properties in the last quarter of 2008, resulting in falling rents and prices of industrial properties by end 2008. Moving into 2009, rents and prices of industrial properties are very likely to experience further downward pressure, as industrialists become increasingly cautious. The effect of a weakened global demand will have severe impact on Singapore manufacturers, as much of Singapore’s manufacturing is export-oriented. The Economic Intelligence Unit (EIU) has forecasted that exports of goods and services will contract about 3.9% in 2009, as US import demand decreases and other major Singapore’s export markets stagnates. The performance of Singapore’s technology sector in 2009 is also expected to be discouraging, as global electronics demand weakens. These will lead to a notable fall in

export orders for local manufacturers and if these persist, a number of industrialists will have to downsize operations. There may be some manufacturers who may be so adversely affected that it results in business closures, adding to both the industrial space available for lease and for sale. Industrial rents are therefore likely to head further downwards, while a lack of investor interest for industrial buildings will cause prices to continue to contract. Based on official statistics, average prices and rents of industrial space increased by 1.5% and 4.2% yoy in 2008 respectively. Notwithstanding these statistics, industrial price and rentals were observed to have fallen between 10% and 15% qoq in 4Q 08. For instance, the asking price for a property in Changi South has reduced by approximately 13.4% qoq from S$3 million to S$2.6 million. In terms of rentals, asking rentals for hi-tech space in the locality of Bukit Merah have also dropped by about 10% qoq. Going forward, average prices in 2009 could contract by between 12% and 20% yoy, while average rents are projected to

19

oct-dec 2008/4th quarter

real estate highlights

Investment Sales Property Market 2008 has been a disappointing year for the investment sales market in Singapore, with investment sales totaling only S$14.7 billion. This was only about a third, or 37%, of the investment sales in 2007. Total Investment Sales 2008 has been a disappointing year for the investment sales market in Singapore, with investment sales totaling only S$14.7 billion. This was only about a third, or 37%, of the investment sales in 2007. Unlike 2006 and 2007 where the residential sector dominated investment sales, the commercial sector formed the largest Chart 1

Share of Property Investment Sales in 2008

Residential Commercial Industrial Mixed Hotel Others Source: Knight Frank Research

20

23% 38% 20% 5% 5% 9%

share, or 38%, of investment sales in 2007. The falling share of residential investment sales was due to a major slowdown in collective sales, as most developers have already replenished their land banks. In addition, the rapidly decelerating home sale volume had also deterred developers from acquiring more development sites. With prices of private residential properties going through downward corrections, owners are also discouraged from selling residential properties collectively as collective sales premium are lower than that in the previous years.

Government Land Sales A total of S$5.04 billion worth of development land was sold through the Government Land Sales (GLS) in 2008, forming 34% of overall investment sales. The S$5.05 billion worth of sites sold in 2008 was only 37% of that in 2007, and was due to a significant slowdown in developers’ interest for leasehold sites, including commercial sites, which amounted to S$2.67 billion worth of land sale in 2007. Nevertheless, it must be noted that the S$13.7 billion worth of sites sold through GLS in 2007 was exceptionally high. The S$5.04 billion worth of sites sold through GLS in 2008 was also actually higher than the S$4.9 billion awarded through GLS in 2006, when the property market boom was heating up. Across sectors, the largest drop in the value of GLS sites sold is in commercial sites. The S$101.3 mil of commercial GLS sites sold was less than one-tenth of that in 2007. The

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The value of hotel sites, as well as mixeduse white sites sold in 2008, declined by 83% yoy and 81% yoy respectively. About S$124.3 billion worth of hotel sites were sold by the Singapore Government in 2008, while a single White Site at Serangoon Central was sold at S$800.9 million in 2008. The weak demand for hotel development land was contributed by the declining visitor arrivals, where the number of visitors continued to slide by 8.1% yoy in October 2008. Visitor arrivals have fallen in five consecutive months. Hotels, which have been enjoying consecutive years of growth, are now challenged by rising vacancies. Hoteliers are therefore increasingly cautious before undertaking expansion plans, given the current economic crisis and rising operating costs. The value of industrial land sold by the State declined by 44% yoy. The interest for industrial sites among certain developers was because some developers felt that they need to acquire certain sites to protect their market positions. Residential GLS sites awarded totaled only S$2.67 billion, about 60% of that sold in 2007. The fall was because developers have already built their landbank, and primary

Chart 2

Government Land Sales $10 Value of Investment Sales (Billions)

decline in buying interest for commercial sites in 2008 was partly due to the economic slowdown and the concern that there could be a potential office oversupply when substantial quality office space is completed from 2010.

