Melbourne beats Singapore as top real estate investment market

Oversupply in the logistics market and CBD office shortages dragged Singapore's real estate market.

Singapore lost to Melbourne as the top real estate investment market in Asia Pacific (APAC) due to its constrained office supply pipeline, good yield over the cost of debt and sovereign bonds, a deep and liquid core market and good prospects for rental growth, according to the Emerging Trends in Real Estate Asia Pacific 2019 report by PwC and the Urban Land Institute (ULI).

During 2018, rental growth boomed in Melbourne, with yields running around 4.5% for prime office and retail and 5.5% for industrial space. Prices were also slightly more reasonable compared to Sydney, hence the shift in the centre of attention.

The lion city on the other hand continued to rebound from cyclical lows from a couple of years ago with office rents rising strongly due to the lack of supply and a revival in tenant demand which saw co-working and flexible space operators amongst the biggest lessors.

“Singapore has climbed from third to second place in this year’s rankings,” ULI executive director Pauline Oh said. “The improvement in Singapore’s office market has seen the city-state comprehensively rerated by respondents, after falling to 21st place in our 2017 report.”

Also read: Real estate investments to hit $48b in 2018

A number of major office deals were sealed in the past 12 months, PwC observed, with domestic investors amongst the highest buyers. But with the Central Business District (CBD) not seeing any supply until 2020, decentralised office markets will see new office openings going into 2019.

And despite the government’s cooling measures, Singapore’s residential market continued to be resilient with solid economic growth and high visitor numbers supporting rents and yields from prime retail spaces in 2018, according to PwC. Singapore placed 32nd on Demographia’s least affordable housing markets in the world which saw Hong Kong and Sydney taking the top two spots.

“It’s pro-business environment and the growth in crowd data also has placed the republic as one of the more attractive markets for data centres; an alternative asset class with higher yields,” Yeow Chee Keong, real estate & hospitality leader at PwC Singapore, said.

Singapore is one of the ‘big four’ markets for data centres alongside Tokyo, Hong Kong and Sydney which the report cited are areas ‘where the cloud actually exists’ with prices stabilising and the high price of land encouraging the redevelopment of low-end buildings and repurposing of brownfield sites.

Meanwhile, the report highlighted how Singapore is the largest source of APAC outbound investment in H1 2018 with $12.48b (US$9.06b) of capital deployed.

“Starved of yield and opportunities at home, Singapore real estate investment trusts (REITs) and developers have been buying overseas, especially in Australia, Southeast Asia and Europe,” the report’s authors noted. “The favoured destination for Singaporean capital in H1 2018 was Europe, according to commercial real estate investments firm CBRE, with $4.68b (US$3.4b) of investment.”

Also read: Singapore's real estate investment in Australia ballooned 141% to US$3.5b

The report drew upon the $617.19m (US$448m) listing of one new Singaporean REIT offering an 11-office portfolio in the US that underlined how higher yields available in overseas markets are becoming more and more attractive to Singaporean investors.

Singapore’s REIT market has also begin to witness consolidation amongst smaller REITs on the back of the need to gain size and liquidity, the report noted. Smaller Singapore REITs have been trading at substantial discounts to net asset value.

“Broadly speaking, a REIT needs market capitalisation of at least $1b in order to get on institutional investors’ radars and generate liquidity in the stock,” the report’s authors explained.

On the other hand, the logistics market was plagued by oversupply, resulting in the suppression of rents in 2018. Things may start to look up for them in 2019 the report’s authors noted, with rents predicted to improve slightly as signs are pointing to some excess spaces being taken up.

The Emerging Trends report provides an outlook on APAC real estate investment and development trends and real estate and capital markets based on the opinions of 350 real estate professionals including investors, developers and consultants.