Key sectors seen benefiting include hotels, aerospace, healthcare, transport

URBAN Redevelopment Authority’s Master Plan 2008 - which will be exhibited soon - will see changes in land use and increases in plot ratios, but these will be selective and focused on growth areas, rather than a widespread upgrade in densities, DBS Vickers Securities said in a report dated yesterday.

The strategic initiatives from the Master Plan will filter down to improved growth fundamentals for various economic sectors. While the property sector will be a key and obvious beneficiary, also standing to benefit from the strategic outline are the hotels, aerospace, healthcare, transport and construction sectors, the report said.

More land will be provided for development of the aerospace industry and the establishment of a designated hub near Seletar Airport will continue to provide strong fundamentals for the sector’s continued growth. For the healthcare sector, DBS Vickers sees a medical hub developing around the Novena area and ‘we could see rezoning of land parcels in this area to facilitate the development of this medical hub’.

It also suggests plot ratio increases in some mature HDB estates, as part of the rejuvenation plan. With Jurong and Paya Lebar earmarked as new business hubs outside the CBD, ‘we are likely to see a concentration of Government Land Sale projects in these two areas in the medium term’.

Noting that the authorities have revealed plans for new residential enclaves such as the area around Marina South Gardens and Kallang Basin, it said, ‘we expect rezoning and plot ratio adjustments in these areas’.

‘We expect much of the key significant land use and plot ratio changes to be concentrated in certain strategic areas - Seletar (aerospace industrial use), Jurong (new regional centre), Paya Lebar (commercial hub near city fringe), Marina Bay (white sites and residential), Novena (medical and healthcare), Kallang Basin (residential) and Ophir-Rochor (mixed development).’

The report added: ‘With the phased opening of the Circle Line from 2009 onwards, we also expect to see an increase in plot ratios for undeveloped state land sites that are close to Circle Line MRT stations, and in particular those that intersect with existing MRT stations.’

‘With interchange stations planned at Paya Lebar, Serangoon, Bishan, Buona Vista, Harbourfront and Dhoby Ghaut, we believe that the highest potential for plot ratio changes could come at the Paya Lebar and Serangoon stations, given that the area around the remaining interchange stations are already relatively built up,’ DBS Vickers said.

Source : Business Times - 6 May 2008

Income growth a better driver of housing price trends: Citi

LOW or negative real interest rates are often cited as one factor supporting housing prices. But Citi believes that in today’s market, negative real interest rates will at best be a ‘cushion’ in the near term.

In a report on the Singapore market, Citi analyst and vice-president (Asia Pacific Economics & Market Analysis) Kit Wei Zheng said: ‘Negative real interest rates, in and of themselves, are unlikely to be sufficient to drive housing prices, especially if income growth and sentiment are weak.’

In his analysis of property prices and real interest rates, Mr Kit noted that while a correlation was ‘maintained’ during the Asian financial crisis, this correlation broke down during the 2001 recession.

‘Between 2001 and mid-2004, property prices continued to fall even as real interest rates fell and eventually turned negative,’ he said. He also pointed out that between mid-2004 and 2007, property prices soared despite rising real interest rates.

‘Finally, property price inflation has moderated in the past two quarters, despite increasingly negative real interest rates,’ he added. Mr Kit believes income growth probably has a ’stronger explanatory power in explaining housing price trends’.

He noted that a strong labour market not only improves housing affordability but lifts rental demand from foreigners, thereby increasing rental yields and the attractiveness of residential property as an investment.

Citing the Monetary Authority of Singapore’s Macro-economic Review, he also noted that on average, the boost to asset prices from a one percentage point fall in foreign interest rates - which would affect domestic interest rates - is less than half of the income effect from a positive one per cent foreign demand shock.

The bad news, however, is that Mr Kit believes employment growth here may have peaked. ‘Total employment growth will likely fall short of the record 238,000 jobs created last year, more likely in the range of 120,000-150,000, with attendant slowdown in payroll growth,’ he said.

