PROPERTY INSIGHTS. Market Overview. TDSR framework impacts transaction volume. Citigold Private Client. Singapore Quarter 3, 2013

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1 Citigold Private Client PROPERTY INSIGHTS Singapore Quarter 3, 2013 TDSR framework impacts transaction volume Market Overview Based on advance estimates by the Ministry of Trade and Industry (MTI), Singapore s economy expanded by 5.1% year-on-year (y- o- y) in Q3 after growing by 4.2% in Q On a quarter- on- quarter (q- o- q) basis however, the economy contracted by 1.0%. Despite a significantly lower transaction volume, resale prices of non- landed private homes were unchanged q- o- q in Q3 (Figure 1). In the landed market, only non-prime freehold and leasehold terrace homes saw price increases in Q3, due to their more affordable overall quantum. Real estate investment activity reached a quarterly record of $13.3bn in Q3. Private sector investments accounted for the bulk of activity which comprised mainly mixed-use development and hotel deals. Investments originating from the public sector, on the other hand, surged by more than 80% q-o-q and amounted to about $4.0bn in the quarter. Figure 1 Primary and secondary home sales (excluding executive condominiums), units 5,000 4,000 3,000 2,000 1,000 0 Aug-11 Source: URA REALIS, 8 October, DTZ Research after three consecutive quarters of decline. Affected by the implementation of the new TDSR framework, resale transactions also fell in Q3, causing a further slowdown in price growth of prime strata- titled retail space across all regions. Nov-11 Feb-12 May-12 Aug -12 Nov - 12 Feb -13 May-13 Aug-13 Primary sales Secondary sales Units launched Leasing activity in the office market picked up in Q3 following months of gradual improvement. This resulted in islandwide net absorption doubling q- o- q to 350,000 sq ft. As occupancy rates grew, rental increments were seen in most areas, particularly in the newer and betterquality buildings. Average retail rental values in all regions remained unchanged in Q3, with rents in the other city areas flat

2 Trends & Updates Economic Overview Economy contracted in Q3, but outlook remains Figure 2 positive GDP growth rates Based on advance estimates by MTI, GDP growth in Q3 was 5.1% y-o-y, slightly higher than the 4.2% 20% y- o- y expansion for last quarter. However on a q- o- q basis, economic growth posted a pullback as overall 10% GDP figures contracted by 1.0% q-o-q compared to the surge of 16.9% in Q2 (Figure 2). The q- o- q slowdown in Q3 was partially caused by the financial services sector, which shrank as equity and foreign exchange market activities fell due to 0% -10% Source : MTI Q3 11 Q1 12 Q2 12 GDP growth (y-o-y) Q3 12 Q1 13 Q2 13 GDP growth (q-o-q) Q3 13 concerns over the QE tapering by the US Fed as well as the threat of military action against Syria. Figure 3 Singapore PMI and NODX While the Purchasing Manager s Index (PMI) stayed above the expansionary reading of 50 in Q3, weakness in the electronics and pharmaceuticals industries also resulted in a 3.4% q-o-q drop in manufacturing (Figure 3). This is a reversal from the 33.5% q-o-q growth % 20% 0% -20% in Q2. Overall GDP growth however still remains at previous projections of % for Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-12 Apr-12 May-13 Jun-13 Jul-13 Aug-13 Sep-13-40% Inflationary pressures picked up After easing in previous quarters, inflationary pressures picked up in Q3 as core inflation (excluding accommodation and private transport costs) increased to 1.8% y-o-y in August, from 1.6% in the first seven months of the year (Figure 4). While imported inflation should be kept under control going forward, this could be offset to some extent due to higher domestic cost pressures from the continued tightness of the labour market and cost pass- through to prices of consumer services. Accordingly, to guard against inflation, the Monetary Authority of Singapore (MAS) will maintain its policy of a modest and gradual appreciation of the S$ nominal effective exchange rate (S$NEER) policyband. The present width of the band is sufficient to accommodate temporary fluctuations in S$NEER and will be kept unchanged. PMI (LHS) Source: SIPMM, IE Singapore, DTZ Research *NODX figures for September 13 are not available Figure 4 NODX growth (y-o-y) (RHS) Inflation, interest rate and unemployment rate 6% 5% 4% 3% 2% 1% 0% Q3 11 Q1 12 Q2 12 CPI change (y-o-y) Overall unemployment rate Source: MTI, MAS, MOM, DTZ Research Q3 12 Q month SIBOR Q2 13 *CPI figures for Q3 13 are based on July and August. Unemployment figures for Q3 13 are not available. Q3 13

