Singapore rises from the bottom to become one of region’s top real estate investment markets

Asia Square Tower Two in Singapore.
Reuters

The promise of a bottom in Singapore’s office market has made it a top investment market for next  year, a report has found.

The Emerging Trends in Real Estate Asia Pacific 2018 report published by the Urban Land Institute (ULI) and PwC has found that Singapore rose from its near-bottom position last year, to third place in a forecast ranking of the top five regional markets for investment and development in 2018.

After two years of declining rents caused by a sluggish economy and a glut of supply, investors now believe Singapore’s commercial and residential markets are near their bottom.

Office rents in Singapore have stabilised earlier than expected this year, the report said, as Singapore saw the region’s biggest office deal going through in September 2017 with CapitaLand Commercial Trust’s S$2.09 billion acquisition of Asia Square Tower 2.

The transaction has “galvanised the local market and set a floor for valuations,” the report said, adding that “several core office transactions have taken place this year, with foreign funds buying actively”.

In the residential sector, signs of recovery were also seen “with rising transactions and a slight uptick in pricing for the first time in four years”.

The report also found that sales of developer sites have surged amid tightening supply as developers sought to replenish land banks this year.

“The rebound seems likely to be sustainable, given several years of pent-up consumer demand,” it said.

In addition, Chinese developers have been active in buying land, and thus pushed up land auction prices for residential sites significantly throughout the year.

Singapore’s third place ranking for 2018 is “reassuring for Singapore’s investment prospects,” Khoo Teng Chye, chairman of ULI Singapore and executive director of the Centre for Liveable Cities, said.

Acorss Asia Pacific, excess liquidity is seen as having the biggest influence on shaping investment flows into regional real estate.

“Local sovereign and institutional funds bearing stockpiles of accumulated cash are buying property, both regionally and globally, creating competition for assets that is changing investment patterns in fundamental and often unexpected ways,” the report said.

Changes it identified include the realignment of traditional risk/return classifications, changing expectations over returns, the convergence of core and opportunistic investors on the value-add space, and investor migration into alternative asset classes and new markets that in the past were of little interest, including data centers, affordable housing projects, build-to-rent (or co-living) facilities and student and senior housing.

Other areas of interest include opportunities in co-working facilities, concerns about how the Asian retail sector will weather e-commerce challenges, and the ongoing exodus of money from Asian institutions into international markets.

At the top of the list are Sydney and Melbourne, which ULI Asia Pacific chairman and Global Logistic Properties chairman Dr. Seek Ngee Huat said “combine the appeal of a stable investment environment with a combination of relatively good current yields and the prospect of strong rental growth going forward”.

The report shows that “there is an increasing divergence between investors adopting growth-driven strategies and those happy with yields that are low but still higher than sovereign bonds,” Dr Seek added.

Top five markets for investment in 2018:

  1. Sydney (also first in development) Sydney’s appeal lies in the fact that it is a major city in a mature economy combining a reasonably deep and liquid market of core assets with a better-than-average yield.
  2. Melbourne (also third in development) Melbourne’s appeal is similar to Sydney’s — a mature market, high-quality core assets, and relatively good yields by Asian standards.
  3. Singapore (also sixth in development) After two years of declining rents caused by a sluggish economy and a glut of supply, the promise of a bottom in Singapore’s office market has caused its ranking to soar from next-to-bottom last year to third in this year’s table.
  4. Shanghai (also fourth in development) Shanghai is seeing an increase in transactions driven partly by surging demand from domestic buyers who are unable to export capital due to a regulatory crackdown, and partly by foreign core funds flush with new capital they need to deploy.
  5. Ho Chi Minh City (also second in development) With an economic trajectory thought to be similar to an early-day China, Vietnam is seeing large regional developers and an increasing number of private equity funds betting it will offer up a repeat of the Mainland China experience in terms of property price inflation.