$9 $8 $7 $6 $5 $4 $3 $2 $1 $0

1H06

2H06

Residential

1H07

Commercial

2H07 Industrial

1H08 Mixed

Hotel

2H08 Others

Source: Knight Frank Research

home sale volume has decreased sharply in 2008 compared to the previous year. In addition, the high construction costs were squeezing the profit margins of mass-market developments harder than that of higherend projects. However, some developers were still interested in choice sites that were attractively located. Therefore, there was mixed interest for the different residential sites that were launched for sale in 2008. For example, the residential site in Tampines Ave 1/10 received only one bid at S$84.6 million (S$118 psf ppr), while the residential site next to Tanah Merah MRT attracted seven bids. This Tanah Merah site was sold to TID Pte Ltd in September 2008 at $84 million ($282 psf ppr), while the Government did not award the Tampines site as it deemed the bid too low.

21

oct-dec 2008/4th quarter

real estate highlights Outlook

Chart 3

Private Investment Sales

Factors such as the economic slowdown and tight credit environment that caused the investment sales volume to decrease in 2008 would continue to plague the market in 2009, especially in the first half of the year.

Value of Investment Sales (Billions)

$20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0

1H06

2H06

Residential

1H07

Commercial

2H07 Industrial

1H08 Mixed

Hotel

2H08 Others

Source: Knight Frank Research

Private Investment Sales Private Investment Sales totaled only S$9.6 billion in 2008, 65% lesser than that in 2007. The residential sector was the main contributor to the contraction, as private investment sales of residential sites and residential properties dropped 96% yoy. Of note there were cases of aborted residential investment sales. These include Kuwait Finance House (KFH), which allowed the initial option for 97 Goodwood Residences units, priced at S$3,200 psf to lapse in 1H 2008. KFH eventually agreed to buy the 36 apartments at S$2,800 psf in 2H 2008. Meanwhile, a fall in collective sale activity and residential property prices brought collective sales to total only S$338 mil in 2007. This reflects a 97% fall compared to the S$12.4 billion of collective sale deals closed in 2007.

22

As a result, non-residential sectors accounted for a larger share of private investment deals concluded in 2008. The commercial sector accounted for 55% (S$5.28 billion) of private investment sales, while the industrial sector accounted for 30%. Industrial properties, which received healthy investor interest in 2008, achieved a 67% yoy increase in private investment sales volume in 2008, totaling S$2.85 billion. The sharp fall in private investment sales was also exacerbated by a sudden slowdown of acquisitions of investmentgrade properties by REITs. During the year, REITs remained inactive in acquiring properties for inorganic growth, as it became increasingly difficult to attain financing. REIT managers therefore focused on active asset management in 2008 to ensure healthy occupancy levels and lease sustainability amid the economic uncertainty.

There should be a dearth of public and private residential land sales in 2009 because the primary home sale volume is expected to remain low. Even if home sales picked up in 2H 2009, it would take a few months for developers’ inventory to be reduced before they feel the need to acquire new development sites. It is very unlikely that REITs, which have traditionally accounted for a major share of investment sales, will step up their acquisitions in 2009. This is because the financiers are likely to tighten credit and raise the financing cost to reflect the increasing risk. The higher financing cost would in turn reduce the attractiveness of some property acquisitions. Although the recession is expected to cause asset deflation, this could attract opportunistic funds that aim to acquire distressed properties at discounted prices. Therefore, we expect such bargain hunting to provide a floor that prevents a price depression. While some hopes are still available for the private investment market in the form of smaller-scale and lower-priced investments, the public investment market is expected to remain quiet. Sites from the GLS Programme are unlikely to be triggered especially in 1H 2009.

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Auction Property Market

continued to decrease in 2H 2008. Only 375 properties were put up for auction in 2H 2008, reflecting a 21% decrease compared to 477 properties in 1H 2008. The fall in auction sales activity was due to a sudden worsening of the global economic conditions in 3Q 2008, including Singapore, which has entered into technical recession. This affected property-buying sentiments.

