PROPERTY INSIGHTS. Market Overview. Strongest performance in the office market. Citigold Private Client. Singapore Quarter 4, 2014

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1 Citigold Private Client PROPERTY INSIGHTS Singapore Quarter 4, 2014 Strongest performance in the office market Market Overview Based on advanced estimates from the Ministry of Trade and Industry (MTI), GDP growth was 2.8% in 2014, broadly in line with the ministry s forecast of 3.0% for the year. For 2015, the MTI has set a growth projection of between 2% and 4%. However, uncertainty in the global economy may cause GDP growth to fall short. Real estate investment activity fell by approximately 57% quarter-on-quarter (q-o-q) to $2.38bn in Q4, bringing the total investment volume for 2014 to $17.7bn. The limited number of Government Land Sales (GLS) sites sold and the slowdown of investments in the office sector from Q contributed to the decline in investment volume in Q4. In view of the current limited available space, average gross rents in the Central Business District (CBD) rose between 2.4% and 3.9% q-o-q in Q4, with office space in Marina Bay registering the highest increase in rents (Figure 1). For the whole of 2014, average gross rents in CBD rose between 3.9% and 20.5%. Landlords were more flexible on rental contracts, which led to a marginal decline of islandwide average gross retail rents in At the same time, capital Figure 1 Office rental indices Q = Q4 05 Q4 06 Q4 07 Q4 08 Q4 09 Q4 10 Q4 11 Q4 15 Q4 16 Raffles Place Shenton Way / Robinson Rd/Cecil St value growth of strata-titled retail space was positive throughout the year as investors continued to seek out strata-titled retail units for long term capital appreciation. Following a full year of weak buying sentiment and staggered launches by developers, transaction activity in the residential market reached a new 10-year low at only 12,800 units for the whole year. At the same time, average prices of private non-landed homes fell up to 10%. The large number of new private home completions in the year resulted in a downward pressure on rents, especially for the older developments in the suburban areas.

2 Trends & Updates Economic Overview Economic growth in 2014 falls in line with estimates Figure 2 Based on advanced estimates from MTI, GDP grew by 1.6% q-o-q in Q4, a slowdown from the 3.6% q-o-q growth registered in Q (Figure 2). Similarly, GDP growth rates 20% 15% GDP growth for Q4 was only 1.5% year-on-year (y-o-y), 10% down from the 2.8% y-o-y expansion recorded in the previous quarter. In annualised terms, the economy grew by 2.8%, broadly in line with the ministry s forecast of 3.0% for Overall manufacturing expands in 2014 after patchy performance throughout the year 5% 0% -5% Source : MTI Q1 12 Q2 13 Q3 13 GDP growth (y-o-y) Q1 13 Q2 14 Q3 14 GDP growth (q-o-q) Manufacturing performance in 2014 was uneven throughout the year, as performance in the transport engineering, electronics and general manufacturing clusters remained patchy. Despite a 5.8% q-o-q contraction recorded in Q4, the manufacturing sector was estimated to have grown by 2.0% for the full year. Meanwhile, the Purchasing Manager s Index (PMI) stayed above an expansionary reading of 50 for most months in the year, recording contractions only in August and December (Figure 3). On the other hand, non-oil domestic exports (NODX) in Singapore rose by 2.3% y-o-y, as both the electronic and non-electronic products expanded in December. The top three contributors to the growth were Malaysia, South Korea and European Union. Figure 3 Singapore PMI and NODX Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 AUg-14 Sep-14 Oct-14 Nov-14 Dec-14 PMI (LHS) NODX Growth (y-o-y) (RHS) Source : SIPMM, IE Singapore, DTZ Research Figure 4 Inflation, interest rate and unemployment rate 40% 20% 0% -20% -40% Core inflation to stay firm in 2014 and 2015 Inflation fell marginally in Q for the first time since This is mainly on account of base effects associated with fluctuations in the car Certificate of Entitlement (COE) premiums. Price increases for other major categories, except food, also eased. However, core inflation is expected to stay firm and average 2% - 2.5% for the whole of 2014 and 2% - 3% in 2015 according to the Monetary Authority of Singapore (MAS). With the economy at close to full employment, wage pressures are expected to increase the prices of various services items, especially for those which demand is firm. 5% 4% 3% 2% 1% 0% -1% Q3 12 Q1 13 Q2 13 Q3 13 CPI changey-o-y) Overall unemployment rate Q1 14 Q month SIBOR Source : MTI, MAS, MOM, DTZ Research *CPI figures for are based on October and November. Unemployment figures for are not available yet at the time of publication. Q3 14