3 US fiscal impasse triggers uncertainty in world economy Due to ideological differences between Republican and Democratic houses, and failing to come to a consensus on budgetary implications of President Obama s healthcare reforms, the US government went into a much dreaded partial shutdown on 1 October Although private investment confidence has been shaken, there has been limited impact on Singapore s financial markets and trade up to date. Nevertheless, as the impasse continues, the risk of US national debt default looms and if materialises, could trigger significant consequences for Singapore s economy. Residential Transaction volume falls Primary sales of private homes fell from 4,538 units in Q2 to 1,224 units in July- August (Figure 5). Although transactions were expected to pick up in September with reportedly healthy take- up for newly launched projects, transactions in Q3 will not exceed that in Q2. In the secondary market, 1,452 units were sold in Q3, falling sharply from 2,407 units in Q and 4,358 units in Q Transaction volume was affected by the TDSR measures as the application process for a property loan is now longer and more onerous. Multipleproperty owners who still want to purchase or invest in residential properties found it more difficult to obtain a loan for their purchases. Resale prices largely unchanged in Q3 Notwithstanding the fall in transaction volume, resale prices across all non- landed private residential segments remained unchanged q- o- q in Q3 (Figure 6). Based on a basket of completed developments tracked by DTZ Research, resale prices of freehold condominiums in the prime districts of 9, 10 and 11 were flat after registering a 1.0% growth in H1 while resale prices of luxury condominiums remained flat for the fifth consecutive quarter. In the suburban areas, resale prices of leasehold condominiums were also unchanged in Q3 after registering a 2.2% growth in H1. Although the landed segment had held up better than the non- landed segment in previous quarters, resale price growth of landed homes Figure 5 Primary and secondary home sales (excluding executive condominiums), units 5,000 4,000 3,000 2,000 1,000 0 Aug-11 Nov-11 Feb-12 May-12 Aug -12 Nov - 12 Feb -13 May-13 Aug-13 Primary sales Secondary sales Units launched Source: URA REALIS, 8 October, DTZ Research Figure 6 Resale non-landed residential price indices (Q1 2011=100) Q3 10 Q4 10 Luxury Q1 11 Source: DTZ Research Q2 11 Q3 11 Q1 12 Prime freehold Q2 12 Q3 12 Q1 13 Q2 13 Q3 13 Suburban leasehold also slowed down in Q3. Resale prices of landed homes in most segments registered flat growth q- o- q with the exception of non- prime freehold and leasehold terrace homes, which saw prices increase by a marginal 1.5% and 1.0% q-o-q respectively in Q3, due to their comparatively more affordable

4 overall quantum. This increase was, however, a moderation compared to their growth of 5.6% and 5.1% respectively in H1. Looking ahead, primary sales volume will fall from last year s record level of around 22,000 units but could still come in close to 15,000-16,000 units, similar to the levels seen in , while resale transaction volume is likely to remain weak as the TDSR measures and earlier cooling measures continue to work their way through the market. As the TDSR measures limit the amount of loans buyers can take, they are now more selective in their purchases even as they have more choices. Demand will therefore gravitate towards developments that offer buyers better value such as those that are competitively priced or projects that are welllocated with easy access to amenities. Nonetheless, there could be some downside pressure on overall prices going forward, against the backdrop of a strong pipeline supply and lower launch prices of new projects. Investment Quarterly record for real estate investments in Q3 Real estate investment activity reached a quarterly high of $13.3bn in Q3 2013, surpassing the previous record of $12.4bn in Q (Figure 7). Investment sales comprise transactions that are $5m and above and exclude $734m of transactions in single residential units and lots that cannot be redeveloped/subdivided into more than one plot. Investment activity boosted by REIT listings Investment activity in Q3 was bolstered by three REIT listings (Figure 8). They were SPH REIT (with an initial asset portfolio worth $3.1bn), OUE Hospitality Trust ($1.7bn), and Soilbuild REIT ($905.3m). This led to average deal size almost quadrupling q- o-q to $166.9m in Q3. Excluding the REIT listings, real estate investment activity in Q3 amounted to a smaller $7.7bn although this was still about 31% higher than the $5.9bn registered a quarter ago. was acquired by SPH REIT for $2.5bn as well as UE BizHub EAST which was sold for $518.0m. Figure 7 Investment sales, SGD bn Source: DTZ Research Figure 8 Q1 Q2 Q3 Q4 Investment sales (Q3 2013), SGD bn - investor types REITs Net purchaser Mixed- use and hotel deals drive investment activity Private- sector deals dominated in Q3, accounting for about 70% of activity. They were largely driven by mixed- use and hotel investments worth $3.1bn and $2.8bn respectively. Some of these major mixed- use properties included The Paragon which Property Companies Corporates Source : DTZ Research Net seller Sell Purchase