Nevertheless, Citi is ‘not inclined to be overly bearish and do not anticipate a collapse’ in the property market.

Negative or low interest rates may eventually prove ’supportive of housing demand’ if they coincide with a rebound in incomes and sentiment that many expect with the launch of the integrated resorts.

Mr Kit also believes that official figures for new housing supply could be over-estimated. He said that in the context of ‘heightened construction bottlenecks and spiralling material costs, actual supply in 2009 and 2010 will more likely be in the range of 18,000-19,000 units’, less than two-thirds of the 30,296 projected.

Also on the optimistic side, he said a recent MAS survey showing a fall of the value of mortgages in negative equity suggests that households ‘remain flush with cash’.

Affordability is also in check. For example, Mr Kit said the median price of a 110 sq m condo is about 23 times the average annual wage per person, which is still below the 25 times in 2000 and more than 33 times before the 1996 bust.

Source : Business Times - 6 May 2008

THERE have been several episodes of residential property price escalations in Singapore that may have overshot income levels. But just how do we determine if private property prices have become more or less affordable?

We have developed a housing affordability index that might add an additional indicator to help answer policy questions on housing affordability. Standard measures that link property prices to annual incomes are not enough. Here we present a more meaningful index that we developed primarily to assess the affordability of private residential housing in Singapore.

Buying a residential property is a long-term decision. We need, therefore, a measure of a household’s long-term income. For this we obtained unpublished data from the Department of Statistics on median household income since 1990 by age of household head at five-year intervals from age 20 to 64. The raw data shows income peaks occurring at age groups 30-34 and 55-59. If we remove the effect of different birth cohorts from the data, we can see that income peaks around age 50.

From the above income data, we used statistical techniques to estimate the income of different birth cohorts over their working age. From this, we computed a time series of lifetime incomes as the discounted present value of future income streams - that is, calculating future incomes in terms of today’s dollars.

Chart 1 plots the lifetime income of middle-income earners by birth year. Significantly, the lifetime incomes of those born before the 1960s were stagnant. As can be seen from the chart, whether one was born in 1926 or 1956, the lifetime median income hovered around $500,000 in 2000 prices. (Most of these cohorts were in their old age during our observation period.)

The lifetime median incomes of those born after 1960 were significantly higher, coinciding with the rapid economic growth of Singapore at that time. But the lifetime median incomes of those born after the mid-1970s taper off. This is because these people began their working lives after the mid-1990s, when the economy entered a turbulent period beginning with the 1997-98 Asian financial crisis.

Having developed a chart tracking the lifetime median incomes of different cohorts, we linked this to property prices to derive an index. We divided long-term income for any chosen age group by the price of a selected type of property. This gives us a housing affordability index, which in essence measures property price against the median lifetime income of a household.

Chart 2 plots the income-price ratio for the 30-year-old group each year considering buying private residential property. We focus on this age group because that is roughly the age at which people might begin to buy private residential property. One graph on the chart looks strictly at this income-price ratio.

The other graph ‘with HDB upgrader effect’ tries to capture the wealth effect generated by rising HDB resale prices. We assume that the 30-year-old had bought a subsidised HDB flat, resold it, and directed all cash proceeds from the sale into the purchase of a private property. In practice, not all HDB resale proceeds accrue to the seller, but for lack of available data, we assume that it does. This means the ‘HDB wealth effect’ as represented on the graph is an overestimate, but it provides a useful indicator nevertheless.

Chart 2 is instructive. In 1975, a 30-year-old’s lifetime income was nearly five times the amount he would have paid for a private property. But with prices rising, by 1983, his lifetime income would have sufficed to purchase only one private property. This trend continued: By 1997, a 30-year-old’s lifetime income would have been enough to pay for only about 60 per cent of the price of an average private property.

In other words, as a result of the rapid increase in property prices in the early 1980s, private housing affordability dropped rapidly. After recovering somewhat in the late 1980s, affordability further declined in the 1990s when property prices escalated to unexpected heights. Last year, affordability moved in the downward direction.