A total of 852 properties were put up for auction in 2008, reflecting a 35% decrease compared to 2007. The success rate, determined by the number of properties sold versus the number of properties sent for auctions, also fell in 2008. It dropped from 16% in 2007 to 8% in 2008. Fewer Properties Put Up for Auction Overall, only 852 properties were put up for auctions in 2008, reflecting a 35% decline compared to 1,302 units in 2007. Of note, the number of properties put up for auction

However, distress sales, which were often associated with past economic recessions that led to home foreclosures, has yet to develop and this explains why auction sales activity is still low. This is still considered the beginning of a major economic crisis, and the number of owners who are hit by the economic crisis is not significant. As such, the number of properties put up for auctions through mortgagee’s sale continued to decline. It fell from 144 properties in 1H 2008 to 100 properties in 2H 2008.

Chart 1

Number of Properties Put Up Under Owners and Mortgagee’s Sale Since 3Q 2007 No. of Properties put up for Auctions

450 400 350 300 250 200 150 100 50 0

3Q07

4Q07

1Q08

2Q08

3Q08

No. of Properties put up for

No. of Properties put up for

Auction through Mortgagee’s Sale

Auction through Owner’s Sale

4Q08

Source: Knight Frank Auctions, Knight Frank Research

23

oct-dec 2008/4th quarter

real estate highlights But Residential Properties Remained the Majority of Properties Sent for Auction

Chart 2

Number of Properties Put Up for Auction by Property Types No. of Properties put up for Auctions

450 400 350 300 250 200 150 100 50 0

3Q07 Residential

4Q07 Office

1Q08 Industrial

2Q08

3Q08

Shops & Shophouses

4Q08 HDB Shops

Source: Knight Frank Auctions, Knight Frank Research

Chart 3

Share of Properties Put Up for Auction by Property Types Share of Properties put up for Auctions

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

3Q07 Residential

4Q07 Office

1Q08 Industrial

2Q08

3Q08

Shops & Shophouses

4Q08 HDB Shops

Source: Knight Frank Auctions, Knight Frank Research

Office Properties Put Up for Auctions Increased The number of properties put up for auction in 2008 fell almost across all property types, except for office properties. 79 office properties were put up for auction in 2008, representing a marginal 7% increase compared to that in 2007. As such, the share of office properties put up for auctions rose from 6% in 2007 to 9% in 2008. However, this increase was mainly due to a surge in office properties put up for auction in 1H

24

2008. A total of 53 office properties were sent for auction in 1H 2008, reflecting a 56% increase compared to that in 2H 2007. This was just before office properties start to display strains of falling rents and prices in 2H 2008. Strata-titled office properties, such as those in the Golden Mile Complex, Peninsula Plaza and International Plaza were particularly active in the auction market in 1H 2008, where some owners also used auctions as price discovery mechanism. Along with a general decline in business conditions affecting the interest for office properties, the number of office properties sent for auction in 2H 2008 fell to 26.

Although the number of residential properties sent for auction fell in 2008, residential properties continued to make up the largest group of properties put up for auction. This means that the share of residential properties sent for auction in 2008 was not far from that in 2007’s. There were a total of 428 residential properties put up for auction in 2008, 27% fewer than that in 2007. Notwithstanding, it accounted for a 54% share in 2H 2008, up from 47% in 1H 2008. Residential properties accounted for about half of the properties put up for auction in 2007 – the share was only 43% in 1H 2007 and 48% in 2H 2007, at a time when economic performance was stellar, and there were little difficulty for homeowners to receive buying interest for their properties. As market conditions are now weaker, it is increasingly difficult to attract buyers. Owners are thus more opened to using auctions to gauge possible selling prices, as well as a mean to sell properties quickly. These explain why the share of homes put up for auctions increased, although there was a general decline in the number of residential properties sent for auctions. On a quarterly basis, this percentage surged from 47% in 3Q 2008 to 62% in 4Q 2008. Although the number of shops/shophouses and industrial properties sent for auctions fell from 2007 to 2008, the share maintained at 21% and 11% of the total number of properties offered at auctions respectively. The share remained stable as there was little speculative interest in these properties. Moreover, these properties are more yield accretive and owners of these properties usually need the premises for business operations and will not sell unless dictated by circumstances, e.g. closure of business, downsizing or foreclosures, and hence these shares maintain.

