real estate Highlights

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1 Research Jan-mar 2012/1st quarter real estate highlights Highlights Developers new sales surged 81% q-o-q in 1Q 2012 (6,526 units). Private property prices fell by 0.6% q-o-q after increasing for 10 consecutive quarters. Prices of resale HDB flats rose 0.6% in 1Q Q 2012 prime Orchard Road retail rents stay firm as they continue to be highly sought after. Moving forward, however, declining consumer confidence and rising business costs may put a drag on average retail rentals islandwide. Rental expectations are lowered alongside a net supply surge of 1 million square feet in 1Q Singapore s industrial property market has come forward as the star performer for the first quarter of 2012 with strata-titled industrial units being the subject of strong interest.

2 Jan-MAR 2012/1st quarter real estate highlights Residential Property Market Developers new sales surged 81% q-o-q in 1Q 2012 (6,526 units). Private property prices fell by 0.6% q-o-q after increasing for 10 consecutive quarters. Prices of resale HDB flats rose 0.6% in 1Q Private Residential Sector Near Double Developers Sales Developers launched a record number of residential units in 1Q 2012, an increase of 68% compared to 4Q Out of 6,903 new units released to the market, 82% or 5,638 units came from OCR. In total, 33 new projects were freshly launched in 1Q 2012, mainly in Geylang, Bedok, Serangoon, and Pasir Ris. Developers sales also reached an all time high in 1Q 2012, recording 6,526 new units (excluding executive condominiums), including 6,458 uncompleted units and 68 completed units, or an 81% increase quarter on quarter (Chart 1). Mass market homes remained the key focus, accounting for 82% or 5,268 units of total uncompleted homes sold by developers. Meanwhile, activities in the high-end market slowed down for the 5th consecutive quarter with only 129 units sold. The mid-end market picked up by 39%, registering 1,061 units sold. New sales of mass market homes saw an overwhelming response due to the launch of headline projects such as Parc Rosewood, Chart 1 Total Number of Uncompleted Private Residential Units Sold by Developers by Market Segment 7,000 6,000 Number of Units Sold 5,000 4,000 3,000 2,000 1, Q11 2Q11 3Q11 4Q11 1Q12 CCR RCR OCR Source: Urban Redevelopment Authority, Knight Frank Research 2

3 The Hillier, Watertown, Bartley Residences, and Ripple Bay. The top 10 projects sold 3,574 units or 55% of total new sales in 1Q Noticeably, Watertown at Punggol Central sold 94% of its 992 units over the 3-month period. The mixed commercial residential project attracted market interest for its location next to Punggol MRT station and unique concept. Mixed developments tend to be located near MRT station and provide shopping convenience, hence draw strong market interest. Examples include Watertown, The Hillier, and Bedok Residences. Chart 2 Property Price Index 1Q 2012 by Market Segment Property Price Index Q11 2Q11 3Q11 4Q11 1Q12 Overall PPI CCR Non-landed Source: REALIS, Knight Frank Research RCR Non-landed OCR Non-landed First Price Decrease since 2009 URA price index showed a marginal price correction of 0.1% quarter-on-quarter, the first price decrease since 2Q Prices on non-landed properties fell 0.2% while landed property prices increased slightly by 0.1%. Activities in the high-end and midend markets, as denoted by property transactions in Core Central Region (CCR) and Rest of Central Region (RCR), remained subdued at a 0.6% price decrease in each market. Meanwhile, prices of mass market properties in Outside Central Region (OCR) increased 1.1%, resulting from record new projects launched in this segment. Results from Knight Frank s property basket showed 7.5% decrease in prices of luxury properties, transacting at an average of $2,110 psf. Prices of mass market properties fell by 0.2% to $992 psf on average while mid-end homes prices increased 1.2% to average price of $1,578 psf. Chart 3 Property Rental Index 1Q 2012 by Market Segment Property Rental Index Q11 2Q11 3Q11 4Q11 1Q12 Islandwide PRI RCR Non-landed PRI Source: REALIS, Knight Frank Research Moderate Rental Increase URA s Property Rental Index showed that the rate of rental increase moderated for three consecutive quarters since 3Q 2011, registering a 0.3% quarter-on-quarter increase in 1Q CCR Non-landed PRI OCR Non-landed PRI Rents of high-end homes in CCR increased by 0.5% quarter-on-quarter, higher than 0.1% increase in 4Q Rents of mid-end and mass-market homes increased at lower rates compared to the previous quarter, registering 0.4% and 0.2% increases quarter-on-quarter, respectively. 3