Generally, since 1992, the index has hovered around unity - that is, lifetime income has just about equalled the price of one property. The pattern is the same even for HDB upgraders, though their affordability is somewhat better.

An income-price ratio of unity means that a middle-income household that buys an average-priced private property would be locking up its entire lifetime income in that property. The price escalation in the mid-1990s pushed the income-price ratio below unity, indicating a scenario of perpetual debt if a middle-income earner had committed to an average- (or higher-) priced private property.

The same computations using the data available since 1990 for average-priced HDB resale flats show a much better picture. The HDB affordability index dropped from eight in 1990 to three in 1996 and then recovered to five between 2001 and 2006. The price hike last year led to a slight drop in the index to 4.5, which means lifetime earnings were equal to 4.5 times the price of an HDB flat.

An optimal rate for property price inflation should be one that does not erode housing affordability. The long- term growth rate of our lifetime income measure is about 4-5 per cent, which has also been the long-term growth rate of per-capita disposable income. But the long-term increase in property prices has been much higher.

There are serious implications when housing affordability is eroded to the point where higher prices do not translate into higher wealth for property owners. For example, if affordability sinks below unity, this generation’s lifetime income would not be enough to pay for the property, so the wealth from higher prices cannot accrue to the property owner today. Housing wealth may end up being transferred to the children of the current owners.

If this occurs, a question would arise: How to balance the cost of private property to the current generation against the benefits that might accrue to their children of having higher-valued properties?

On this point, our colleague Professor Basant Kapur thinks that a system of intergenerational transfers may work, whereby children can compensate their parents for such properties once they start earning. The complex of issues this raises would require another detailed research paper to examine.

By Tilak Abeysinghe & Gu Jiaying

Tilak Abeysinghe is the deputy director of the Centre for Applied and Policy Economics, Department of Economics, National University of Singapore.

Gu Jiaying is a research fellow at the centre.

Source : Straits Times - 3 May 2008

THE recent climb enjoyed by equity and property prices was driven more by strong economic growth than by low interest rates, according to a study by the Monetary Authority of Singapore (MAS).

Empirical research by MAS shows that economic activity exerts a larger influence on asset prices in Singapore than borrowing costs.

‘Asset price inflation reflects an underlying increase in income growth augmented in part by favourable sentiment towards domestic assets,’ says the study, featured in the MAS macroeconomic review report released yesterday.

The MAS report also says: ‘This linkage has been misunderstood by some analysts, who expressed concern that the increase in domestic liquidity, in and of itself, has fuelled the run-up in asset prices.’

Private housing prices increased by 31.2 per cent for 2007 as a whole, and some market analysts had felt that the central bank should raise interest rates to rein in property inflation.

This was because while overseas investors were driving property prices up, the inflow of foreign funds continued to add to domestic liquidity and kept borrowing costs low.

But as the MAS report mentions, ‘the factors behind the increase in liquidity are much more complex in view of Singapore’s monetary policy framework’.

Domestic interest rates have dropped since September last year as US interest rates fell and the Singapore dollar grew stronger.

The benchmark three- month domestic interbank rate fell by 144 basis points from August 2007 to 1.31 per cent at the end of March 2008.

As interbank rates fell, banks also started offering cheaper and more innovative mortgage packages.

Source : Business Times - 30 Apr 2008

Asia expected to weather real estate downturn

THE mood was generally subdued at a property conference held by Citi yesterday although a few positive assessments of the market provided some bright spots.

Opening the event, Citi country officer Piyush Gupta said that 2007 was a strong year for property across Asia but the first quarter of this year had been challenging.

Property indices are under-performing the broad market in several regional cities, such as Hong Kong and Singapore, he said.

Amid this broad picture however, it is not all doom and gloom. Banyan Tree executive chairman Ho Kwon Ping pointed out that the US sub-prime crisis and the resulting credit crunch have so far had minimal impact on the high-end hospitality business.