3 However external price developments are expected to stay generally benign for 2015, owing to ample supply buffers in the commodity markets. Meanwhile, following the end of the Quantitative Easing measures by the US Fed in October 2014, the 3-month Singapore Interbank Offered Rate (SIBOR) increased in December to 0.45% (Figure 4). While the rate still remains low, homeowners and buyers are likely to be among the first to feel the effects of a rising interest rate in Business costs may also increase but they are unlikely to be transferred to consumers. Growth forecast of 2% to 4% in 2015 Looking ahead, the MTI has set a growth projection of between 2% and 4% in However, the downside risks of falling oil prices and the economic slowdown in China may cause GDP growth to fall short of targets. Residential Transaction activity reached a 10-year low in 2014 Following a full year of weak buying sentiment and staggered launches by developers, transaction activity in the residential market reached a new 10-year low at only 12,800 units for the year (Figure 5). This comprised about 7,400 units sold in the primary market and another 5,400 units in the secondary market, registering a y-o-y decline of about 50% and 30% respectively. In Q4, there were only around 1,400 units transacted in the primary market, the lowest quarterly figure for the year and since Q As buying sentiment remained sluggish, developers also scaled back on new launches which kept the market quiet. In Q4, there were only three major new launches. Non-landed resale prices dip by up to 10% Similarly, activity in the secondary market stayed weak in Q4. As a result, prices of resale condominiums eased further. Based on a basket of completed properties tracked by DTZ Research, the luxury segment experienced the largest decline in prices, falling by another 2.5% q-o-q in Q4, bringing the total decline for the year to close to 10%. On the other hand, prices of freehold condominiums located in the prime districts 9, 10 and 11, as well as suburban leasehold condominiums saw a softer fall of 2.0% q-o-q in Q4. On a y-o-y basis, both prime freehold and suburban leasehold condominiums recorded a fall of close to 8% (Figure 6). Figure 5 Primary and secondary home sales (excluding executive condominiums), units 4,000 3,500 3,000 2,500 2,000 1,500 1, Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Primary Sales Secondary sales Units launched Source : URA,15 January 2015, DTZ Research Prices in the primary market hold up better While price declines were apparent in the secondary market, the median prices of units sold directly by developers (primary sales) appeared to hold up better over the course of For example, at some projects launched earlier in the year, median prices of units sold in Q had only fallen by only up to 2.0% since they were first launched. At the same time, median prices of units sold at some suburban projects launched in H even increased marginally by the end of the year. These transacted prices however may not reflect the net price of these new sale transactions. Some developers are reluctant to lower prices during phased launches and instead offer rebates and other incentives to lure potential buyers. Although some developers have adjusted prices at certain projects to

4 move units, they have generally not lowered prices to attract buyers, given that most still have healthy balance sheets. Rents fall due to competition from new completions Separately, while seasonal factors lowered the volume of rental transactions in Q4, overall rents continued to moderate, largely due to the competition from new homes that completed earlier in the year. In 2014, average rents fell by about 7% and 5% in suburban and prime areas respectively. About 17,000 to 18,000 new private non-landed residential units were estimated to have completed in 2014 alone. This was about 55% higher than the past five-year ( ) annual average of 11,300 units for non-landed homes. Therefore, as leasing demand gravitated towards these newer developments, especially those with good facilities and close to transport links, vacancies in older developments increased. Transaction activity to remain muted going forward Even though the government continues to signal that that there is still some distance to go in achieving Figure 6 Resale non-landed residential price indices Q = Q4 11 Q1 12 Q2 12 Q3 12 Q1 13 Q2 13 Q3 13 Q1 14 Q2 14 Q3 14 Luxury Prime freehold Suburban leasehold Source : URA, DTZ Research a meaningful correction, in view of the expected increase in interest rates in H2 2015, there could be some pressure for the government to relax or tweak some of the cooling measures to ensure that the property market remains stable and sustainable. However, until clearer signs of stabilization in the property market are apparent, we expect transaction activity to remain relatively muted as buyers wait on the sidelines for prices to bottom-out. Investment Real estate investments dip close to 40% in 2014 Real estate investment activity fell by approximately 57% q-o-q to $2.38bn in Q4, bringing total investment volume for the year to $17.7bn (Figure 7). The scaling back of GLS sites a 52% q-o-q fall and the slowdown in investment activity in the office sector from the previous quarter contributed to the decline in investment volume in Q The value of investments for office space in Q4 fell by 92% q-o-q to $153m. Although investors were attracted to the expected rental appreciation in 2015, investment activity was constrained by limited stock and yield gap in pricing expectations between sellers and buyers. 1 Investment sales comprise transactions that are $5m and above and exclude transactions in single residential units and lots that cannot be redeveloped/subdivided into more than one plot. Figure 7 Investment sales, SGD bn Q1 Q2 Q3 Q4 Despite the overall decline in investments in Q4, private investment sales for residential, retail, and industrial properties increased from the previous quarter. The residential sector recorded the largest increase, of about 102% q-o-q in investment sales.

