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Cushman & Wakefield Comments on URA private residential price index Q3 2023

Xian Yang Wong • 27/10/2023

RESIDENTIAL

Home buying sentiments grow cautious

Overall sales volume has been tempered as home buyers are increasingly selective and price-sensitive due to a confluence of factors such as elevated financing costs, wide selection of new launch options in the pipeline, recent cooling measures and economic uncertainties. Some buyers are waiting on the side lines, in hopes of lower prices. Overall sales volume declined by 3.5% qoq in Q3 2023, reversing the past two consecutive quarters of increase. The fall in overall sales volume was driven by the new sales market, which declined by 8.5% qoq to 1,946 units in Q3 2023. The decline in new sales volume arise despite more project launches (9 new launches (total inventory of 3,370 units) in Q3 2023 compared to 6 projects (total inventory of 2,497 units) in Q2 2023).

The average take-up rates of major projects (defined as projects with more than 100 units) within the first month of launch has slowed to around 32% in Q3 2023 from 57% in the previous quarter as buyers are more selective due to wider choices from a larger launch pipeline. Though initial take-up rates have slowed, it remains higher compared to pre-pandemic average initial take up rates of around 24%. Some projects have continued to attract demand such as Grand Dunman (585 units or 58% sold to-date*) and Lentor Hills Residences (407 units or 68% sold to-date*). Several major launches anticipated in Q4 2023, such as J'den (368 units), Hillock Green (474 units), Hillhaven (341 units), and Sora (440 units) should support new sales volumes.

Among the various market segments, the Core Central Region (CCR) sales volume continued to be tempered following the latest round of cooling measures as buyers adopt a watch-and-wait stance. CCR overall volumes fell 20.8% qoq to 788 units in Q3 2023, the lowest quarterly volume since Q2 2020. The Rest of Central Region (RCR) sales volume also fell 26.1% qoq to 1,931 units, largely due to lower new sales volume. In comparison, the Outside Central Region (OCR) market recorded higher sales volume (+39.5% qoq to 2,482 units) in Q3 2023, driven by an increase in new sales volumes.

In the first three quarters of 2023, total private residential volumes recorded 14,710 units, or 80.4% of 2022’s volume during the same period. Overall sales volume in 2023 is expected to fall between 18,000-20,000 units, lower than previous year’s tally of 21,890 units. Going forward, an overhang of cooling measures, a weak economic outlook and heightened interest rates will continue to weigh on buyer demand. On the other hand, sellers’ holding power largely remains strong as they remain generally firm on their selling prices as replacement costs have risen considerably. As such, we may see an increasing mismatch in buyer-seller expectations, and this would weigh on overall sales volumes.
* based on realis data pulled on 27-Oct

Home prices demonstrated resilience despite headwinds

Private residential prices rebounded mildly, growing by 0.8% qoq in Q3 2023, following previous quarter’s 0.2% qoq decline. The market was divergent across property types, as non-landed residential prices rose by 2.2% qoq while landed residential prices fell by 3.6% qoq in Q3 2023.

While the fall in landed residential prices followed past 8 consecutive quarters of increase, we do not anticipate a sustained decline in landed home prices as landed homes remain in tight supply and are still highly sought after by locals. On a YTD basis, landed residential prices have risen by 3.2%.

Within the non-landed segment, price growth was driven by the OCR and RCR market which increased by 5.5% qoq and 2.1% qoq respectively. The sharp increase in OCR prices was driven by higher new launch volumes and prices, which was exacerbated by relatively lower new sales volumes in Q2 2023. However, we expect OCR prices to stabilise or witness moderate growth. On the other hand, CCR prices fell by 2.7% qoq for the second consecutive quarter. The CCR market has been more adversely affected by recent cooling measures, with sentiment taking a hit with lower foreigner demand. On a YTD basis, the CCR prices have fallen by 2.0% while OCR and RCR prices have risen 8.8% and 4.0% respectively.

In sum, we continue to see resilience in the private residential market (prices rose 3.9% YTD) and we maintain our full year forecast of 2-5% for 2023. Unemployment rates remain low, and resale HDB prices have continued to increase (+1.3% qoq in Q3 2023), supporting upgrader demand for private property.