5 Besides Mandarin Orchard, which was acquired as part of OUE Hospitality Trust s initial portfolio, other major hotel deals in Q3 included the sales of Grand Park Orchard, The Gallery Hotel, The Sentosa Resort and Spa and Hotel These hotels were sold at close to or above $1m per room. Residential GLS sites continue to see stiff competition After falling in the last two quarters, investment sales originating from the public sector surged by more than 80% q-o-q to $4.0bn in Q3. Despite the introduction of the Total Debt Servicing Ratio (TDSR) 1 framework on 29 June 2013, competition for residential sites under the Government Land Sales (GLS) programme remained intense. Residential sites awarded during the quarter received between six and 16 bids each, with one Executive Condominium (EC) site at Yuan Ching Road/Tao Ching Road fetching a new record bid for EC sites at $418 per sq ft per plot ratio. Other government sites that were awarded during the quarter included the reserve office site at Cecil Street/Telok Ayer Street and the mixed- use site at Yishun Avenue 2/Yishun Central 1, where the winning bids were 19% and 47% above the secondhighest bids respectively. 1 Under the TDSR framework which took effect from 29 June 2013, property loans extended by financial institutions have to meet the TDSR threshold of 60%, inclusive of all other loan obligations of the borrower. In addition, other rules related to loan-to-value (LTV) limits were refined, for instance, borrowers named on a property loan have to be the owners of the property for which the loan is taken. Retail Rents in all regions unchanged in Q3 Average rental values of prime retail space in all regions remained unchanged in Q3. The average rental value of prime retail space in the other city areas halted its decline in Q3, registering flat q- o- q growth after falling by 0.7% and 0.3% q-o-q in Q1 and Q2 respectively. Some of the asset enhancement initiatives at Marina Centre area have been completed, increasing shopper traffic in the area. Share of foreign investments increased in absolute terms Even though the share of foreign investments in Q3 was 12.7 percentage- points lower than that in Q2, in absolute terms, foreign investments increased by 9.3% q-o-q to $1.6bn in Q3. These investors originate mainly from the Asian region, and have accounted for $3.2bn of activity in 2013 to- date, which is already a shade higher than the $3.1bn they invested for the whole of While funds have remained inactive in Q3, foreign developers continued to participate actively in the GLS tenders for private residential sites, either singly or through joint- ventures with local developers while a Chinese investor was involved in the largest non- REIT and non- GLS deal in Q3 (Grand Park Orchard) investment volume to be on par with last year Going forward, due seasonal factors, investment activity is likely to slow in the last quarter of Notwithstanding, the $13.3bn invested in Q3 has brought overall investment activity for the first nine months of 2013 to $24.6bn, which is 15.4% higher than the same period last year. Investment volume for the whole of 2013 is now expected to come in on par with or slightly higher than the $29.3bn invested in The average rental value of prime retail space in Orchard/Scotts Road and in the suburban areas also held firm in Q3 (Figure 9). Suburban retail rents stood unchanged despite increased competition from newly completed malls, which have been successful in attracting international retailers eager to tap local demand. Some of these brands include, H&M, Books Kinokuniya and Victoria s Secret. American retailer Coach and Swedish brand Cos have also leased space in a soon- to- be- completed suburban mall.

