Property scene face hazy prospects in H2

Albeit a few bright spots, JLL expects falling rents to persist in all segments.

Whilst many economists note that the worst period for Singapore is over, the same cannot be said for the property industry as an Economic Development Board (EDB) survey revealed that most firms in the real estate industry are projecting a less favourable business environment over the same period.

In the same vein, JLL stated in separate reports that the industrial, retail, office and residential properties will face further pressures for the rest of 2020, even as Circuit Breaker measures continue to ease.

Starting off with retail, the report stated that more retail closures could emerge in the coming quarters as government and/or landlord support for retailers ease and the Temporary Deferment Bill no longer protects businesses from their deferred liabilities.

Additionally, there’s also the risks of new waves of COVID-19 outbreak that could potentially trigger repeated lockdowns. Prolonged implementations of safe-distancing measures is also likely, curbing operating capacity and keeping operating costs elevated.

With mass international travelling unlikely to occur in H2, retailer sentiment is foreseen to stay dented and the demand for retail space will likely stay depressed, keeping rents on the downtrend in H2, said JLL’s head of research & consultancy Tay Huey Ying.

“On a brighter note, retailers with a deeper balance sheet and a medium-to-long-term perspective are likely to continue to anchor in Singapore as a gateway to Asia. The eventual successful containment of the COVID-19 outbreak would see the government lifting safe-distancing measures and travel restrictions, and reinvigorating economic activities,” Tay said.

As a result, retailer and consumer confidence should return and business expansion should resume. Occupier demand will also likely recover as foot traffic and retail sales pick up alongside economic growth. Coupled with the supply tightness, vacancy rates could fall to support rent recovery by 2022.

The Urban Redevelopment Authority’s (URA) Q2 real estate statistics showed that the retail rental index for Central Region fell 3.5% QoQ to its lowest since the start of the time series in 2011. The quarterly rent fall in the quarter was also steeper than the 2.3% QoQ correction recorded for Q1. This came on the back of rising vacancies and shrinking demand across all regions.

Subdued office leasing market
As for office rents, URA showed that their headline office rental index held steady in Q2. Delving deeper, the office rental index for the Central Area fell 2.3% QoQ after a relatively stable Q1 with a 0.3% QoQ rise.

Tay noted that these results are in line with their ground observations that the average monthly gross effective rents of Grade A CBD office space eased a faster 3% QoQ in Q2, to $10.48 per sqft (psf), following a marginal correction of 0.1% QoQ to $10.80 psf in Q1. For H1, JLL’s CBD Grade A rent corrected to a moderate 3.1% from its Q4 2019 level of $10.81 psf.

“Leasing activity grounded to a near halt in Q2, hindered by the inability to conduct physical viewings in most parts of the quarter,” Tay said. “Given a downcast outlook, most occupiers also chose to hold back relocation and expansion plans to avoid incurring capital expenditure. To entice tenants to renew or commit to new leases, landlords have become more accommodating to tenants’ requests and generous on incentive offers.”

As the economic fallout could spillover in H2, JLL is expecting rent corrections to intensify, bringing full-year CBD Grade A rent correction to around 12%. Rent could potentially bottom in H2 and recover by 2022, assuming economic recovery alongside the successful management of the spread of COVID-19 globally and domestically.

But on a positive note, Tay added that the current market downtime is spurring redevelopment interest in the CBD which, if it materialises, could help to rebalance demand with supply and aid in office sector recovery.

“Displaced tenants looking for replacement work premises would help in space absorption, whilst demolitions and potential construction delays due to COVID-19 will moderate supply growth. In the medium-to-longer-term, a refreshed CBD will sharpen Singapore’s edge as a global office hub,” she commented.

Space-conscious industrial tenants
Citing JTC Q2 figures, industrial property rents and prices fell at a faster pace of 0.7% and 1.1% QoQ in Q2, respectively, which JLL noted to be the largest QoQ declines in rents and prices since 2017. This was despite the 0.2 ppt QoQ climb in its occupancy rate to 89.4% in the same quarter.

The slightly higher occupancy rate was mainly due to fewer space completions amidst disruptions to construction activities, as well as higher net absorptions from the single-user factory and warehouse segments.

In particular, JLL stated that demand for warehouse space was healthy in Q2, underpinned by renewals and short-term leasing requirements to accommodate medical supplies, food and consumer items, as safety concerns and movement controls fuelled a spike in e-commerce activities and increased stockpiling requirements. On the other hand, leasing enquiries for business park space slowed down during the quarter.

“In the coming quarters, continued macroeconomic headwinds are likely to see most businesses staying cautious on their space requirements,” Tay said.

However, she added that stockpiling needs could continue to provide support for warehouse demand amidst risks of new waves of COVID-19 outbreak and repeated lockdown measures, but Tay notes that it might not be enough as occupiers are still likely to stay rent sensitive amid the deep economic recession.

As such, JLL expects both rents and prices to continue to trend down across all industrial property types in the next six months.

More pressure ahead for home rents
Just like the segments above, residential rents are expected to continue facing downward pressure in the coming quarters, as leasing demand is likely to weaken. The ongoing economic slowdown and border control measures are drying up the pool of limited tenants in the market, despite low vacancies.

JLL stated that in Q2, net absorption of private homes turned negative for the first time in almost 13 years, indicating weaker leasing demand due to deterioration in business conditions affecting the employment and wages of expats. In mitigation, low completion levels coupled with some withdrawals have also resulted in negative net new supply, keeping vacancy rate unchanged at 5.4% in Q1.

Consequently, the residential rental index dropped by 1.2%, reversing the 1.1% rise in Q1. Rents for landed homes declined moderately by -2.3% during the quarter, whilst the non-landed rental index, which went up by 1.3% in Q1, softened by 1.1% in 2Q20.

Further, as developers did not rush in launching their new projects, only 1,852 new private homes were launched for sale in the same quarter. This figure is 11.5% QoQ and 26% YoY lower. Of those launched, 1,713 new private homes were sold, which shows a 20.3% QoQ drop. However, JLL noted that new home sales volume rebounded in June, following a slowdown in April and June.

According to URA, the number of unsold units dipped 4.3% QoQ and 25.5% YoY to 28,143 in Q2. JLL stated that this marks the fifth straight quarter of declining unsold inventory on the back of sustained primary market transactions while land sales remained low-key in replenishing the stock for sale.

“The continued easing of unsold supply is a healthy development as oversupply is being reduced. However, it is still of concern to developers who are facing challenges in moving sales in the midst of cautious demand and market uncertainties,” said Ong Teck Hui, JLL’s senior director of research & consultancy.