The story of three slumps

The current downturn bears little resemblance to those of 1998 and 2001

HOW does the current property market slump compare with the earlier ones in 1998 and 2001?

Sitting here at my desk, looking out over the huge Marina Bay building site that will grow into Singapore’s first integrated resort, it doesn’t look much like a market in a downturn. But, we are currently experiencing some very special market conditions that started 18 months ago with the sub-prime issue in the US. It has had a knock-on effect across the global economy that few at the time anticipated.

To make some sense of it all, I find myself thinking about how very different from 1998 and 2001 this current situation is. In 1998, the turmoil came from some parts of Asia, as a result of weak fundamentals such as inadequate regulatory oversight, and overexposure to foreign exchange risks. There were also two further events - the dotcom failure in 2000 and Sars in 2003 - that derailed the recovery and shut down tourism, dampening consumers’ confidence in Asia until 2005. As a consequence of this sequence of events that started in 1997, a number of the Asian markets underwent a substantial structural revamp, harried on and supported by the developed economies.

Today, thanks to these economic storms, the Asian economy is in much better shape than in 1998.

However, the current downturn is more serious than we’ve seen before. Credit - a key tool in the business world - is at the centre of the crisis. As the credit markets froze earlier this year, consumption in the developed markets shifted to low gear and this is affecting the global economy. With debt availability low, businesses find it difficult to continue functioning as before. Even a growing company is stymied without investment.

So, coming back to Singapore, it showed itself to be strong in 1998 and has continued to use the experiences of the last 10 years to advance its economic and financial structure even further. It is now better positioned to manage this global slowdown. And, more importantly, to come out of it faster and stronger.

For example, Singapore has been very successful in attracting foreign direct investment (FDI), with an estimated $348 billion in 2007, compared to $165 billion in 1998 in (estimated real value terms). This is a direct endorsement of the business-friendly measures that Singapore has put in place. These have ranged from the removal of capital gains tax through to the signing of tax treaties with 50 countries that allow companies based here to reduce taxes in dividends, interest and royalties.

The property market here benefited from this investment influx. The value of property investment in Singapore has increased from $15 billion in 1997 to $43 billion by 2007 (estimated real value terms) - almost a 290 per cent increase.

Part of this property investment has come from Reits. The Monetary Authority of Singapore’s issuance of the guidelines for property trusts in 1999 opened the door for Singapore to become the Asian Reit hub it is today. There are now 20 Reits listed on the Singapore Exchange built from a variety of properties across Asia.

The formation of the Reit market has made this chunky and illiquid investment class accessible to a larger pool of retail investors and improved the transparency of this market - a key determinant in attracting foreign investments that has provided more liquidity.

One of the most striking changes from 1998 is that, despite its size, Singapore has increased its resident population from 3.6 million in 2005 to 4.6 million today.

With the enlarged population, the proportion of non-Singaporeans has also increased by 5 percentage points to 25 per cent. It is with no surprise that the volume and demand for new residential launches has similarly jumped.

In 2007, there were over 13,000 units launched and sold - 25 per cent more than the 10,000 units launched in the 1996 peak. Demand, spurred by a relaxation in government policy on foreign ownership of residential properties in Singapore, increased some 64 per cent over the same period.

There is much talk about the health of the property market in Singapore at the moment, but looking at the figures, our market today is in a more robust state than in 1998. Vacancy rates are much lower, with grade A office vacancy at 1.8 per cent today, against 14.4 per cent 10 years ago. This indicates a very tight market.

In the residential sector, we see the same strong story, with capital values in the prime market still 57 per cent higher than in 1998 and affordability improving. So those who see themselves in Singapore for the long term and missed the last market rise, now have an opportunity to enter the market.

As the global economy continues to struggle, Singapore is still likely to feel the pinch. However, the pro-business mindset and innovative attitude of its government are two crucial ingredients that will support the economy - and the property market - through the downswing.