Developers’ holding power remains strong

Amidst still low levels of unsold inventory, developers have continued to show site acquisition interest. Total unsold inventory fell 4.3% qoq to 17,161 units in Q3 2023, compared to the five-year annual average of 23,312 units. However, developers have turned increasingly cautious and selective in the face of elevated financing costs and uncertain buyer demand due to recent cooling measures. This is seen from cautious bidding activities from recent Government Land Sales (GLS) tenders. Developers are placing their bets strategically, with a preference towards smaller to medium sized sites and/or sites with low future market competition.

The widening gap in buyer-seller expectations will continue to be a challenge for the residential en bloc market. Assuming sites with similar attributes, developers tend to prefer to acquire from the GLS programme as it is more straight forward. However, 7 out of 8 sites in the H2 2023 confirmed list are mid to large sized sites (>500 units) and may be out of reach for smaller developers. Hence, developers looking for smaller projects would still look towards the enbloc market to landbank.

New launches are expected to be priced competitively amidst a higher new launch pipeline. Developers are unlikely to lower prices significantly as unsold inventory remains low and development costs remain elevated.

Rental growth continued to soften as demand eases

Private residential rents rose for the twelfth consecutive quarter by 0.8% qoq in Q3 2023, easing from previous quarter’s 2.8% qoq growth. In 2023 YTD, private residential rents grew 11.1%. Within the non-landed residential segment, the high-end CCR market rents fell 1.7% qoq for the first time since Q4 2020. Given heightened rental levels coupled with an economic slowdown, some occupiers could have been priced out of the CCR market and opted to move towards the city fringe or mass market homes, where rents are cheaper. The mid-tier RCR market recorded the strongest rental growth at 1.9% qoq, while mass market OCR rents rose by 1.3% qoq. In Q3 2023, islandwide private residential vacancy rates rose at a faster pace to 8.4% from 6.3% in Q2 2023, which reflected the continued easing of rental demand. Private home rents are forecasted to grow by 10-15% in 2023, moderating from the rental growth spurt of 29.7% in 2022.

OFFICE

Rental growth remains resilient despite economic gloom

Central Region office rents rose 4.9% qoq in Q3 2023, exceeding the 2.3% qoq growth in the preceding quarter. This rise was led by Central Area office rents which grew 5.2% qoq in Q3 2023, higher than the 2.7% qoq rental growth for Fringe Area office rents. The rise in rents could have been driven by Grade A offices, as landlords held on to their rental expectations amidst low levels of vacancy rates and rising operating costs.

In Q3 2023, median rentals of Category 1* office fell 2.3% qoq and Category 2* office rents fell 4.5% qoq. The fall in median rents could be due to the different characteristics of office space transacted during that quarter, and mean reversion effects after a 6.7% qoq jump in median rents for both categories in Q2 2023. Nonetheless, Category 1 office vacancy rates tightened for a second straight quarter to 8.0% in Q3 2023 from 9.2% in the previous quarter. Category 2 office vacancy rates tightened slightly to 10.9% in Q3 2023 from 11.5% in the previous quarter.

Driving the higher office rental growth, office vacancy rates in Central Area tightened for a sixth straight quarter to 10.2% in Q3 2023, marking a close to 2.5 year low. This came with Central Area office net demand of 269,098 sf in Q3 2023. Notably, the bulk of this net demand was driven by the Downtown Core where its net office demand reached 398,264 sf in Q3 2023, the strongest qoq growth in net demand since Q1 2020. On the other hand, net demand in the rest of central area, which includes areas such as Outram, River Valley, Rochor, Newton etc, saw negative net demand of -161,459 sf. The difference in net demand could be reflective of flight to quality, with a strong concentration of Grade A offices located within the downtown core.

Financial and professional service sectors remain the dominate driver of office demand in the CBD in 2023. We estimate that firms in the financial and professional service sectors drove 58% of new leases in the CBD as of Q3 2023 YTD, up from 26% for the whole of 2022. Amidst uncertainties in the global economy and rising geo-political tensions, Singapore remains an attractive destination as a regional wealth hub. This has encouraged expansion demand from asset management, financial services, legal sectors. While overall demand from tech has slowed, we still note pockets of demand from tech companies looking to grow their footprint in Singapore.