6 These new suburban malls with similar tenant offerings to those in Orchard/Scotts Road could divert local shopper traffic away from older existing suburban malls as well as from Orchard/Scotts Road. Notwithstanding the increase in competition, retail rents are expected to remain largely flat for the rest of the year. Major suburban malls scheduled to open in Q4 have reported healthy pre- commitment rates while expected completions in Orchard/Scotts Road only makes up about 9.5% of the pipeline supply of 5.2 million sq ft from Q to 2017 (Figure 10). In addition, demand in Orchard/Scotts Road will still be supported by international retailers who are new to the Singapore market looking to establish their first flagship store. Further slowdown in resale price growth Resale price growth of prime strata- titled retail space in all regions continued to slow in Q3, as transactions of strata- titled retail units fell by close to 60% q-o-q from 387 in Q2 to 161 units 1 in Q3. The average resale capital value of prime retail units in Orchards/Scotts Road and the suburban areas both grew by 1.7% q-o-q in Q3, after registering growth of 2.6% and 2.5% respectively in the previous quarter. Transaction volume was affected by the implementation of the TDSR framework, which lengthened the loan application process and increased the hurdle for multiple- property investors and buyers to obtain a loan for their purchases. 1 Based on information from caveats downloaded from URA REALIS on 8 October 2013 Figure 9 Average prime first-storey retail gross rental index in Orchard/Scotts Road (Q1 2011=100) Source: DTZ Research Figure 10 Retail development pipeline including projects on awarded GLS sites, sq ft (million) Going forward, after increasing by more than 10% in the first three quarters of the year, resale price growth of strata- titled retail units is likely to slow, especially in light of the new TDSR measures. Q4 04 Q4 05 Q Completed in Q1-Q Other city areas Source: UR A, DTZ Research Q4 07 Q4 08 Q4 09 Q4 10 Orchard Suburban areas Q4 13 Q4 14 Office Improved net absorption q- o- q Following months of nascent improvement, leasing activity in the office market picked up in Q3. Islandwide net absorption increased to approximately 350,000 sq ft in Q3, double the net absorption recorded for Q2. However, on a cumulative basis, net absorption up to Q3 remains relatively low at 890,000 sq ft, compared to the net absorption of 1.6 million sq ft for the whole of last year. Demand emanated from small- to medium- sized firms Besides the expansion of space by existing occupiers within the Central Business District (CBD), take- up of office space in Q3 primarily stemmed from small- to medium- sized firms. Because of the smaller space requirements by these firms, demand figures have remained relatively modest in Nevertheless, the steady build- up of demand has

7 resulted in a tighter leasing environment where landlords are now less flexible on rental negotiations and instead have been holding or increasing their asking rents. Office rents increase in most sub- markets Rental increments were seen in most areas, particularly in the newer and better- quality buildings. Within the CBD, sustained leasing activity led to an increase in the average gross rents in Raffles Place and Shenton Way/Robinson Road/Cecil Street by 1.3% and 3.4% respectively q-o-q to $9.40 and $7.50 per sq ft per month as occupancy rates held up well (Figure 11). The average occupancy rate in Raffles Place increased 1.0 percentage- points q- o- q to 95.3% while Shenton Way/Robinson Road/Cecil Street recorded a larger increase of 2.9 percentagepoints q- o- q to 97.7% in Q3. In Marina Bay, with most buildings more than 90% occupied, average gross rents grew by 4.8% q-o-q to $11.00 per sq ft per month. Limited supply in the CBD up till 2014 Supply of premium space in prime locations will be limited as 65% or close to 1.6 million sq ft of office space that are to be completed between Q and 2014 will be in the decentralised areas (Figure 12). Currently, supply of premium space in the CBD is limited. Thus, despite relatively low pre-commitment rates, some landlords are holding on to their asking rents which range from the low-to mid-teens. If the moderate pace of leasing activity continues, there could be some pressure for these landlords to exercise some flexibility on rental terms. Furthermore, landlords of buildings with vacant space could face additional pressure when vacancy claims for property tax cease with effect from 1 January Office rents to increase gradually Figure 11 Office rental indices ( Q1 2011=100) Going forward, demand for office space is expected to remain modest as occupiers are still cautious on their space requirements. Take- up of new office space within the CBD may be moderated as cost- conscious occupiers still prefer to renew existing leases rather than relocate to avoid incurring additional capital expenditure. Notwithstanding, average rents in the CBD are anticipated to rise on the back of strong occupancy rates and an expected economic improvement, but this increase will be gradual. Q4 04 Q4 05 Source: DTZ Research Figure 12 Q4 06 Q4 07 Q4 08 Q4 09 Q4 10 Q4 13 Ra es Place Shenton Way/Robinson Rd/Cecil St Office development pipeline including projects on awarded GLS sites, sq ft (million) Completed in Q1-Q3 Decentralised Areas Source : UR A, DTZ Research CBD CBD Fringe Q4 14

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