In fact, having just returned from a roadshow in the Middle East to promote the group’s Indochina hospitality fund, Mr Ho said that investors’ reception was positive.

According to him, there has been no perceptible slowdown in the hotel business, though travel within the US has probably come down.

‘Even the sale of branded residences by us this year has increased several-fold over the last year,’ said Mr Ho, as buyers probably see them as a relatively attractive form of alternative investment.

Citi’s real estate research team also reckoned that there are some worthwhile investment real estate plays, despite the market slowdown, in the form of real estate investment trusts (Reits).

An April 25 Citi report on Singapore property says: ‘We believe news flow for developers will remain negative and are hence putting a cap on developers’ performance. Suntec, Ascendas, Parkway Life and Capitamall Trust are our preferred buys among Reits.’

Ending yesterday’s media session on a hopeful note, Citi’s Asia-Pacific director of research Adrian Faure said that although Asia will not be immune from the sub-prime crisis, it is in good shape to weather the real estate downturn, underpinned by low loan-deposit ratios and strong liquidity.

Source : Business Times - 29 Apr 2008

THE broader economic backdrop for the Singapore property market generally looks weak in the next 18 months, says Mr Don Hanna, Citi’s global head of emerging markets economic and market analysis.

‘The level of economic activity that we foresee in general continues to weaken this year and next,’ he told reporters on the sidelines of Citi’s closed-door Asia Pacific property conference at the Ritz-Carlton Millenia hotel yesterday.

One of the implications of the United States subprime crisis is that central banks in Singapore and many other nations are more concerned about the way real estate is financed, he said.

‘In an economy like Singapore, which is probably the most open in the world, where you are going to see weaker global demand and lower trade flows, and as a result, lower income,’ he added. And that would affect general demand for property, he said.

But Asia is in much better shape to ride out the downturn, said Citi Investment Research’s director of research for the Asia-Pacific, Mr Adrian Faure.

He told reporters that a speaker from US home-loan lending giant Fannie Mae had said that there has never been a time when the US saw a fall in property prices all across the nation.

‘But all of us in this part of the world are used to extreme and sharp up-and- down cycles, where these markets tend to be very efficient. They correct rapidly,’ said Mr Faure.

In good markets, investors tend to be less choosy but as credit conditions get tougher, companies with high quality credit will have it easier, he said.

‘Inevitably, this downturn is going to be a great opportunity for the big (firms) to consolidate, and to get better access to capital and projects.’

Source : Straits Times - 29 Apr 2008

Supply of homes, vacancy rates up, but buyers discouraged by high prices

THE lacklustre property market seen in the first quarter of this year is likely to persist, with developers expected to launch more projects in the months ahead, increasing the supply of new homes even as buyers stay away.

The prices of homes in both the private and public sectors rose at a much slower pace in the first quarter while the volume of transactions remained thin.

Private home prices rose 3.7 per cent in the first quarter, according to the Urban Redevelopment Authority (URA), lower than its earlier estimate of 4.2 per cent and well below the 6.8-per-cent rise in the previous quarter.

Developers sold 762 private residential units in the quarter, the lowest number of transactions since Sars-stricken 2003.

The URA data released on Friday for the full three months were an update from its April 1 estimates, which were based on transactions in the first 10 weeks of the quarter.

“This is quite a marked difference and it shows that in the last two weeks of the quarter, there has been some evidence of price cutting in the market,” said Mr Donald Han, managing director of real estate firm Cushman and Wakefield.

The vacancy rate for completed private residential units rose 6.3 per cent, up from 5.6 per cent in the previous quarter, the URA data showed. With more supply in the market, there is added pressure to reduce prices.

“If the vacancies continue rising at this rate, the market will definitely turn this year. Prices will peak for sure,” said Mr Colin Tan, head of consultancy and research at Chesterton International.

Among the projects to be launched in the coming months are the Marina Bay Suites and Duchess Royale on Duchess Avenue. They add on to developments such as The Verte at Telok Kurau and Waterfront Waves at Bedok Reservoir Road that were launched in the first quarter.

