Singapore property market segments rebound in 2Q 2010

Estimated 19.3% economic growth made buyers upbeat on property but caution on European debt crisis remains.

Investment Sales
Review of 2Q 2010
The investment sales market strengthened further in the quarter ended June, turning in sales of $7.11 billion, 24.3% above the $5.72 billion chalked up in 1Q 2010. With this, the total investment sales value for 1H 2010 at $12.83 billion has already surpassed the $10.54 billion accumulated for the whole of 2009, as mentioned in a Colliers International Knowledge Report in July.

The investment sales market was driven predominantly by developers’ aggressive land acquisition activity. In all, developers picked up some $3.25 billion worth of development sites from both the public and private sectors in 2Q 2010, representing 45.7% of the quarter’s total investment sales value.

In the public sector, the sale of state lands raked in $2.78 billion, accounting for 85.5% of all land sales in 2Q 2010. At $2.78 billion, this was the highest quarterly level of state land sales achieved since 1Q 2008.

Outlook
In the coming months, driven by the need to replenish land inventory, developers are expected to continue acquiring land, particularly for residential sites located in outlying suburban areas. However, they can be expected to be more selective with the ample supply and wide selection of sites available from the 2H 2010 GLS programme, and this should keep tender bids in check.

In the private sector, although there remains a gap between sellers’ and developers’ price expectations, more collective sales deals are likely to be closed in the rest of the year, albeit these will likely involve smaller sites under $200 million situated in suburban and mid-tier locations.

Institutional investors are expected to remain on the sidelines in the coming months until there is greater clarity and certainty surrounding the Eurozone crisis in Europe and until fitting investment properties become available.

Total investment sales value in 2H 2010 is forecast to match at least the level achieved in the first six months of the year. Hence, for the whole of 2010, investment sales value could reach $25 billion to $28 billion.

Office
Review of 2Q 2010
The Singapore office property market surprised with a moderately strong rebound in 2Q 2010, despite concerns over large new supply.

The average monthly gross rents of Grade A office space posted gains of between 5% and 7%, with the Shenton Way/Tanjong Pagar micro-market leading the climb. Grade A office space in the Raffles Place/New Downtown micro-market strengthened by 6.3% to end the June-quarter at $7.28 per sq ft.

The uptick in rents came about as occupancy rates tightened across all micro-markets, in spite of the addition of more than 1.5 million sq ft of Grade A office space since 2H 2009.

Within the Central Business District (CBD), the Grade A Raffles Place/New Downtown micro-market also saw its average occupancy rate breaching the technical full occupancy rate of 95% in 2Q 2010. 96.1% of its office space was occupied as of end-June 2010, 1.3 percentage points higher than three months ago.

On average, the occupancy rates of Grade A office space climbed 3.0 percentage points in 2Q 2010.

Outlook
The positive economic outlook for 2010 is expected to further boost demand for office space.

While there are concerns over the possible hollowing out of the older office buildings in the CBD when companies move to the newly completed office buildings, it is worth noting that some of these spaces will be maintained by the expanding companies, or have secured new tenants.

For example, Standard Chartered Bank may retain more space in 6 Battery Road than originally planned when it moves to MBFC Tower 1 in November 2010, where it has committed to some 500,000 sq ft of space. This is in view of its plans to hire an additional 2,000 people by end-2012 in order to keep pace with the growth of the bank’s businesses in Singapore.

Petrochina and Bloomberg are said to be taking over some of the space to be vacated by Baker & McKenzie.Wong & Leow and Macquarie Group at Millennia Tower and Capital Square when they move to MBFC Towers 1 and 2, respectively.

The improving business environment, which sees financial institutions looking to hire, expansions by existing companies and new set-ups, is expected to backfill the vacant space from tenants relocating to newer buildings.

Hence, there is potential for office rents to post further growth in the region of 10% in the second half of 2010, barring the derailment of the recovery of the global and domestic economies as a result of the financial woes in the Eurozone.

Industrial
Review of 2Q 2010
The recovery of the industrial property market continued into 2Q 2010, with values outperforming rents.

Industrial strata sales volume continued to climb in 2Q 2010, reaching a new high of 340 deals. This brings the industrial strata sales volume for 1H 2010 to an estimated 669, exceeding the 610 deals seen for 2H 2009 by 9.7%.

The strong interest in industrial strata properties saw capital values being pressured up strongly, by 6.4% and 8.6% QoQ, for prime freehold warehouse space on the ground and upper floors; and a milder 3.6% and 5.5% QoQ for their factory counterparts, respectively, in the quarter ended June 2010.

The appreciation in values was supported by rental growth, although the pace of growth for the latter was slower in comparison, at between 0% and 3.2%.

Warehouse rents led the gains in 2Q 2010 after lagging behind factory rents in the current recovery path. They rose by 3.2% for ground floor space and 2.6% for upper floor space, after staying relatively flat since hitting a bottom some six to nine months ago.

Factory rents held steady at last quarter’s level of $1.91 per sq ft per month on the ground floor and $1.62 per sq ft per month on the upper floors, after recovering by up to 3.2% from the floor levels seen six to nine months ago.

Hi-specs rents remained soft, although the relatively more robust leasing activity seen in 2Q 2010 provided support and helped rents to stay unchanged for the second consecutive quarter, at $3.00 per sq ft per month.

Outlook
The industrial property market is expected to benefit from the sterling performance of the manufacturing sector in 1H 2010 and the expected healthy growth in 2H 2010.

Beyond the traditional manufacturing activities, the opening of the two Integrated Resorts at Sentosa and Marina Bay can also be expected to give a boost to the industrial property market in 2010 through spin-off businesses.

On the sales front, investors are likely to remain piqued in the industrial strata sales market, as more new industrial projects are progressively rolled out in the coming quarters. More immediate projects could include upcoming developments on GLS sites at Yishun Avenue 6, Woodlands Avenue 12 and Tampines Industrial Avenue 4.

However, there are concerns that the European sovereign debt crisis could weigh on domestic exports to the European Union (EU), Singapore’s largest trading partner.

Such concerns are likely to dampen growth in rents and capital values of conventional industrial space to not more than 10%, while keeping growth in the rents for high-specs space to within 5% for the next six months in 2010.