5 Major transactions in Q4 included Blackstone s acquisition of 18 units of Paterson Suites for $83m from Real Estate Capital Asia Partners, an unlisted close-ended fund as well as the reported sale of 48 units of Treasure on Balmoral by Hiap Hoe Ltd to its controlling shareholder Hiap Hoe Holdings for $185m. For the whole of 2014, real estate investment volume fell by 38% to $17.7bn. Investments in mixed used properties registered the largest drop at 88.5%, followed by hotel (69% fall) and hotel sectors (64% fall). Investment activity in 2014 was largely driven by office investments ($5.8bn), some 16.6% increase from previous year. Chinese developers continue to support real estate investment activities Although activity in 2014 was dominated by domestic investors, foreign investment increased from 14% in Q to 40% in Q4. It was mainly developers from mainland China, who were active particularly in the GLS Programme that contributed to the increase. The private residential site near Upper Thomson Road was awarded to Nanshan Group Singapore for $173.6 million, while Qingjian (Realty) Residential Pte Ltd was awarded the EC site at Sembawang for $229.4m, about $21m above the next bid. REITs and property companies dominate investment activity in 2014 Property companies and REITs continued to be the biggest buyers in 2014 (Figure 8). However, they invested much less than the 11.3bn they put in Property companies purchased $6.3b in 2014, as compared to their $15.7 bn outlay in Similarly, REITs invested $5b in 2014, some $2.2bn less than what they invested in Figure 8 Investment sales in Q3 2014, SGD bn by investor types Property companies REITs Funds Corporates Public sector/goverment Net Buyer Net Seller Sell Purchase The largest purchase registered in 2014 was by OUE commercial REIT, which bought OUE Bayfront from OUE Ltd for $1bn. On the other hand, Keppel REIT registered the largest divestment by selling its stake in Prudential Towers for $512m. Special purpose vehicle deals Given the soft residential market in 2014, investors and developers explored ways to manage their portfolio. For example, City Development Limited (CDL) partnered with Blackstone s Tactical Opportunities Fund and CIMB Bank Berhard, Labuan Offshore Branch to create a unique investment platform that invests in the cashflows of CDL s properties in Sentosa Cove. 2 Office market expected to attract interest in 2015 The office sector is expected to continue garner interest among investors and potential owner occupiers, both in response to the expected rental appreciation in This SPV deal was not recorded as an investment sale in our analysis. Retail Fall in occupancy due to slow space take-up in 2014 Although islandwide occupancy of retail space stayed above 90%, it hit a four-year low of 92.6% in Q Occupancy rates were compressed not only because of several large completions over the year which added to vacant stock, but also due to a substantial slowdown in the take-up of retail space. As more suburban retail developments have been completed in Q4 2014, occupancy rates are expected to have declined further by year-end.

