Singapore's commercial property market – no signs of a turnaround

By Istvan Loh

The property market is closely linked to economic conditions as the demand for commercial space fluctuates with changes in the level of business activity. Unfortunately, due to the combination of a number of factors, the slowdown in Singapore looks set to continue.

In its Macroeconomic Review issued at the end of April, the Monetary Authority of Singapore has painted a dismal picture. It says that the estimates released by the Ministry of Trade and Industry indicate that the Singapore economy clocked 0 percent growth on a quarter-on-quarter seasonally adjusted annualised basis in Q1 2016, following the 6.2 percent expansion in Q4 2015.

Global economic conditions show no signs of improvement. The US registered a GDP growth of a paltry 0.5 percent on an annualised basis in the first quarter. Closer to home, there are confusing signals coming from the Chinese economy, but it is apparent that a turnaround anytime soon is unlikely.

Japan and the European market also do not hold out much hope as their appreciating currencies and weak external demand continue to be a drag on growth.

A glut of office space
According to the Urban Redevelopment Authority (URA), the vacancy rate for office space in Singapore was 9.2 percent in the first quarter of 2016. Although this is a minor improvement over the rate of 9.5 percent in the last quarter of 2015, the overall trend in the office space category is negative.

Source: URA

Vacancy rates may be slow to improve as there are no signs of a hike in demand. Additionally, a further gross floor area of over a million square metres of office space is in the pipeline.

The following chart gives an idea about the timing in which this area will be available:
Source: URA

By the end of 2016, a further 482,000 square metres of office space will enter the already saturated market.

Retail space – a lack of demand
Retail space has fared no better. According to URA data, the retail space price index fell from 129.6 in the fourth quarter of 2015 to 127.1 in Q1 2016, a decline of 1.9 percent. Similarly, the rental index also registered a drop of 1.9 percent, sliding down from 113.5 to 111.3 in the same period.

The vacancy rate in the retail space category is hovering slightly above 7 percent with an additional gross floor area of 783,000 square metres in the pipeline.

What drives Singapore's growth?
The country's economic expansion stems from three separate streams of activity. These are a) finance and insurance, information and communications, and business services; b) trade-related businesses, which include manufacturing, transportation, storage, and wholesale trade; c) the domestic sector, which includes construction, retail, utilities, and other services.

In the last few years finance, insurance, and business services have shown growth while manufacturing has been slowing down. The domestic sector has been registering slow but steady growth.

But Q1 2016 has seen a decline in activities related to the finance sector. Meanwhile, the manufacturing sector has shown a surprising upturn in the current year, primarily because of a 20.8 percent uptick in pharmaceutical production.

But a major component of the trade-related businesses, including the crucial electronics components industry, continues to remain in the doldrums.

Revival of the commercial property market
Some analysts hold the view that a turnaround in real estate can take place only if the government tweaks its policies and provides concessions to the real estate sector. While this may be true to some extent, the fact is that unless there is an improvement in economic conditions, demand will not pick up.

In the second half of 2016, two large office properties, Guoco Tower and Marina One, are expected to become available in the CBD. Between them, they will add 260,000 square metres of new space. This will lead to a rise in vacancy rates and provide a further downward pressure on rentals.

A recent survey conducted by the Royal Institution of Chartered Surveyors (RICS) has found that tenant demand for commercial space in Singapore declined at the fastest rate since the 2008 global financial crisis. Consequently, investment activity in this area has fallen as buyers look for returns in other markets.

The RICS Q1 Global Cities Commercial Property Monitor says that the coming year will see a further drop in capital values and rents as a result of poor economic conditions.

Source: RICS

The RICS survey expects capital values to continue to fall an estimated 2.7 percent in the next 12 months.

RICS Asean Director Dexter See said, "In the immediate future, Singapore property professionals remain pessimistic about the market rebounding. Ongoing cooling measures, compounded with rising interest rates, suggest that improvements, if any, are likely to be both slow and small."

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