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Success Rate The number of properties sold in auctions held in 2008 fell, from 204 properties in 2007 to 68 properties in 2008. The success rate, determined by the number of properties sold versus the number of properties sent for auctions, also fell in 2008. It dropped from 16% in 2007 to 8% in 2008. On a quarterly basis, it fell to about at most 10% in each quarter in 2008. The worst performance was in 4Q 2008, when only 5% of the properties offered at auctions were sold. It was more than 10% in each quarter in 2007, with 1Q 2007 enjoying a success rate of 18%. Chart 4

450

20.00%

400

18.00%

350

16.00% 14.00%

300

12.00%

250

10.00%

200

8.00%

150

6.00%

100

4.00%

50

2.00%

0

3Q07

4Q07

1Q08

2Q08

No. of Properties put up

No. of Properties

for Auction

Sold in Auctions

3Q08

4Q08

0.00%

Success Rate (%)

Source: Knight Frank Auctions, Knight Frank Research

Chart 5

Value of Properties Sold in Auctions. ($mil)

Total Value of Properties Sold

No. of Properties sold through Auctions ($mil)

No. of Properties put up for Auctions

Success Rate – No. of Properties Sold vs No. of Properties Put Up for Auctions

Drastic fall in Total Value of Properties Sold During Auctions In line with a lowered success rate, the total value of properties sold dropped by 83% in 2008. It fell from S$422.3 million in 2007 to a mere S$69.9 million in 2008. This was mainly because of the weak economic conditions, which has by now developed to a certainty. Buyers are generally very cautious in committing to property purchases, including at auctions. Further supporting this, the total value of properties sold during auctions has been falling over the quarters, since 2Q 2008. A mismatch in the higher reserve prices of sellers, and buyers’ expected prices, also accounted for the fall in auction sales activity. There are many potential buyers who are striving to maximize opportunities for cheap buys in today’s poor market conditions, although sellers are already more realistic in setting lower reserved prices than before. Out of this S$69.8 million, more than a third, or 36%, were sold through mortgagee’s sale. In 2007, the value of properties sold through mortgagee’s sale accounted for a slightly lower percentage of total value of properties sold in auctions. This percentage was 32% in 2007. The rise in the share of mortgagee properties sold during auctions in 2008 could also be that some mortgagee properties were more able to meet the buyers’ price expectations, especially some buyers who are bottom fishing.

180 150 120 90

82.2 54.3

60

29.2

30 0

25.8

9.5 3Q07

4Q07

1Q08

4.6 2Q08

3Q08

4Q08

Source: Knight Frank Auctions, Knight Frank Research

25

oct-dec 2008/4th quarter

real estate highlights Drop in Value of Properties Sold during Auctions exacerbated by fall in Property Prices A general fall in property prices also magnify the drop in value of properties sold during auctions, besides subdued buying sentiments. For example, an eighth-floor unit in Merawoods was sold in auctions during November for $720,000, at $535 psf, but lower floor units were transacted at about $630-$650 psf in the open market in 1H 2008. Similarly, a 14th storey apartment at King’s Mansion was sold at $842 psf during an auction in August, whereas a similar unit was sold in April’s auction for $991 psf, reflecting a 17% price decline. Besides residential properties, prices of other property types have also softened. For example, a coffeeshop was sold in August for about $3.6 mil, considerably lower than an average $5 mil that it can fetch in better times. Prices of some industrial properties sold in auctions have declined too. For example, a freehold warehouse in Aljunied Industrial Complex was sold at $262 psf in August while similar units were transacted at about $280-$290 psf in the open market a year ago. Chart 6

Total Value of Properties Sold by Property Types No. of Properties put up for Auctions