However, Central Region rental growth may moderate in subsequent quarters, amidst an expected higher-for-longer interest rate regime and global economic uncertainties. Occupiers are likely to remain cautious and would face CapEx constraints, leading to higher lease renewal activities rather than relocation. Furthermore, office supply will increase in 2024, leading to more competition for tenants. The completion of IOI Central Boulevard Towers and Keppel South Central will contribute about 1.9 million sf of new office supply in the Central Region next year, alongside a potential emergence of substantial secondary stock.

On the pricing front, Central Region office prices rose by 0.8% qoq in Q3 2023, following the 1% rise in the previous quarter. While prices have edged higher slightly, overall volumes remain challenged by heightened interest rates. In Q3 2023, there were only 57 office strata transactions within the Central Region, the lowest since Q3 2020 volume of 47 units sold.

* According to URA, Category 1 refers to office space in buildings located in core business areas in Downtown Core and Orchard Planning Area which are relatively modern or recently refurbished, command relatively high rentals and have large floor plate size and gross floor area. Category 2 refers to the remaining office space in Singapore which are not included in “Category 1”.

RETAIL

Rental recovery gains steam as footfall gradually returns

Retail rents in Central Region continued to climb 0.5% qoq in Q3 2023, extending the growth of 0.3% qoq in the prior quarter. The Central Region retail market is riding on the recovery in visitor arrivals and expanding return-to-office crowds. Notably, net demand in the downtown core rose by 118,403 sf in Q3 2023, the highest in 3.5 years.

Retail rents in Central Area led growth, edging up 3.2% qoq in Q3 2023, surpassing the 0.4% qoq increase for Fringe Area retail rents. Year-to-date (YTD), Central Area retail rents grew 3.5%, as compared to Fringe Area retail are still slightly down by 0.1% YTD.

Amidst ongoing tourism recovery, more new-to-market international retailers have sprung up to bolster occupancies in Orchard and in other city areas. While these are dominantly food and beverage (F&B) players, many fashion and lifestyle new entrants have also emerged recently, with some reported to be using the city-state as a springboard for regional expansion. Chinese activewear brand Neiwai has begun its Southeast Asian expansion with a debut at Raffles City in July, and Finnish clothing brand Marimekko eyes to enter Vietnam and Malaysia after its debut at ION Orchard in September.

Retail vacancy rates Outside Central Region (OCR) inched up to 4.2% in Q3 2023 from 4.0% in the preceding quarter. Suburban retail spaces, underpinned by nearby residential catchments, remain highly sought after by retailers. Many new foreign brands, especially those in the F&B sector, have chosen to launch their first outlets outside Central Region this year. So far this year, international doughnut chain Mister Donut has debuted at Junction 8, Australia-based beverage brand Chaffic has launched at Westgate, Taiwan fried ice-cream Frozen Heart chain has opened their first overseas outlet at Jewel Changi, and avocado dessert chain from the Philippines, Avocadoria has set up its first international franchise at Ang Mo Kio Hub.

Singapore’s overall retail market is on a steady path to recovery, riding on her resilient labour market and rising levels of foreign visitors. The islandwide retail vacancy rate tightened to 7.2% in Q3 2023, from 7.5% in the previous quarter.

Central Region retail rental recovery should pick up going forward, alongside the low availability of prime retail spaces, limited new supply as well as China’s ongoing outbound tourism recovery. China has regained its spot as the top source market for visitor arrivals in Q3 2023, contributing about 581,000 visitors to Singapore, albeit still 44% lower than pre-pandemic (Q3 2019) levels.

Nonetheless, retail demand remains challenged from higher labour costs, intensified competition for consumers and dampened economic sentiments. Retail landlords are expected to hold on to their rental expectations amidst rising operating costs. This would spur a change in tenants as some struggling retailers call it quits. Nonetheless, resilient consumption demand in Singapore would continue to attract new demand from retailers and backfill vacant space.

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