4 Jan-MAR 2012/1st quarter real estate highlights Chart 4 Number of Foreign Buyers (PR and NPR) in 1Q , % Public Residential Sector Total No. of Foreign Buyers 2,500 2,000 1,500 1, Q11 2Q11 3Q11 4Q11 1Q12 Number of PR Number of Foreigners (NPR) % PR and NPR Source: REALIS, Knight Frank Research 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% % of Foreign Buyers The rate of price increase for HDB Resale flats moderated to 0.6% in 1Q 2012, less than half the 1.7% increase in 4Q Resale transactions fell 0.5%, registering 5,892 cases in 1Q The slowdown in the HDB resale market was in tandem with the increase of new flat supply. HDB offered 8,076 BTO flats and 3,825 Sale of Balance Flats in 1Q 2012, providing more housing options besides resale flats for which homebuyers have to fork out Cash-Over-Valuation (COV) on top of market prices. Malaysian Buyers Top the List Again The total number of foreign homebuyers (PR and NPR) fell by 16% quarter-onquarter in 1Q The proportion of non-singaporean buyers fell to 21.3% in 1Q 2012 from 32.3% in 4Q Foreign buyers who are not PR only made up 5.5% of total private home buyers in 1Q 2012, compared to average 19.8% in The drop was mainly attributed to the 10% Additional Buyers Stamp Duty applicable to non permanent residents buying residential properties in Singapore. Malaysian homebuyers (PR and NPR) accounted for 27.7% of foreign transactions, replacing Chinese buyers to become the top foreign nationality buying residential properties in Singapore. Proportion of home buyers from China decreased from 28.8% in 4Q 2011 to 22.9% in 1Q The majority of Malaysians bought residential properties in District 25, mainly from Parc Rosewood. Meanwhile, the Chinese and Indonesian preferred Districts 19 and District 9, respectively. Policy changes including increase in proportion of HDB flats and executive condominiums catering to second-timers, income ceiling revision and bumper rollout of new flats have drawn buyers away from resale market, resulting in lower transaction volume, marginal price increase and drop in COV. Chart 5 Proportion of Foreigners buying Private Residential Properties by Nationality in 1Q 2012 China 22.9% Malaysia 27.7% Indonesia 17.8% India 13.5% USA 1.5% Others 16.5% Source: REALIS, Knight Frank Research COVs fell across all estates and flat types, except for a marginal increase for 4-room flats in Toa Payoh ($2,500), 5-room flats in Ang Mo Kio ($500) and executive flats in Sembawang ($2,000). 4

5 Market Outlook Price Correction in Private Property Market On the back of ample supply including upcoming government land sales and unsold units in projects launched over the last few quarters, we expect prices of private residential properties to correct by about 1% quarterly in Amidst competition from many new projects launched in OCR, developers need to price their projects competitively in order to move the units. In fact, some projects were launched recently at lower prices to draw buyers. Home buyers and investors now have an array of housing options to consider as developers offer variety of designs, sizes and lifestyles at different locations. As a result, people thinking of buying private properties nowadays are more likely to opt for new launches instead of resale homes. As demand in secondary market softens and buyers in primary market become more selective, prices will correct accordingly. Moderate Demand for Resale Flats We expect demand for resale HDB flats to remain moderate moving forwards on the back of ample public housing supply. The government will release in total 25,000 flats in 2012, on top of executive condominiums and private condominiums catering to higher income groups. Homebuyers, especially first-timers with tight budget, are now more willing to wait for the 2 to 3 year construction period to get BTO flats as there are more housing options at choice locations and higher balloting chances. New flats are considered more affordable compared to resale flats which are sold at market prices plus additional COV. Notwithstanding lower demand in resale market, prices of resale flats and COV are not expected to fall sharply over the next few quarters as supply remains tight till new BTO flats are available in secondary market after 5-year Minimum Occupation Period. The high-end market will remain quiet arising from the ongoing troubles in the Euro zone and uncertainty in global economy. In addition, recent government policies including ABSD and Seller s Stamp Duty have also made Singapore high-end residential properties less attractive to foreign investors. As such, we expect prices of high-end homes to fall by 5 to 10% yearon-year in Notwithstanding higher competition in the rental market due to more project completion, rentals are expected to increase by 1 to 2% quarter-on-quarter for the rest of the year arising from growing leasing demand as foreigners who are affected by ABSD will turn to leasing market for accommodations. 5

