Geopolitical tensions and rising interest rates are expected to result in a softening of the Singapore real estate market in 2023, with rate sensitive investors laying low. For those whose investment motives are less economic in nature, Savills Research anticipates that they will continue to pile into the market, despite increased borrowing costs.
In this Property Market Outlook for 2023, Alan Cheong, Executive Head of Research & Consultancy at Savills Singapore rounds up the key data and expert insights from the 2022 quarterly briefings to project what we can look forward to in 2023.
Residential Prices
Savills Research projects 2023 will be the year where mass market condominiums will have a price per square foot (psf) baseline of greater than S$2,000. Overall residential prices are expected to rise 10% year-on-year (YoY) in 2022 and 7% YoY in 2023.
The S$2,000 psf price cross over for highly subscribed projects like Piccadilly Grand, AMO Residences and Lentor Modern in 2022 provides empirical evidence that the mass market could take such prices.
Alan Cheong adds, “This brings to question whether the price psf measure is the line that potential buyers take when looking at affordability or what is deemed expensive. It also questions the cap set on affordability levels for mass market and Executive Condominiums.”
However, if interest rates begin to fall by mid-2023, this could further boost buyers’ confidence and prices may rise by up to 10% YoY, instead of the initial projection of 7%.
Residential Rents
For 2023, private non-landed residential rents may rise by 5% to 10% YoY, at a much slower rate of increase compared to the 25% expected for 2022.
Savills Research anticipates that it may take another 18 months before the market starts to cool down or correct. This is when the stock of delayed completions caused by the 2020 and 2021 pandemic induced disruptions get cleared up.
For the high end non-landed segment in the Core Central Region (CCR), given the low availability of leasing stocks, rents for 2023 may rise by a significant 15% on a YoY basis.
Alan Cheong foresees, “Even if there is any correction, it may be mild because short of a crisis, rents tend to be sticky.”
Office Rents (Grade A CBD)
Savills Research rental projections for CBD Grade A (comprising AAA, AA and A sub-grades) in 2022 remains at 3% YoY increase, with 2023 rents expected to rise by 2% YoY.
This increase in gross rents is driven by inflationary pressures on the service charge element and some partial ability of landlords to pass those increases on due to the relative low levels of new supply.
As 2023 progresses, especially towards the end of the year, multinational tenants will be the major driver for demand because of their need to be located in only Green rated buildings. Owing to the relative dearth of new supply, rents in the highest sub-grades (Grade A CBD) would be able to stay firm as most of them have the Platinum Green Mark rating.
Investment Sales
Savills Research projects that total investment sales in 2023 will remain at S$24 billion to S$25 billion, similar to 2022 levels.
The income producing investment sales market has simmered down, especially with sellers still under no compunction to lower their prices. If rates do inflect, the market may see a resumption of acquisitive activity for big ticket items by large private equity investors.
They would be looking to acquire ageing commercial buildings to be converted into mixed-use modern developments, such as Green-certified buildings or repurposing them for residential use. The latter could have a better chance of occurring because of the Central Business District (CBD) Incentive Scheme.
How the market will develop in 2023 depends heavily on whether central banks pivot on their current stance of raising or keeping interest rates high.
Retail Rents
Savills Research expects that prime Orchard retail rents will increase up to 1% to 2% YoY and for prime suburban rents to go up by 2% to 3% YoY.
For 2023, inflationary pressures will drive up retail sales revenue and raise conservancy and advertising costs. These factors are expected to override the softer economic conditions and ultimately lift rents marginally.
The retail mix in the market continues its huge transformation with the reshuffling of tenants. As landlords’ rental expectations rise, tenants operating at thin margins amid escalating operating costs could either be forced to cease their business or relocate to less prime locations. The vacated space will be backfilled by well-performing retailers or new entrants who are willing to match up to the new rental expectations.
For example, Porsche will be setting up their new showroom at Guoco Midtown in 2023, from its existing centre at Leng Kee Road. The luxury carmaker is making this move to the more accessible and visible city-centre location.
Industrial Rents
Savills Research foresees that rents for prime warehouse & logistics properties will rise by 2% to 5% YoY in 2023, same as in 2022. The limited stock available for warehouse spaces after 2024 when no significant new supply is expected to come on stream could place further upward pressure on warehouse rents.
As the external environment grows more challenging, the Singapore economy is projected to see a slowdown. The tightening of global financial conditions and protracted pandemic restrictions in some countries are expected to weigh on the trade-related sectors in the coming quarters. Therefore, more industrialists might become more cautious in their expansion plans.
Alan Cheong says, “The weakening global growth outlook and heightened headwinds are also expected to dampen industrial sentiments.”
Nevertheless, demand for industrial spaces, especially modern high specification warehouses, as well as high-specs industrial and business parks with excellent connectivity and amenities will still be underpinned by growth industries such as the logistics, food, precision engineering and biomedical sectors.
Summary
2022 was a year when the fallout from geopolitical tensions upset the normal functioning of the real estate market. Come 2023, the market will become more settled and embark on a journey through a new landscape where interest rates will be higher than the past decade.
For the residential sector, the strong influx of foreign professionals is expected to keep rents rising, albeit at a lower rate than in 2022. Prices are expected to continue rising because of cost-push driven factors. Together with developers’ need to redeploy their returning capital from projects completing, the stage is set for land prices in general to rise to a new base and this would reset selling prices for launches in 2024 to 2025.
Income producing assets have skewed back to the days when asset prices were reflective of an environment when discount rates were significantly higher, and liquidity could no longer knead excesses on asset prices. The clarion call to comply with Environmental, Social and Governance (ESG) standards, particularly the “Environmental” part for real estate, has notably taken on greater weightage in the investment and redevelopment decisions of landlords and buyers.
While the retail sector is lagging its counterparts in the office, residential and hotel sectors, it is coming from a low base. The loosening of Covid mobility restrictions in China is expected to ultimately lead to easier cross-border travel for Chinese tourists. This should benefit the Singapore retail scene, especially those situated in the CBD.
For the industrial sector, properties would be expected to do well in 2023 as the need to build buffer continues unabated.
Savills Research provides in-depth analysis of property market trends, forecasts from our professional research team and market commentary to help you make the right property decisions. Please find the 2023 Savills Singapore Market Outlook Report here, for your reference.