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Pent-up demand to boost property investment sales for 2021

Pickup in Q3 investment sales activity signals a recovery in investors' sentiment, confidence in real estate market prospects.

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Retail investment sales in the first nine months of 2020 were boosted by Frasers Centrepoint Trust's S$1.8 billion acquisition of a 63.11 per cent stake in AsiaRetail Fund Limited - which holds five retail malls and one office development and five retail malls including Hougang Mall (pictured) - in the largest investment sales deal since January 2020.

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Residential property sales were driven by landed homes, amounting to a total of S$2.4 billion, of which about a third stemmed from the sales of Good Class Bungalows (GCBs).

SINGAPORE property sales dipped in 2020, but still outperformed that of the global financial crisis (GFC). Investors injected some S$12.2 billion into Singapore's property investment sales market in the first nine months of 2020.

This is 55.2 per cent below the S$27.3 billion accumulated in the first nine months of 2019.

The economic uncertainties due to the Covid-19 pandemic and the travel restrictions affecting the practical ability to execute transactions have hampered deal-making.

On a brighter note, the S$12.2 billion worth of funds injected into Singapore's property investment sales market in the first nine months of 2020 is more than the S$9.2 billion accumulated in full-year 2009.

This, despite the economic recession brought about by the Covid-19 pandemic - deeper than the downswing caused by the global financial crisis - is a testament to the underlying strengths of investors' confidence and demand.

RESIDENTIAL SECTOR DOMINATES

The residential sector has been the most active asset class in 2020 thus far, accumulating S$5.4 billion worth of deals between January and September 2020.

Sales were driven by landed homes, amounting to a total of S$2.4 billion, of which about a third stemmed from the sales of Good Class Bungalows (GCBs).

This had already surpassed the S$2.1 billion worth of landed homes transacted in the same period a year ago, and could go on to outperform the S$2.7 billion accumulated in the whole of 2019 if the robust buying momentum endures into Q4.

Being cooped up at home during the eight-week "circuit-breaker" period and the prospect of increased frequency of working from home post-Covid have likely drawn many to the landed home segment in search of larger residences with their own compounds.

RETAIL SECTOR SHOWS SURPRISING RESILIENCE

Property investment sales in the first nine months of 2020 fell across all key property sectors on a year-on-year basis, with the fall in retail sales being the mildest at just -11.6 per cent.

This was in spite of the severely battered in-store retailing and dining market amid the Covid-19 pandemic.

Retail investment sales in the first nine months of 2020, which totalled almost S$3 billion, was boosted by Frasers Centrepoint Trust's acquisition of the remaining 63.11 per cent stake in AsiaRetail Fund Limited, which holds five retail malls and one office development, from its sponsor Frasers Property Limited.

The deal translates to about S$1.8 billion for a 63.11 per cent stake in five retail malls - namely, Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1.

This is also the largest investment sales deal since January 2020.

The second-largest retail investment deal during this period also involved a suburban retail mall. This was the S$550-million sale of a 50 per cent stake in Northpoint City (South Wing) to its majority shareholder TCC.

While these may be related-party transactions, they still underscore market players' continued confidence in the medium-term prospects of well-managed and strategically located suburban retail malls, even in the face of continued headwinds brought on by online shopping.

In other property sectors, prominent deals in the first nine months of 2020 include Alibaba's purchase of a 50 per cent stake in the AXA Tower commercial development along Shenton Way for S$840 million, and Tuan Sing Holding's proposed divestment of Robinson Point office tower along Robinson Road for S$500 million that set a record office en bloc unit price of S$3,736 per square foot (psf) of net lettable area.

OUTLOOK

While investments in Singapore's real estate slowed during the pandemic, the overarching trend is still towards rising allocations to real estate.

The current ultra-low interest rates and bond yields, as well as the volatility in equity markets, have reinforced the attractiveness of real estate as an asset class.

With ample liquidity and the pressure to deploy, the economic rebound foreseen in 2021 should drive a more active property investment sales market in 2021.

In fact, the pickup in Singapore's investment sales activity in Q3 2020 already signals a recovery in investors' sentiment, as well as their confidence in the city-state's management of the Covid-19 pandemic and the ensuing growth prospects of the real estate market.

OFFICES STILL HIGH ON INVESTORS' RADAR

We expect the current uncertainty over office demand post-Covid to steer investors towards gateway cities with lower upcoming supply for a wider margin of safety. Singapore's office property market is well-placed to benefit from this trend.

A dearth of land supply in the central business district (CBD) for new office developments, coupled with the ongoing demolition of aging office assets for redevelopment - motivated in part by the CBD Incentive Scheme that grants owners bonus plot ratio for redeveloping their office assets into mixed-use developments - is resulting in the city-state's investment-grade CBD office inventory to grow at a slow rate of 600,000 square feet (sq ft) per annum on average between 2020 and 2024.

This is just half of the last 10 years' annual average net absorption of 1.2 million sq ft, and should buffer the sector well against the impact of any potential increase in the adoption of work-from-home practices by occupiers.

Singapore's attractive propositions as a gateway hub for the region would also enable it to continue drawing more corporations to set up bases here. This will provide support for demand for office space and keep vacancy tight.

Investment-grade CBD office rents could recover in the region of 25 per cent to 30 per cent by 2024 from their bottom in 2021.

RESIDENTIAL COLLECTIVE SALES POISED FOR NASCENT RECOVERY

On the residential property market front, the projected closing of tenders for H2 2020 government land sales (GLS) in H1 2021, coupled with an expected fresh slate of sites for tender under the 2021 GLS programmes, would boost sales.

Demand for homes should also continue to gather pace, underpinned by the expected economic recovery and the gradual reopening of borders that could facilitate high-end home purchases by foreigners.

Healthy demand for homes in 2021 would reduce unsold inventory, which has already dropped significantly to 26,578 units as of Q3 2020, from a peak of 37,799 units in Q1 2019.

This could revive developers' appetite for land banking, starting with smallish sites, and drive a nascent recovery for the residential collective sales market in 2021.

Investors are likely to continue to be on the lookout for retail and industrial assets. They will likely employ a high degree of selectiveness especially with the latter, given the generally short land tenure and strict government regulations governing their uses.

  • The writer is head of research and consultancy, JLL Singapore

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