6 Jan-MAR 2012/1st quarter real estate highlights Retail Property Market 1Q 2012 prime Orchard Road retail rents stay firm as they continue to be highly sought after. Moving forward, however, declining consumer confidence and rising business costs may put a drag on average retail rentals islandwide. Market Pulse Rising Business Costs Due to Tight Labour Market a Bugbear Rising business costs, in particular manpower-related ones, remain a bugbear for the retail industry. Deputy Prime Minister, Minister for Finance and Minister for Manpower, Mr Tharman Shanmugaratnam announced as part of the Government s budget for 2012 that the Dependency Ratio Ceiling (DRC) 1 will be lowered from July this year. For the services sector, the DRC will be reduced from 50% to 45%. This poses significant challenge for the service and retail industry, which is relatively reliant on foreign labour. Unable to engage the required manpower in time, some retailers have had to postpone business expansion plans in recent months. With unemployment rate at a low 2.0% for the overall population, and 2.9% for Singapore residents, the stricter foreign worker dependency policies in July are expected to intensify competition for manpower and raise costs as a result. Rising manpower and business costs are likely to cause a drag on rental growth in the short to medium term, as retailers will need time to develop and implement productivity enhancement measures. 1 The DRC refers to the maximum permitted ratio of foreign workers to the total workforce that a company is allowed to hire. More Mid- to Mid-Plus Lifestyle Brands Opening Stores in Prime Fringe and Suburban Malls Mid- to Mid-Plus market retailers, particularly F&B and lifestyle brands, are increasingly looking to malls located in the city fringe and suburban areas as viable locations for their stores. Previously, non-orchard malls may have been considered less attractive or unsuitable propositions for mid- to midplus brands to locate their stores. However, these malls, particularly those situated in new growth areas or where residents are of higher income profile, are increasingly adopting an up-market positioning. JEM, for example, which is located at Jurong Gateway and slated for opening in 2013, has positioned itself as the mall of choice in Western Singapore, and has attracted well-known mid-tier brands and operators such as Cathay Cineplex, Robinsons, Marks & Spencer, and FairPrice Xtra as anchor tenants. Another example is the HillV2, which will see gourmet brands such as Dean & DeLuca, Cold Storage Market Place and Coldstone Creamery when it opens, also in This paradigm shift among retailers and landlords to look to new and less conventional regions of the island opens many new opportunities for retailers to expand their businesses. Meanwhile, older malls which are located within close proximity to these new, mid- to mid-plus market malls are increasingly nervous about the upcoming competition which they expect to be intense. An increasing number of them are embarking on asset enhancement initiatives in a bid to stay relevant. 6

7 Consumer Sentiments Monthly Retail Sales Decreased 1.8% in February 2012 Retail sales excluding motor vehicles (seasonally adjusted and at constant prices) decreased 1.8% in February 2012 compared to January Compared to a year ago, retail sales increased 5.2%. Retail sales of watches & jewellery and telecommunications apparatus & computers declined 11.6% and 10.1% respectively in February 2012 over January Retailers of optical goods & books and furniture & household equipment recorded smaller declines of 5.4% and 3.4% respectively. On the other hand, the other categories posted increases in retail sales of between 1.3% and 3.4%, with the exception of food & beverages and wearing apparel & footwear, which increased 8.7% and 7.5% respectively. Tourist Arrivals Continues Strong Growth Singapore received 3.57 million visitors in the first quarter of 2012, representing a 14.6% growth compared to the same period in This is similar to the growth from the first quarter of 2010 to 2011 at 15.7%. This seems to indicate that overall tourist arrivals have not slowed down thus far. Chinese visitors form approximately 15% of total arrivals to Singapore, as their numbers grew 31.5% in the first quarter of 2012 as compared to the first quarter of Compared against the 24.8% growth for the same period in 2011 over 2010, we see clearly the growing momentum and importance of the Chinese arrivals to the Singapore tourism sector. Chart 1 Monthly Visitor Arrivals 1,300,000 While short-term performance of the retail sector has remained buoyant, consumers are expected to turn more cautious moving forward. The Master Card Worldwide Index of Consumer Confidence, which measures consumers attitudes towards the next six months, fell significantly from 75.9 in the first half of 2011, to 50.0 in the second half of Scores of 0, 50 and 100 on the Index reflect pessimism, neutrality and optimism respectively. Visitor Arrivals 1,250,000 1,200,000 1,150,000 1,100,000 1,050,000 1,000, , , , ,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Singapore Tourism Board, Knight Frank Research