Foreigners — who have been a key catalyst in the 30-per-cent jump in private home prices last year — are increasingly being discouraged by high asking prices.

This is especially so amid the continued uncertainty over the United States economy and the fallout from the sub-prime mortgage crisis.

Kuwait Finance House, which last December took an option to buy 97 units of the luxurious Goodwood Residence condominium for $818 million from Guocoland, has decided not to go through with the purchase.

The lacklustre real estate market in Singapore and the region has affected the performance of listed property firms.

Keppel Land reported a 7.6-per-cent fall in property sales to $273.1 million in the first three months of the year due to the increasingly cautious sentiment.

Mr Ku Swee Yong, a director at property consultancy Savills, said that until global stock markets show clear signs of a recovery, investors would remain wary of putting their money in real estate. He noted that banks here had not been selling many home loans this year.

“Other parts of consumer expenditure are still going strong, it’s just that property is taking the brunt of it,” said Mr Ku.

For the office sector, rentals increased at a slower rate of 7.3 per cent, down from 10.9 per cent in the previous quarter.

The URA said there was a total supply of 16 million sq ft in gross floor area of office space at the end of the first quarter.

Since last July, the Government has made available land on short-term leases for transitional office sites to meet the high demand for such space.

Mr Han said that the pace of office rental increase would continue to moderate for the rest of the year.

Mr Nicholas Mak, a director from Knight Frank, said that despite this moderation in pace, rentals will still rise by 15 to 20 per cent this year as “demand for office space is still healthy”.

Resale transactions for HDB flats down down 6%

The public housing market is also showing nascent signs of waning.

The number of resale transactions of Housing and Development Board (HDB)flats fell 6 per cent to 6,360 in the first quarter of the year from 6,750 in the previous quarter. Meanwhile, the HDB Resale Price Index rose 3.7 per cent from the previous quarter, down from 5.7 per cent in the fourth quarter of last year.

“HDB flat buyers were resisting the rise in resale prices,” said assistant vice-president of property agency ERA Eugene Lim.

The median cash-over-valuation (COV) for resale transactions was $21,000 in the first quarter, slightly lower than the previous quarter’s $22,000. The COV is the difference between the actual transacted price of the flat and its valuation. It cannot be paid from a loan or from savings in the Central Provident Fund.

“We saw the resale market hitting resistance level in the fourth quarter last year as HDB flat buyers do not have or are not willing to part with so much cash. This resistance carried through to the first quarter,” said Mr Lim.

“Very often, the deal cannot be closed or takes much longer to close because of unrealistic sellers demanding high COV,” he added.

Also, with more new flats coming on stream, some demand will be removed from the resale market. Buyers who can afford to wait up to three years for the completion of the flats may prefer to buy new flats directly from the HDB as this often involves a very small or no immediate cash outlay.

Source : Today - 26 Apr 2008

Buyers not forthcoming, so developers delay projects that are ready for market

The number of homes that could be launched for sale immediately, but have been held back, has increased to 10,239 in the first quarter of 2008, an increase of 44.2 per cent over the 7,099 units in the fourth quarter of last year. This, perhaps, is a reflection of the standoff between developers and buyers.

The Urban Redevelopment Authority’s (URA) property data for the quarter also revealed that there were 2,526 homes launched, but unsold at the end of the first quarter of 2008, an increase of 22.4 per cent over the previous quarter.

CB Richard Ellis director Leonard Tay said simply: ‘As homebuyers were less forthcoming, developers decided to delay their launches.’

Mr Tay highlighted that most of the new projects launched were small projects located outside the prime residential districts. ‘The only project targeted at the mass market, the 405-unit Waterfront Waves at $800 psf (per square foot), met with a certain degree of success as evidenced by the 108 units sold,’ he added.

According to URA, prices of private residential property increased by 3.7 per cent in Q1 2008 compared to 6.8 per cent in the previous quarter.

