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Singapore a choice investment in uncertain times
THE first quarter of 2016 saw wild swings in the local and global bourses and market volatility is expected to be protracted for much of the rest of the year on the back of a China slowdown, geopolitical uncertainties, weakened oil prices and broad-based job losses that are starting to ripple beyond the finance and oil and gas sectors. The local real estate investment market, on the other hand, had a muted quarter, be it on a quarter-on-quarter or year-on-year basis. Sale volumes are down but valuations broadly remain flat. While investor sentiments are fraught with negativity, we do not expect any distressed sales any time soon.
THE PREMISE FOR OUR BELIEF:
- Yield-hungry investment landscape
With increased expectation that 2016 will be shrouded in continued uncertainties, a protracted slow growth environment may emerge as the new norm for local and global economies. Faced with slower growth and consumer prices showing benign to deflationary pressures, the central banks of most countries have already amended fiscal and monetary policies allowing for different forms of quantitative easing, thereby eradicating fears of further interest rate rises that had stalked the market for much of H2 2015. These policies will keep yields compressed and prices elevated. Similar to how it has been in the financial markets where investors seek fixed income investments, the local real estate investment market will be no different attracting yield-hungry investors who seek stable returns.
- Capital on the sidelines waiting to buy
With capital originating from sovereign wealth funds, insurance, private equity and high-net worth groups on the prowl for opportunities, rental yields will likely remain compressed particularly for core investments that can demonstrate a stable income stream over the mid term. Deal flow in Singapore will remain thin. At any point of the real estate investment cycle, the Singapore market, being small, sees only limited core office and retail investment opportunities trade as there is a lack of true sellers.
In short, the scarcity factor and the premium to pay for investing in a safe market such as Singapore amid uncertainty will keep any decline in capital values of trophy core investments with reasonable unexpired leases in check. However, we expect properties with higher vacancies to trade at wider yields to defray occupancy and leasing risks. That said, such opportunities will surface as potential investment targets for value-add investors who will find the near-term slow office and retail market conditions an opportune time to reposition the assets and ready them for exit on market recovery.
- Relative prices of Singapore real estate versus other safe haven markets
Residential to office properties, including alternatives (such as student housing, worker dormitories, nursing homes) across many safe haven markets have seen their real estate yields compress. Quantitative easing and low interest rates will keep asset prices elevated and certain markets could possibly see continued measured asset price appreciations. On balance, Singapore appears affordable on relative terms. For Singaporean investors, Singapore becomes a choice investment as it is an investment in their backyard with minimal foreign exchange risks and delivery risks as compared to investing overseas. For foreign funds, owning Singapore real estate sexes up the portfolio. It is difficult for most fund managers not to have Singapore on their radar especially for those with Pan-Asian mandates given our "safe haven" status.
All said, this is not a written piece to denounce the market risks that exist across the various real estate classes here. In the residential sector, market cooling measures are keeping sales volumes low and prices moderately depressed. In the office and industrial sector, there is waning occupational demand against a backdrop of growing oversupply. And in retail, a weakened consumer market, a direct result of job losses and tight immigration and foreign employment policies, along with the impact of e-commerce, are starting to hurt rents. Beyond the foregoing is a fundamental lack of a strong set of positive growth drivers that can set the economy on a sustained expansionary path.
Therefore, risks exist, as with in any point of any investment cycle. But we are in unprecedented times and with slow economic growth possibly being the new world order and quantitative easing and low or negative interest rates as antidotes to keep the economy humming. We may be on the edge of price rationalisation in some quarters but not on the cusp of a market collapse.
INVESTMENT SPOTLIGHTS 2016
Income-yielding assets in the tightly held office and retail sectors will be favoured as with development or repositioning opportunities that could take advantage of a market recovery further down the road. Plain vanilla property opportunities may be fewer in the offing but we could see an advent of structured real estate transactions that provide investors with a greater degree of certainty where downside risks are mitigated, or even endeavours to acquire undervalued corporate deals in the public markets. We may continue to see some capital from Singapore diversifying into matured overseas core markets of Australia and Japan, where yields are still wide in relative terms. But as yields further compress, the investment compass will naturally guide more investors home.
Therefore, barring any unexpected shocks, the Singapore real estate investment market is poised for a resurgence in buying activity. Buying opportunities will remain limited and only brave hearts with fast fingers will win the deals.
- The writers are respectively managing director for investments and residential services, and senior director of research at Savills Singapore.