Singapore's real estate market may have brighter prospects in 2021

SINGAPORE'S economy was hit hard in 2020 as Covid-19 paralysed the world and shrank Singapore's GDP by a post-independence record of 5.8 per cent.

Although Singapore's property market buckled under the stress, the damage was generally less than expected and just a fraction of that recorded during the Global Financial Crisis (GFC) in 2008/9. This attests to Singapore's sound property market fundamentals today, as well as the effectiveness of the government's Covid-19 response packages in helping to keep many businesses afloat and propping up occupier demand for real estate space.

Demand for warehouses more than doubled, while office rents fell less than expected

Warehouses stood out as the star performer, where demand spiked on the back of stockpiling needs and the e-commerce boom. Net absorption for warehouse space in 2020 was two-and-a-half times that in 2019. Consequently, the vacancy rate for warehouse space tightened from 12.0 per cent at end-2019 to 10.4 per cent at end-2020 and kept rents relatively firm.

On the office front, the average vacancy rate for Grade A CBD offices rose 2.7 percentage points in 2020 and pressured rents downwards. The average monthly gross effective rents of Grade A CBD office space fell 9.3 per cent in 2020, from S$10.81 per sq ft, per month in Q419, to S$9.81 per sq ft, per month in Q420. Notwithstanding, this is just a fraction of the 49.1 per cent plunge in rents in the first four quarters of correction during the GFC. It is also better than the 12 per cent decline we projected at the start of the Covid-19 outbreak in April 2020.

The retail sector bore the brunt of the pandemic given that border closures and safe-distancing measures kept shoppers away. The weakened demand for retail space led to the average monthly gross effective rents of prime retail space falling 9 per cent to 16 per cent in 2020, with the Suburban sub-market faring better than their Prime and Secondary sub-market counterparts.

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Resilient demand for homes rekindling residential collective sales market

On the sales front, the lack of sizeable trading assets, economic uncertainties and lower practical ability to execute transactions due to the pandemic led to investment sales falling 46 per cent, from S$32.1 billion in 2019, to S$17.3 billion 2020. Still, this is nearly double the paltry S$9.2 billion recorded during the GFC in 2009, underscoring current investor confidence in Singapore's property market compared to that of a decade ago. Except for some weakening in retail space capital values, healthy interest for Singapore's real estate kept asset prices largely stable in 2020.

In particular, private residential home prices defied recessionary pressure and rose 2.2 per cent in 2020. Demand for new homes was resilient, with the 9,982 new homes developers sold in 2020 comparable to the 9,912 units they moved in 2019. This is driving down unsold inventory and reawakening the residential collective land sales market, which is set to gather momentum in 2021.

Pent-up demand to boost 2021 property investment sales

With the economy expected to rebound, coupled with optimism surrounding the availability of Covid-19 vaccination, the availability of ample liquidity and the pressure to deploy, Singapore's property investment sales market is poised for a pickup in 2021.

We expect Singapore's office assets to stay high on investors' radar as the low pipeline supply supports a wider margin of safety in light of the uncertainty surrounding office demand post-Covid-19. Specifically, the city-state's investment-grade CBD office inventory is estimated to grow at a slow rate of 0.5 million sq ft, per annum on average between 2021 and 2025. This is just half of the 1.0 million sq ft average annual net absorption recorded between 2010 and 2020, and should buffer the sector well against the impact of any potential increase in occupier adoption of work-from-home strategies.

Allianz Real Estate's recent acquisition of a 50 per cent stake in OUE Bayfront - a prime commercial development in Singapore's CBD, is a testament to investors' confidence in the medium- to long-term growth prospects of Singapore's office property market.

Investors are likely to continue to be on the lookout for retail and industrial assets, although selectively and especially for the latter, given the generally short land tenure and strict government regulations governing their use.

Potential for office and retail rent stabilisation by end-2021

The short-term outlook for the leasing market is more cautious. While demand for warehouse space is expected to receive a boost from vaccine storage requirements, office and retail occupiers are generally expected to stay prudent with real estate needs given uncertain business prospects amid an obscure safe-distancing landscape. Phase 3 of the reopening has heightened risks of community viral outbreaks and could slow or even reverse the relaxation of safe-distancing rules.

That said, some companies may take the opportunity to move up to quality in light of rent corrections. The growing technology and asset management sectors could also drive demand for office space in 2021. With more occupiers planning new premises in 2021, there would be greater clarity on the impact of Covid-19 on workplaces and their designs.

The retail sector should see support from domestic spending. Statistics show that online retail and food & beverage sales as percentages of their respective totals have fallen sharply from their Circuit Breaker peaks of 24.9 per cent and 44.6 per cent in May 2020, to 14.3 per cent and 19.3 per cent correspondingly in November 2020. This is a strong indication of Singaporeans' preference for in-store shopping and dining. With travel restrictions expected to stay largely in place in 2021, some of the money reserved for overseas travel could continue to be channelled towards domestic retail spending.

Hence, demand for office and retail space in 2021 could be healthier than 2020, and support significantly milder rent declines than in 2020. We project that CBD Grade A office rent could ease around 6 per cent, while prime retail space rent could retreat by 3 per cent to 8 per cent in 2021. These forecasts take into account the potential for rent to stabilise by the end of 2021 on the back of an improving Covid-19 situation, underpinned by the availability of vaccines.

Warehouse rents should continue to hold firm in 2021, but private residential rents could stay under pressure given large completions amid soft demand on the back of the uncertain job market and tight immigration policies. The Prime submarket could face more difficulties securing tenants due to higher rents, but demand could be propped up by tenants capitalising on soft rents to move to prime locations.

The unfolding pandemic situation and overall uncertainty of the global economy continue to weigh on the industry as a whole. However, some optimism remains for the real estate industry this year.

• The writer is head of research & consultancy at JLL Singapore