8 Jan-MAR 2012/1st quarter real estate highlights 1Q 2012 Retail Rents URA Shop Space Rental Index Remains Flat from Previous Quarter The Retail Rental Index for the Central Region remained flat in the first quarter of 2012 compared to the fourth quarter of This comes as both Central Area and Fringe Area indices remain stable, moving marginally by -0.16% and 0.28% from the previous quarter. Overall, rentals have stayed stable this quarter as retail sales continue to be buoyant and the tourism sector remains strong for now. Chart 2 URA Retail Rental Index Indices (4Q98=100) Q10 3Q10 1Q11 3Q11 1Q12 Central Region Central Area Source: Urban Redevelopment Authority, Realis, Knight Frank Research Fringe Area Orchard Road Prime Retail Rents Stay Firm On a quarter-on-quarter basis, average island wide prime retail gross rents in 1Q 2012 remained flat at around $29.90 psf. Average prime rents on central Orchard Road belt remained firm at about $41.60 psf, while Orchard Road fringe and Marina Centre, City Hall and Bugis rentals remained stable at $24.10 psf and $29.40 psf respectively. Rentals of prime retail space located at city fringe and suburban regions saw marginal changes to $22.50 psf and $32.10 psf respectively. Table 1 Knight Frank First Quarter 2012 Prime Retail Rents 1Q2012 Monthly Gross Rents for prime spaces* ( $/psf) Islandwide S$ Orchard (Central) S$ Orchard (Fringe) S$ Marina Centre, City Hall, Bugis S$ City Fringe S$ Suburban S$ * Based on pre-defined portfolio of properties; refers to prime specialty shop space on ground level with good frontage and of up to 1,500 sq ft Source: Knight Frank Research In general, prime retail spaces on Orchard Road central continue to be highly sought after as availability of such spaces is limited. New-to-market brands looking to enter Singapore are often selective over location and most would prefer to set up the first flagship stores at prime spots on Orchard Road. However, with limited options and no major upcoming supply along Orchard Road this year, some prospective retail market entrants postponed their entry plans in the recent few months, awaiting better opportunities in the future. Retailers and landlords are currently adopting a wait-and-see approach amidst a myriad of factors including greater global economic uncertainty, lower economic growth of 1% to 3% expected for Singapore, heightened consumer caution and rising business costs. These factors are likely to weigh on rental growth. 1Q 2012 Retail Occupancy Islandwide Occupancy Rates Rose 0.34% Year-on- Year Islandwide average occupancy rates fell marginally by 0.55% to 94.19% in the first quarter of 2012, from 94.71% in the previous quarter, which traditionally sees the end-ofyear festive season high. 8

9 Compared to the same period last year, occupancy rates have in fact risen 0.34%, as a result of the growth in demand keeping pace and slightly exceeding the growth in supply. In particular, supply of retail space outside Central Region grew 1.35% but demand increased 2.06%, and continues to boast strong occupancy of 96.89%. Conditions in Central Region remained relatively stable with supply falling marginally and demand remaining flat. Occupancy rate for this Region was 92.87%. Chart 3 Islandwide Take-up, Supply and Occupancy Floor Space ( 000 sq ft) 700, Q10 3Q10 1Q11 3Q11 1Q % 96.0% 94.0% 92.0% 90.0% 88.0% 86.0% 84.0% Occupancy Rate (%) Significant New Retail Supply Expected in 2012 Approximately 950,000 sq ft of new retail lettable area is expected to be ready by the end of Almost 50% of this total space is located in the Central Area, contributed mainly by the completions of the refurbishment works at The Orchard and Chinatown Point. Market Outlook The rental outlook for prime retail space on the central Orchard Road belt remains resilient as big brands, both existing and new-to-market players, continue to source for available space here. Given the scarcity and strong demand for prime spaces on the shopping belt, landlords are not expected to lower rents for such spaces. We expect prime retail rents in Orchard Road to increase at 2-3% over the course of the year. While islandwide prime retail rents are expected to stay flat, rents at some locations may face some downward pressure in face of the large volume of upcoming supply, coupled with rising business costs. Based on recent surveys, consumer confidence in the economy is weakening, leading to rising caution, especially among smaller retailers. While the government aims at increasing productivity by imposing stricter foreign New Supply New Take-Up Source: Urban Redevelopment Authority, Knight Frank Research Chart 4 Upcoming Retail Space by Year and Region Retail Space (sq ft) 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , , Downtown Core Source: Knight Frank Research 2013 Outside Central Region (Suburbs) worker dependency ratios, the industry is likely to see a sticky inertia during the initial productivity drive. Retailers will need time to grapple with the situation and adopt innovative ways to enhance efficiency in their retail management. In the shorterterm over the course of this year and next, business cost concerns coupled with cautious sentiments over the economy may put a drag on rental rents. Henceforth, we expect average retail rents to be fairly flat over the year and any increases are likely to be between 1 to 2%. Occupancy Rate Orchard & Rest of Central Area City Fridge 9

