What to expect from Singapore’s property market in 2012

Surprising residential

The residential market held up much better than expectations in 2011, with an average price increase of 5.6% on our estimates. Volumes also surprised despite the onerous January 2011cooling measures. The 2011 take-up rate should be close to the all-time high of 16,292 units achieved in 2010.

We had suggested that 2011 would be a tug-of-war between concerns over more cooling measures and an environment of ample liquidity and low interest rates (positive yield spread and negative real interest rates). Given our expectations that we are unlikely to see more cooling measures next year, we expect volumes to be around 13,000 units. We forecast a 2.5% rise in prices, half the pace seen in 2011, on the back of a slower GDP growth and concerns over the global economic outlook.

Concerns over office rent outlook

Prime Grade A office rents rose 11.7% to S$11.06 psf in the first nine months of 2011; whilst prime rents rose 1.8% to S$7.96 psf. However, the outlook for rent growth is likely to be affected by concerns over the weak economic situation which will result in companies holding back expansion plans. Further there is ample supply to be absorbed, given the vacancy rate of 12.8% for the sector.

We therefore believe that instead of rising 10-15% over the next two years, office rents are likely to be flat, with some downside risks, especially if landlords lower rents to fill up vacant space and/or offer more incentives which means lower effectively rents.

Singapore property

We still prefer landlords with Grade A exposure. Whilst the rent outlook is benign, we believe the market has already priced in a significant fall in office rents, up to a 40% decline. For example, CCT is pricing in passing rents of S$5.54 psf/mth and KREIT S$7.78 psf/mth, vs. average spot rents of S$9.45 psf/mth for overall CBD and S$11.06 psf/mth for Grade A space. Yields of 6.1% for CCT and 7.7% for KREIT are attractive. Both stocks trade on 0.75x to 0.80x P/BV, and KREIT will have 93% of its Singapore portfolio in Grade A locations post the Ocean Financial Centre transaction whilst CCT has roughly 65% in Grade A buildings. Resilient retail and industrial

Retail, especially suburban retail, was the most resilient sector, with rent growth of circa 7-8% YoY (from results of CapitaMall Trust and Fraser Centrepoint Trust (FCT SP, S$1.46, NR)), reflecting the retail sales trends. Likewise, the industrial sector provided extremely stable distributions. It is not a surprise that both sectors outperformed the overall SREIT sector.

Hospitality poised for more upside

Our expectations for RevPAR growth are not high, at 6.6% next year. Given good tourist arrival growth and limited supply of new rooms next year, we believe CDL Hospitality Trusts should attract interest, especially when more than 70% of tourist arrivals are from the Asia region, and hence more immune to a slowdown expected in Europe and the USA. We also like Ascott Residence Trust where almost 45% of gross profits are on master leases and guaranteed minimum income. Further, given ART’s exposure to about seven currencies, its portfolio is not affected significantly by these currencies movements vs. the S$.