Mr Tay said that while there were no new luxury projects launched, a few units from existing projects were known to have been sold at above $3,300 psf in Q1 2008, with several units in Marina Collection sold at above $2,600 psf.

‘These, and probably some high-priced transactions in the resale and sub-sale markets, could have contributed to the 3.7 per cent rise to the private residential price index from the previous quarter,’ he added.

Interestingly, the 3.7 per cent increase in the PPI is lower than the earlier forecast of 4.2 per cent.

URA said that the last time the flash estimate of the change in private residential property price index (PPI) was revised downwards by more than 0.5 per cent points was in Q4 2001, when it was pegged downwards by 1.4 percentage points.

Jones Lang LaSalle local director and head of research (South-east Asia) Chua Yang Liang also noted that PPI was down by 3.1 percentage points from the 6.8 per cent growth recorded in Q4 2007, the biggest quarterly drop since Q3 2000, when prices declined by 4.2 percentage points.

Dr Chua said that overall, developers remained conservative on their new launches.

But while there was a significant growth in Outside Central Region (OCR) where a total of 813 units were released in the quarter - 60.5 per cent of total launches in Singapore in Q1 2008 - he noted: ‘Demand in this region was however not as strong.’

Take-up rate for OCR was only 38 per cent whereas Core Central Region (CCR) and Rest of Central Region (RCR) reported healthier take-up rate of 89 per cent and 71 per cent respectively.

And Cushman & Wakefield managing director Donald Han believes buyers are prepared to wait. ‘Property is sentiment-driven, and if buyers believe the economy will slow down, they will be prepared to wait it out on the sidelines,’ he said.

The disappearance of speculators from the market may have also dampened sales, as reflected by the lower number of subsales at just 346 transactions, down from 649 in the previous quarter.

‘Short-term speculators have been weeded out,’ Mr Han said. But, as Mr Han notes, it is now also ‘a smaller market’.

Savills Singapore director (marketing and business development) Ku Swee Yong also believes sub-sales have reached a plateau with current data ‘reflecting true demand’.

According to Savills’ own basket of properties launched and sub-sold in 2007 and 2008, the level of subsales fell from 34 transactions in Q4 2007 to just six transactions in Q1 2008. Subsale prices, however, remained stable, suggesting that panic selling for the time being at least is unlikely.

On whether the increasing backlog of unsold homes could pose a potential over-supply situation in the future, Mr Ku said that he believes not all the potential developments will be built.

URA projects that 56,501 units are expected to be completed between Q2 2008 and 2011, of which 29,685 units are already under construction.

Mr Ku said there are certain ‘control mechanisms’ which could see a lower number of units completed by 2011 with the first being the construction factors. Mr Ku said that a project that has not already begun construction is not likely to be finished within two years, simply because of the costs and shortages within the construction industry currently.

Another control mechanism lies with developers. ‘In the previous downturn, some developers held off projects for 10 years,’ he said.

Source : Business Times - 26 Apr 2008

Lower-than-forecast 3.7% growth could signal start of decline

THE property market may have gone quiet, but home prices continued their steady climb in the first three months of this year, albeit at a much weaker pace.

Private home prices rose 3.7 per cent between January and March, down from the 6.8 per cent growth in the previous three months.

It was also notably lower than the 4.2 per cent rise that had been predicted early this month, based on sales in the first 10 weeks.

This suggests prices may have started declining last month, dragging down the whole quarter.

‘Price growth is starting to weaken severely and the volume of transactions has halved,’ said Mr Chua Yang Liang, Jones Lang LaSalle’s head of South-east Asia research.

‘The rate of increase in coming quarters is likely to be even slower and prices may peak in the third or fourth quarter.’

Observers have suggested that private home prices could be holding partly because developers are putting off project launches, thus curbing the supply of new homes.

Developers had 10,239 new units ready for sale in the first quarter that were not launched - that is a three-year high and 3,000 more than in the previous quarter.

The number of units actually launched in the quarter - 1,343 - was the lowest in almost four years.