10 Jan-MAR 2012/1st quarter real estate highlights Office Property Market Rental expectations are lowered alongside a net supply surge of 1 million square feet in 1Q Improved Growth Momentum in 1Q Q 2012 saw a 9.9% quarter on quarter (q-o-q) growth in the Singapore economy reversing her 2.5% contraction in 4Q Growth was largely driven by an upturn in the manufacturing sector whereby a q-o-q expansion of 14.7% was experienced. This was supported largely from increased output in the electronics and precision engineering clusters. The services producing industries saw a 6.9% q-o-q growth. On a year-on-year basis, this was a 2.9% growth. Increased activities in the various sectors supported this growth. The finance and insurance sector saw a pick-up in stock market trading activities. While the business services sector saw increased activity in the real estate sector and continued growth in visitor arrivals expanded the tourism related sectors. Surge in New Supply outstrips Demand The sector saw a surge in supply this quarter with a total of 1 million square feet (sf) of net new supply released into the market. While several areas such as Outside Central Region, Fringe, Orchard and the Rest of Central area saw a reduction of space arising from buildings undergoing redevelopment or A&A (additions and alterations works), the remaining areas; Downtown Core and the Central Fringe area Chart 1 Islandwide New Demand, New Supply and Occupancy Office Space ( 000 sq ft) 1,200 1, Q11 2Q11 3Q11 4Q11 1Q % 88.6% 88.4% 88.2% 88.0% 87.8% 87.6% 87.4% 87.2% 87.0% 86.8% Occupancy Rate (%) Office Space New Supply Office Space New Demand Source: Urban Redevelopment Authority, Knight Frank Research Total, Islandwide Occupancy Rate 10

11 saw increases in supply. The completion of Marina Bay Financial Centre Tower 3 within the Downtown Core contributed an additional 1.3 million sf of office floor space. In the fringe area, Ministry of Manpower Services Centre at Bendemeer Road contributed another 217,000 sf of space. New demand on the other hand only saw 570,000 sf of net new take up in the office sector. Similar to patterns in the supply side, major new demand was focused in the Downtown Core and Central Fringe area where 452,000 sf and 118,000 sf of space were absorbed respectively. Chart 2 URA Rental Index for Central Region URA Rental Index of Private Sector Office Space in Central Region Q11 2Q11 3Q11 4Q11 1Q12 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% Q-o-Q Change in URA Rental Index of Private Sector Office Space in Central Region (%) Overall, occupancy dropped by 0.4% q-o-q in 1Q 2012 to arrive at an island-wide average of 88.3% this quarter. The Central Fringe Area with a total stock of 19.6 mil sf of office space had the highest occupancy rate of 92.6% amongst the various areas. Despite the huge surge in new supply, Downtown Core, where Raffles Place, Marina Bay, Shenton Way and Tanjong Pagar are situated saw only a marginal 0.8% drop in occupancy this quarter. Office Rent Expectations in CBD Lowered While occupancy remained stable, the same cannot be said for the rental market. In this softening economic climate, the surge in new supply has shifted office market dynamics in favour of tenants who will now have more choices in terms of availability, location, quality and rentals. The soft office market is further exacerbated as demand from traditional big office space users in the financial sector decline. URA Office Rental Index (Central Region) Source: Urban Redevelopment Authority, Knight Frank Research Chart 3 Effective Gross Office Rents Effective Gross Rents ($ psf per month) $16.0 $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0.0 Q-o-Q Change in URA Office Rental Index (Central Region) (%) 1Q11 2Q11 3Q11 4Q11 1Q12 Raffles Place Grade A Orchard Road Grade A Shenton Way/Robinson Road/Tanjong Pagar Grade A Suntec/Marina/City Hall Grade A Suburban Areas Raffles Place Grade A+ Source: Urban Redevelopment Authority, Knight Frank Research Rental expectations for office space in CBD are lowered, especially for the Super Grade A and Grade A buildings. Based on Knight Frank s office basket, the 1Q 2012 monthly gross office rents for Super Grade A office buildings saw a 12.6% drop from the last quarter, averaging to about $11.40 psf. 11