6 Meanwhile, the slowdown in take-up of retail space is reflective of the cautious attitude of retailers who have had to grapple with manpower issues since the revised quota on the hiring foreign workers. In addition, both big and small retailers have to deal with the competition from the wide-spread adoption of e-retailing which has resulted in the lower footfall in malls and softer tenant sales. Islandwide fall in average retail rents in 2014 As a result, landlords were more flexible on rents and lowered them where necessary to make overall costs palatable for retailers. Average gross rents in Orchard/Scotts Road, other city areas and suburban areas continued to fall further q-o-q in Q4 by 0.3%, 0.7% and 0.4% respectively. Over the whole of 2014, average gross retail rents across all areas fell by between 0.7% and 1.9%, with the smallest decline seen in Orchard/Scotts Road. Average rents in Orchard Road expected to increase While average rents have fallen marginally in Orchard/Scotts Road, prime retail space with good frontage still remain in high demand especially by new-to-market retailers from around the region or Europe. Orchard Road is still Singapore s main shopping belt and a popular destination for tourists, which will help to establish a greater presence for these brands. In view of this, rents in Orchard/Scotts Road are expected to hold up better compared to the other areas over the next few years. In addition, no new major developments in Orchard/Scotts Road are expected to be completed in the next five years. Rather, of the 4.3 million sq ft of retail space expected to be completed between 2015 and 2019, about 70% will be in the suburban areas while the rest will come on-stream in the other city areas (Figure 9). Therefore, the lack of new retail space in Orchard/Scotts Road will also help sustain rental growth for prime retail space in this area (Figure 10). Low sale transaction volume in 2014 On the other hand, sale transactions in the Figure 9 Retail development pipeline including projects on awarded GLS sites, sq ft (million) Completed in 2014 Other city areas Source : URA, DTZ Research Figure 10 Retail rental indices (Q1 2011=100) Q4 06 Q4 07 Q4 08 Q4 09 Q4 10 Q4 11 Orchard/Scotts Rd Suburban areas strata-titled retail market fell 57% in 2014 as the TDSR framework implemented in June 2013 weeded out a significant portion of speculative activity in the market. With demand affected, there were also fewer new launches for strata-titled retail units in 2014 which kept primary sales volume low compared to previous years. The two major launches in 2014 included City Gate and Havelock II. Despite the thin transaction volume, capital value growth was positive throughout the year as some buyers continued to seek out strata-titled retail units for capital appreciation. Average capital values increased by about 1.3% in 2014 in both Orchard/Scotts Road and the suburban areas, while in the other city areas, capital values of strata-titled Q4 15 Q4 16

7 retail space were flat y-o-y. While the limited supply of strata-titled retail units available for sale are likely to help support the potential for capital appreciation in the long term, investors should be mindful that rental demand for smaller strata-titled retail units could be weaker in the current tough operating environment. Office Demand generated from expiring leases in Q4 Although islandwide occupancy stayed above 90%, it declined by 1.6 percentage-points q-o-q in Q4, largely due to the completion of several new office buildings. In the CBD, only Marina Bay registered a growth in occupancy rate of 3.2 percentage-points q-o-q in Q4. A substantial amount of demand in Q4 emanated from tenants that had to relocate due to termination of their lease contracts in Q4. For example, the six-month termination clause issued to tenants of an existing building in Raffles Place forced occupiers to look for immediate space in the CBD. At the same time however, there were also firms that cut down space requirements, resulting in an overall slower take-up rate for the last quarter of the year. Net absorption in Q4 was about 280,000 sq ft, 37% lower than the take-up recorded in Q Nevertheless, for the whole 2014, net absorption was healthy at 1.35 million sq ft, only slightly lower than the 1.45 million sq ft observed in Rents in the CBD rose by up to 19% in 2014 Due to the lack of quality office space, average gross rents in the CBD rose between 2.4% and 3.9% q-o-q in Q4, with office space in Marina Bay registering the highest increase in rent to reach $13.25 per sq ft per month. For the whole of 2014, average gross rents in CBD rose between 3.9% and 20.5%. This is much higher than the increase recorded 2013, which ranged from 2.4% to 6.2% (Figure 11). Figure 11 Office development pipeline including projects on awarded GLS sites, sq ft (million) Completed in Q1-Q3 Termination CBD CBD fringe Decentralised areas Source : URA, DTZ Research Office demand driven by serviced offices, TMT and insurance firms While increasing rents have encouraged more traditional office users such as banks to move their backend operations to some high-tech buildings and business parks, demand still appears to be strong from firms outside the finance sectors. These include firms in the technology, media and telecommunications (TMT) sector as well as serviced office operators. Firms in the TMT sector are willing to pay higher rents to locate in prime office districts to attract talent and to strengthen their brand positioning. As these TMT firms expand, they are more inclined to seek out prime office buildings situated in Marina Bay or newly completed buildings. Another growing source of demand comes from the serviced office providers. They offer swing space and co-working spaces that increasingly sought after due to their flexibility.

8 Rents expected to rise in 2015 but at a slower rate Figure 12 Between 2015 and 2018, about 7.9 million sq ft of office space is expected to be completed. Supply in 2015 however, will be limited with only smaller office completions in the CBD, while the rest is concentrated in the CBD fringe and decentralised areas (Figure 12). Office rents in the CBD are thus expected to continue to grow in 2015, but at a slower rate as compared to The limited new supply in 2015 will be mitigated by some 1.0 million sq ft of space that will be released from leases expiring next year and another 214,000 sq ft of shadow space. Office Rental Indices (Q1 2011=100) Q4 05 Q4 06 Q4 07 Q4 08 Raffles Place Q4 09 Q4 10 Q4 11 Q4 15 Q4 16 Shenton Way/Robinson Rd/Cecil St

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