‘There’s a lot of supply but it hasn’t been released into the market yet, and that could be one reason why prices are still growing,’ said Mr Nicholas Mak, director of research and consultancy at property firm Knight Frank.

Almost half of these unlaunched units were in the core central region, comprising the prime districts 9 to 11, the Marina Bay area and Sentosa. The rest were evenly divided between the city-fringe and suburban regions.

Mr Ku Swee Yong of Savills Singapore said developers may not be delaying launches to deliberately prop up prices but, rather, to wait out the weak market sentiment and uncertain global outlook.

Whatever the reason, the lack of launches has forced buyers to turn to the secondary market, where they bought 2,304 homes in the quarter - three times what they bought directly from developers.

This shows there is still an underlying demand for homes, and may also have helped sustain prices at current levels, analysts said.

The slowdown affected private homes in all areas, from prime to suburban regions. Each region saw prices rise only 3 to 4 per cent, from 7 to 8 per cent the previous quarter.

Sub-sales - this is when a person buys an uncompleted home and then sells it again before it is built - made up a tenth of all sales.

In the case of public housing, resale prices rose 3.7 per cent in the first quarter, down from 5.7 per cent previously. But sales dropped 6 per cent to 6,360 transactions.

The median cash-over-valuation amount - the portion of a flat’s price that buyers have to pay in cash - dipped slightly to $21,000. This shows that buyers are starting to resist having to fork out too much cash for HDB flats, especially since valuations have climbed recently.

All other types of properties also saw lower growth, with office prices logging the biggest slowdown. They rose only 1.1 per cent in the first quarter, down from 8 per cent in the previous three months.

But office rentals stayed strong, as businesses continued to expand and space remained tight.

Source : Straits Times - 26 Apr 2008

OFFICE property prices took a hit in the first quarter of 2008, with foreign investors either withdrawing from the market or demanding lower prices.

According to data from the Urban Redevelopment Authority (URA), office property prices grew a marginal 1.1 per cent in Q1, compared with an 8 per cent increase in the previous quarter.

DTZ Debenham Tie Leung executive director (research and consultancy) Ong Choon Fah believes the office sector has been bolstered by foreign funds that have since been hurt by the global credit crunch, and that there are worries over impending new supply post-2010.

‘Funding is now an issue,’ she said. ‘Investors are adopting a cautious approach.’

URA said that at end-Q1, a total of about 1.49 million square metres of gross floor area of office space was in the pipeline. This includes the new space from the redevelopment of former UIC Building (79,900 sq m) and the former SPI Building (32,000 sq m), both of which were granted planning approval for development in the quarter.

Cushman & Wakefield managing director Donald Han notes that price retreats from Q4 2007 to Q1 2008 could be due to lower prices achieved for 1 Phillip Street and potentially 1 George Street, which saw transactions at $2,500 psf and $2,600 psf respectively. Previous highs include Chevron House and Hitachi Tower at $2,700 psf and $2,900 psf respectively.

On the upside, overall office rents remained relatively stable in Q1, growing 7.3 per cent in Q1 compared with 10.9 per cent in the previous quarter.

‘Yields will rise from 3.5-4 per cent per annum last year to 4.5-5 per cent per annum this year to compensate investors from the global financial market uncertainty,’ Mr Han said.

‘As such, we will see capital values stabilising this year, with moderated rental growth to provide the necessary yield uptick. We will see the emergence of Reits and owner occupiers as primary base investors.’

Knight Frank director (research and consultancy) Nicholas Mak believes one reason for the slower price and rental increases is that office tenants have become resistant to higher asking prices. He also noted some demand has been diverted to office space located outside the CBD.

URA also said a total of 435,000 sq m of business park space is in the pipeline from projects expected to be completed between the current Q2 and 2011.

The overall office vacancy rate rose marginally to 7.7 per cent in Q1, from 7.3 per cent in the preceding quarter. DTZ’s Mrs Ong attributes this to office buildings being vacated for retrofitting or renovation.

Source : Business Times - 26 Apr 2008