12 Jan-MAR 2012/1st quarter real estate highlights The decline in Super Grade A rents was attributed by the intense competition among available existing Super Grade A office buildings and the new supply from Marina Bay Financial Tower 3. The rental drop was also in part caused by a number of recent leases transacted for less desirable units in buildings fronting the Marina Bay Sands (MBS) which had no scenic view of the integrated resort. The lower rental transacted had inadvertently led to a drag down effect on the average rents in these Super Grade A cluster. The drop in monthly gross office rents for Grade A buildings is less prominent at 2.6% quarter on quarter, averaging at about $10.00 psf. However, more challenging times for this sub office segment are expected as the flight to quality trend continues. Big office space users such as Bank of America Merrill Lynch and Citibank are expected to move out of their current Grade A building by end of the year to OUE Bayfront and Asia Square respectively. The year in 2012 may be a testing period for older existing Grade A buildings as landlords endeavour to search for replacement tenants to mitigate their impact from this flight to quality trend. Notably, office rents in Tanjong Pagar and the fringe areas of CBD remained fairly resilient as leasing activities for smaller space users from boutique sized companies providing auxiliary services to MNCs are still strong. The monthly gross office rents for Grade A buildings in Shenton Way/ Robinson Road/Tanjong Pagar stayed firm at $7.80 psf despite falls observed for Grade A offices at prime locations at Raffles Place and Marina Bay. In addition, office buildings in Suntec/ City Hall area, also held strong at about $9.40 psf in this micro market. Similarly, average monthly gross office rents in the sub-urban locations remained relatively firmed at $6.20 psf. Table 1 Effective Monthly Rentals in 1Q 2012 Location Effective Monthly Gross Rentals (psf) CBD (Grade A) Raffles Place S$ S$ Suntec / Marina Centre / City Hall S$ S$ Shenton Way / Robinson Road S$ S$ 8.10 Orchard Road S$ S$ Non-CBD Beach Road / Middle Road S$ S$ 7.40 Suburban (North) S$ S$ 7.40 Suburban (East) S$ S$ 5.20 Suburban (West) S$ S$ 6.80 Source: Knight Frank Research Robust Sales for Office Space New projects located in the Downtown Core such as PS100 and Robinson Square have seen rosy demand from buyers both end users and investors. Some end users seek ownership of office space reducing the risk of turning victim to rent increases in an upmarket. Investors on the other hand, have shifted their attention to alternative investment classes such as office space with recent buying measures in place in the residential market. In 1Q 2012, units sold at PS 100 transacted at median prices of $3,100 psf while Robinson Square transacted at a median price of $2,910 psf. PS100 located at Peck Seah Street saw all 100 office units snapped up within a weekend during its launch. Robinson Square has sold more than 78% of their 32 units. Similarly, office units in suburban areas have seen brisk sales with developments like Changi with median prices of $1,735 psf. At the same time, Paya Lebar Square has reported units transacting as average prices of $1,750 psf. Paya Lebar Square, has a total of 556 office units with more than 75% already sold. Market Outlook Moving ahead, office market may see some challenging times especially those located in the CBD as competition continues to heat up from expected new completions Asia Square and CapitaGreen at Market Street in 2012 and 2014 respectively. However, the outlook is not expected to be as bleak as what was observed in the recent financial crisis of 2009 when office rents dropped drastically. Grade A office rents in competitive spots are expected to soften further by 10% to 15% this year. Current leasing activities are still relatively active as leasing enquires continue to flow in albeit for smaller spaces. Service offices are gaining popularity as new-to-singapore firms adopt a more prudent approach to lease interim office spaces which are almost fully fitted out and in ready to move in conditions before taking up a conventional office space subsequently as they establish their businesses locally. It is expected that any recovery from the global economy may augment well for office rents, though such are likely to occur only towards end of

