January 2024 feels very different from January 2023. Interest rates have peaked, inflation is falling, and the S&P 500 is at an all-time high.

While the fall in interest rates may be slower than some have expected, the glass is half-full rather than half-empty, and some investors are awakening from their hibernation.

The volume of investment deals is likely to close higher in 2024 than in 2023, as buyers and sellers return to the market. Activity is expected across all asset classes, but some will be more popular than others while financing costs remain elevated.

Commercial investment still in process of discovery

Even though there were some notable investment deals in 2023, many sellers were only dipping their toes in the water and staying in pricing discovery mode rather than being fully committed to selling.

Buyers, likewise, were often trying their luck and submitting low offers, not expecting the seller to accept.

In 2024, buyers and sellers are likely to be emboldened with sellers pulling the trigger and really trying to sell, while buyers will be willing to make more realistic offers.

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Having spoken to many institutional and non-institutional investors in January 2024, it is evident that some markets and some asset classes are more sought after than others.

Japan, South Korea, Australia and Singapore are the top four markets.

In Singapore, the most popular asset classes are hospitality, co-living, logistics, retail and office – in that order. There are also some other popular niche asset classes such as data centres and self-storage, but these assets are rarely for sale in Singapore.

In 2023, there were notable big ticket private investment deals across all the assets classes in Singapore.

Singapore also attracts many non-institutional investors who like the country’s safe-haven status, political stability and resilient economy. These investors mostly have smaller budgets and will often look to buy strata offices and shop houses in addition to the usual asset classes.

Most of these investors are motivated by long-term capital appreciation and do not have defined exit strategies in mind when they buy. Often, they do not borrow or borrow very little.

Some commentators have been baffled why these investors can accept the low property yields of 1 to 2 per cent. The answer could be that the investor has a different benchmarking process. If they buy gold or a famous painting, the yield is zero. So 1 to 2 per cent in this context is relatively more attractive. For some, buying a shophouse is like buying a painting – they fall in love with it when they see it.

Investment activity from non-institutional investors will remain strong in 2024, though there has been a slowdown since the money laundering arrests last year.

Even if a few China investors have left the market, the pool of investors remaining is large, with wealthy investors from Indonesia, Malaysia, and Thailand in particular, being long-term investors here.

There has also been a trickle of wealthy investors from Europe and Taiwan investing, and or looking to invest, in Singapore.

A mismatch in the residential collective sale market

One segment of the real estate investment market which is almost unique to Singapore is the collective sale market, where individual strata title owners team up to sell all their units all at once to a developer, en bloc.

Over the last 30 years, the collective sale market has been dominated by residential deals with hundreds of sales worth billions of dollars. However, more recently the residential collective sale market has come to a grinding halt, with only two or three successful residential collective sales last year.

The residential en bloc sale market will continue to struggle for the foreseeable future because there is a significant mismatch between owners’ expected selling prices and the prices that developers are willing to pay.

Sellers are faced with the high cost of buying a replacement property and high transaction costs resulting from the increased Additional Buyer’s Stamp Duty rates.

Developers’ prices, on the other hand, are lower because they are faced with higher construction costs, higher financing costs and reduced saleable floor areas in the new development resulting from the harmonisation of floor area definitions by the government authorities.

The lower prices which developers are willing to pay was reflected in the recent Orchard Boulevard Government Land Sales (GLS) tender.

The highest bid was from UOL at S$1,616 per square foot per plot ratio (psf ppf). This is 38 per cent lower than the reported guide price of S$2,620 psf ppr for prime condo Orchard Bel Air, which was relaunched for collective sale in early 2023.

The gap clearly demonstrates the significant mismatch between owners and developers, with the mismatch greatest in the prime residential areas. Developers will accordingly focus on the GLS sites to replenish their residential land banks.

All is not lost for the collective sale market. Commercial collective sales are active with notable sales being Tanglin Shopping Centre, Ming Arcade and Shenton House.

In the near future, the collective sales of Delfi at Orchard and Concorde Hotel & Shopping Centre will likely be launched for sale by Savills soon, and both are expected to be successful.

Land prices which developers are willing to pay are at record levels along Orchard Road, and owners’ expected selling prices are not excessive. A pricing mismatch for many commercial collective sales does not exist, unlike for residential collective sales.

As liquidity in the market returns, prices for some assets are likely to have dropped by around 10 per cent or so, which may seem painful. But real estate price falls in Europe and North America are in the range of 20 to 30 per cent, and in some extreme cases, more.

Now that we are midway through the first quarter, there are plenty of reasons to be optimistic. The volume of investment deals in Singapore will increase this year, but pricing will be critical. Sellers should not get over-excited, and must remember that interest rates are still high and unlikely to return to the all-time low levels seen two years ago.

The writer is managing director, investment sales and capital markets, Savills Singapore