We all know that there will be a turning point in the current cycle. Perhaps when buyers and sellers of physical assets finally agree on price expectations, or liquidity returns to the market as credit conditions revert to normal. Or perhaps a change in people’s sentiment could cause the turnaround. Whichever it is, Singapore has worked hard on managing its economic fundamentals and infrastructure, to be ready to capitalise swiftly on any positive economic moves. Certainly, the Marina Bay Sands coming to life outside my window will be ready to take advantage of the upswing.

Chris Fossick
Managing Director, Head of SE Asia
Jones Lang LaSalle

Source : Business Times - 27 Dec 2008

Retail rents expected to fall in 2009

Retailers likely to be cautious in expansion, rents may undergo corrections to reflect the gloomy outlook

RENTS for prime retail space in Orchard Road could fall by as much as 13 per cent in 2009, while rentals at suburban malls are expected to ease by about 3 per cent, property analysts here said.

Cuts in consumer spending will be the key threat to rental rates. But rents will also come under pressure from the 3.2 million square feet of new retail space expected to come onstream next year - close to half of which will be along Orchard Road.

A poll of property analysts here showed that they expect prime retail rents to fall by anywhere between 5 and 13 per cent next year. But malls in the suburbs, where people go to buy their neccessities, are expected to fare better. Predictions for suburban rental growth range from ‘holding steady’ to a decline of up to 7 per cent. The consensus view is a fall of about 3 per cent.

By contrast, so far in 2008, prime Orchard Road rents fell 0.8 per cent year-on-year, while prime suburban rents rose one per cent, data from CB Richard Ellis (CBRE) shows.

Consumers are expected to cut back on spending on concerns of job and wage security, which will hit the sales of retailers, analysts said. Tourist arrivals are also expected to fall, which will depress sales further.

‘A prolonged depression in consumer spending could affect retailers’ ability to service their rents and we think it is possible that more retailers would renegotiate for lower rental rates, and retail mall managers may have to give in to avoid a high turnover in tenants,’ noted OCBC Investment Research analysts Foo Sze Ming and Meenal Kumar in a report.

Echoed Knight Frank: ‘Retailers will be more cautious in expanding their businesses and retail rents are likely to undergo corrections to reflect the gloomy outlook.’

In addition, more space is due to come onstream - some 5.7 million sq ft in the next two years. Of this, 20-30 per cent will be located along the Orchard Road belt. Another 21 per cent will come from the Marina Bay Sands resort. Some of the major retail supply due to be completed next year include Ion Orchard, The Marina Bay Sands Shoppes, Orchard Central, 313@Somerset and City Square Mall.

But in spite of all the new space, analysts here remain confident that the healthy take-up of retail space seen so far is likely to keep vacancy rates under control and prevent sharp rental declines caused by oversupply.

Most of the major upcoming malls - such as Ion Orchard, Orchard Central, Mandarin Gallery, 313@Somerset and Marina Bay Shoppes - have reportedly achieved pre-commitment rates of between 50 per cent and 70 per cent, said Colliers’ director for research and advisory Tay Huey Ying. And there should be interest for the remaining retail space, she said. The Orchard Road malls will ‘probably be the only new retail malls the market is likely to see on this prime stretch for a while’ and the Marina Bay Shoppes ’should also be sought after as the locality would be a new icon for Singapore’, Ms Tay said. ‘The challenge, therefore, is really in structuring a rental package that is win-win for both landlord and retailer in an increasingly trying time,’ she added.

Other analysts agreed, saying that the onus will be on landlords in 2009.

‘Prime properties will still be able to attract tenants, but developers must be more flexible with rental expectations,’ said Anna Lee, DTZ’s associate director for retail. ‘As consumers hold their purses tighter, landlords would have to spend more on advertising and promotion to entice more consumer traffic to their malls and translate that into spending.’ And to mitigate lower sales faced by their tenants, some landlords may offer rental rebates and lower turnover rents, she added.

Analysts also said that capital values are expected to remain steady in the retail sector. ‘Of note is that the retail sector remains defensive even during the Asian Crisis period, with rental rates and capital values remaining fairly stable during this period. Hence, we believe that a fair cap rate for the retail sector would remain in the 5-6 per cent range,’ said DBS Group Research analysts Mun Yee Lock and Derek Tan.

Source : Business Times - 27 Dec 2008