13 Industrial Property Market Singapore s industrial property market has come forward as the star performer for the first quarter of 2012 with strata-titled industrial units being the subject of strong interest. Modest Economic Growth 1Q 2012 saw a modest growth in the general economy. On the whole, Gross Domestic Product grew by 1.6% on a year-on-year (y-o-y) basis as compared to 4.9% in the previous quarter. On the manufacturing side, the sector expanded by 14.7% on a quarter-on-quarter (q-o-q) basis in 1Q 2012, although there was an 11.1% contraction in 4Q This rebound was boosted by higher levels of output in the electronics and precision engineering clusters. On a y-o-y basis, the Economic Development Board has highlighted that the output for Biomedical Manufacturing and Transport Engineering clusters grew by 18.4% and 19.7% respectively as compared to the same period in While Precision Engineering and General Manufacturing Industries saw marginal growth on y-o-y basis, the Electronics and Chemicals clusters experienced contractions. The Purchasing Manager Index (PMI) reading in March 2012 dipped to 50.2 from 50.4 in February Although there is a 0.2 decrease in PMI, the industry still points towards an expansion of the manufacturing economy. Sustained High Occupancy in the Industrial Sector The occupancy rate of factory space remained at 93.2%, similar to the last quarter. New demand of factory space increased by 2.14 mil sf island-wide with the Western and East regions making up 59% and 26% of the overall new space demand respectively. Island-wide new supply of factory space increased by 2.15 mil sf, of which 62% was contributed by 1.33 mil sf of new developments in the Western region of Singapore. A large proportion of new supply in the West was from Single-User factory space. Single-User factory space was the largest contributor to the overall new factory supply with 1.42 mil sf space, comprising 66% of overall new factory supply in 1Q The new supply this quarter has outperformed the past two quarters with a sweeping increase of 89% on a y-o-y basis. Most of the Single-User factory space stems from the Western and North-eastern regions. With the new take-up rate of 796,500 sf, the occupancy rate remained strong at 94.7%. New supply of Multi-User Factory space was at 560,000 sf, mainly from the North and East regions, of which HSBC Institutional Trust Services (S) Ltd has accounted for 423,000 sf of space for its project- Foodaxis@Senoko at 1 Senoko Avenue. A reduction of new supply from the last quarter coupled with an increase in new demand in 1Q 2012 led to a higher occupancy rate of 91.5%, a 0.7% increase from the 4Q

14 Jan-MAR 2012/1st quarter real estate highlights Chart 1 Demand and Supply of Industrial Properties (Private and Public Sectors) Floor Space ( 000 sq ft nett) Q11 2Q11 3Q11 4Q11 New Demand New Supply Source: Urban Redevelopment Authority, Knight Frank Research Chart 2 Industrial Rental and Price Index % Change 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% Occupancy Rate 1Q % 94.0% 93.0% 92.0% 91.0% 90.0% Occupancy Rate Signs of Rental and Price Growth Moderation While the Industrial property sector has performed well in this quarter, Rental and Price indices have shown some signs of reduction in growth. In this quarter and on a q-o-q basis, the Industrial Rental Index has seen a marginal growth of 1.8% while the Industrial Price Index saw a greater increase of 7.3%. Although Rental and Price indices have seen growth on q-o-q basis, they have been increasing at a decreasing rate when compared y-o-y. Rental Index has been increasing at a decreasing rate for its third consecutive quarter whereas the same fashion occurs to the Price Index for its fourth consecutive quarter. Rents for conventional factory space remained flat this quarter with an overall average of $1.92 psf per month. Capital values over the same period have however seen a 5% increase to $420 psf for secondary market sales. Based on these rates, Industrial property yield has compressed further to 5.5%, which is substantially lower than the traditional average of 7-7.5% in % 1Q11 2Q11 3Q11 4Q11 1Q12 Rental Index q-o-q change Price Index q-o-q change Rental Index y-o-y change Price Index y-o-y change Source: Urban Redevelopment Authority, Knight Frank Research Warehouse space saw expansion of new supply and new demand at 560,000 sf and 840,000 sf. The Western Region formed majority of the overall new warehouse demand at 79%. Occupancy of warehouse as compared to 94.3% in 4Q As for Business Park, the growth in new demand and new supply were almost increasing in tandem and the occupancy rate remained at 82.8%. space inched up to 94.7% in this quarter Notwithstanding the lower yield, the sales market continues to perform well, particularly well located projects in the primary sales market. There were 543 new strata-titled units which changed hands in this quarter. Notably, AZ@ Paya Lebar hit the $1,000 psf mark at $1,062 psf for a 1,023 sqf unit. Earlier this year, a 1,120 sqf unit at ArcSphere was sold at $944 psf. Both Multi-User factories have freehold tenure and are well-located in the Central Region. Properties in the Central and North Regions were the most sought after, making up 70% of all strata-titled new industrial sales in 1Q 14