450

422.3

400 350 300

279.6

250 200 150 100 50 0

70.8 26.1 Residential

30.9

30.4

2.3

Office

6.1

Industrial

2007 Source: Knight Frank Auctions, Knight Frank Research

26

69.1 27.1

Shops & Shophouses

10.7 7.5 HDB Shops

2008

Total

Sharp Declines in Most Sectors The residential sector continued to be the best performer in properties sold during auctions in 2008. However, the value of residential properties sold during auctions has fallen drastically, from $279.9 mil in 2007 to $26.8 mil in 2008. This was less than 10% of the value of residential properties sold during 2007. This was caused by a lacklustre private residential market, where buyers were generally reluctant to buy for fear that prices may fall further, and also taking into consideration economic uncertainties which affect financing commitments. Although the number of office properties sold during auctions remained similar to 2007’s, this value was less than 10% of that in 2007. The strong auction sales of office properties in 2007 was partly due to strong investor interest for office properties in 2007, and a general escalation in interest for investment-grade office properties which raised overall selling prices. In the absence of investor interest for office properties in 2008, the price increase of office properties saw some inertia and investors are generally cautious about the investment potential of office properties. The total value of shophouses and shops sold in auctions fell lesser in 2008, compared to other property types. This was supported by a limited supply for strata shops and shophouses, particularly shophouses with decent yields. This encourages investors to look out for good buys during auctions. For example, three adjoining units of two-storey shophouses in Upper Weld Road were sold for S$4.65 mil in July. These shophouses were freehold, occupying about 4,783 sq ft of land area and have gross floor areas of about 8,000 sf. A three-storey refurbished conserved shophouse in Smith Street was also sold in July for S$3.38 mil.

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Outlook The auction property market has seen declining sales activity in 2008, where buyers are generally very cautious in property purchases although prices seemed to have somewhat softened. Going into 2009, the auction property market is expected to see the same level of sales activity, or enjoy some improvements in auction sales from a continued worsening of the economy. In other words, the auction market can benefit, if signs of distress become more evident in the property market. Currently, the property market is seeing little sales activity as economic conditions are weak and major re-pricing of properties has not set in. Buyers are generally reluctant to purchase, in addition to job uncertainties and other issues affecting affordability. However, going into 2009, even if a major re-pricing has yet to set in, a continued worsening in job uncertainty and financial conditions may affect some property owners, especially those who have stretched their financial limits during the recent property market boom. There may be some owners who have bought multiple units on deferred payment scheme before 4Q 2007, and the homes will be physically completed in 2009. Owners will have to start securing loans to finance homes when TOP is obtained. There may be some owners who will encounter difficulty if the credit evaluation criteria tightens, making it harder to secure loans at the purchase prices in 2006-2007. Selected owners who have been hit by the economic woes will choose to relinquish the purchase, by putting them on the auction market, which is a faster and more convenient way to dispose properties. In addition, some property investors who do not wish to take possession of the completed property would have to sell the property quickly as the completion date

draws nearer and property auctions would provide venues for such disposal. These will provide opportunities for the auction market, adding to the pool of properties put up by owners for auctions. Some owners who default may also have their properties put up in auctions as mortgagee’s sales. The number of non-residential properties put up for sale may slightly increase. This may be caused by prolonged worsening in business conditions, which could force owners to consolidate business functions or cease operations. There may be some owners who have bought yield accretive commercial properties for both business and property investments in the previous years. While the yields may continue to be decent, some owners may have to sell their properties due to relocations or a closure in business. Putting properties in auctions will allow owners to gauge the prices of their properties, and will be useful for some who wish to make plans to relocate to save business costs or have more liquidity in their businesses. Some owners who wind their business may have their properties put in auctions as mortgagee’s sale, as they may also have difficulty in repaying property loans. The past three years have seen auctions as a useful price discovery mechanism, where auction attendees often engage in post auction negotiations after finding out more about the properties during auctions. As such, success rate has lowered, along with a major mismatch in sellers’ reserved price and owners’ expected purchasing prices. However, success rate may improve if a continued worsening in economic conditions actually forces some sellers to further lower reserved prices and satisfy that of some buyers who are bottom-fishing. Properties with investment potential and offered at attractive prices in auctions may appeal to some buyers, especially those who have been on the wait for opportunistic buys.

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Research

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Research enquiries Nicholas Mak Director, Consultancy & Research 65 6228 6821 [email protected] Singapore contacts Tan Tiong Cheng Managing Director 65 6228 6888 [email protected] Danny Yeo Deputy Managing Director 65 6226 6808 [email protected] Lydia Sng Executive Director, Valuation 65 6228 6868 [email protected] Peter Ow Executive Director, Residential 65 6228 6828 [email protected]

Nicholas Wong Executive Director, Investment Sales 65 6228 6800 [email protected] Mary Sai Executive Director, Auctions 65 6228 6886 [email protected] Agnes Tay Director, Office 65 6228 6887 [email protected] Lim Kien Kim Director, Industrial 65 6228 6894 [email protected] Sherene Sng Director, Retail 65 6228 6878 [email protected]

Knight Frank Consultancy & Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs. Knight Frank Research Reports are also available at www.knightfrank.com. © Knight Frank 2008 This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is allowed with proper reference to Knight Frank Research.