15 The and Primz Bizhub were one of the main contributors to strata-titled transactions for these two regions in 1Q Small industrial units of as small as 540 sf are expected to continue doing well with cooling measures in the residential market diverting investors to this sector. The restrictions imposed on sites issued under Government Land Sales Programmes (GLS) have also further strengthened the demand for such units. Investors are expected to advance their acquisition plans for these projects before the supply turns thin. On the supply side, two industrial GLS sites were sold, namely two Business 1 sites at Serangoon North Avenue 4 and at Sims Drive/ Aljunied Road. Soon Hock Property Development Pte Ltd was awarded the Serangoon North Avenue 4 site with a land area of 86,930 sq ft and 2.5 plot ratio for $47.1 mil or $ psf per plot ratio. There were 7 other bidders for the site. The site at Sims Drive/ Aljunied Road received a whopping 14 bids and was eventually awarded to Fragrance Biz Space Pte Ltd for $43.4 mil or $ psf per plot ratio. The site has a plot ratio of 2.5 and site area of 67,945 sq ft. In the private sector, A-REIT has purchased Cintech I, II and III & IV from its parent- Ascendas at $53.3 mil, $43.4 mil and $88.8 mil respectively. Cambridge Industrial Trust purchased a 5-storey industrial building at Tai Seng Street at $59.3 mil. One Tannery, a 9-storey industrial building was sold to TAS Services Pte Ltd at $47 mil and 17 units at Boustead House, a 7-storey factory were sold at $14.6 mil to a local company. Table 1 Rentals of Sample Factory/Warehouse and Business Park Space in 1Q2012 Locality Monthly Gross Rentals (Upper Floor, $psf) Capital Values (psf) Conventional Industrial Space MacPherson S$ 1.68 S$ 2.02 S$391 S$730 (Freehold) Kaki Bukit - Ubi S$ 1.69 S$ 2.14 S$130 S$638 (60-year leasehold) Paya Lebar S$ 2.05 S$ 2.50 S$563 S$830 (Freehold) Bukit Merah S$ 1.95 S$ 2.33 S$552 (Freehold) Serangoon - Ang Mo Kio S$ 1.60 S$ 2.19 S$218 S$725 (60-year leasehold) Clementi - Bukit Batok S$ 1.69 S$ 2.34 S$205 S$556 (60-year leasehold) Woodlands - Admiralty S$ 1.23 S$ 1.45 S$149 S$405 (60-year leasehold) High-tech Factory Space Islandwide S$ 3.06 S$ 3.53 N.A. Business Park Space Islandwide S$ 4.00 S$ 4.49 N.A. Source: Knight Frank Research Market Outlook Despite the uncertain global economic backdrop, the manufacturing economy of Singapore will stay resilient with modest growth on the whole. It is necessary to note that in 1Q 2012, the average prices have been increasing at a faster rate as compared to average rentals. This disparity leading to a compression of the average industrial property yield is an important investment criterion to investors. In addition, if the government takes strong action to stop the occupation of industrial space by non-industrial users, rents may fall due to decrease in demand. Landlords may face difficulties finding tenants to take up small industrial spaces that do not cater to the needs of the traditional industrialists. As long as the market continues to be flushed with liquidity, retail investors remain attracted to strata-titled industrial units and especially the small format ones. Henceforth, prices are expected to continue to escalate by some 5% to 10% for the rest of the year. It is possible that some developers may start to hold back acquisition plans for sites released under the GLS programme in view of the new regulations imposed with effect from 1 January Going forward, they may be more inclined to acquire in private industrial land particularly those located in the central region with freehold tenure. Overall, the industrial property outlook remains cautiously optimistic. 15

16 Research Americas USA Bermuda Brazil Caribbean Australasia Australia New Zealand Europe UK Belgium Czech Republic France Germany Hungary Ireland Italy Poland Portugal Russia Spain The Netherlands Ukrai ne Africa Botswana Kenya Malawi Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Asia China Hong Kong India Indonesia Macau Malaysia Singapore Thailand Vietnam Research enquiries Png Poh Soon Director, Consultancy & Research, Valuation Singapore contacts Tan Tiong Cheng Chairman Danny Yeo Group Managing Director Lydia Sng Managing Director, Advisory Services Wendy Tang Executive Director, Residential Services Foo Suan Peng Managing Director, Knight Frank Estate Management Peter See-Toh Managing Director, Retail Services Low Kin Hon Managing Director, Valuation Nicholas Wong Executive Director, Industrial Mary Sai Executive Director, Commercial Resale Ian Loh Director, Investment Robert MacDonald Director, Office Sharon Lee Director, Auction Knight Frank Consultancy & Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs. Knight Frank Research reserves the rights to revise the views and projections according to changes in market conditions. Knight Frank Research Reports are also available at Knight Frank 2012 This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is allowed with proper reference to Knight Frank Research.