real estate Highlights

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1 Research oct-dec 2008/4th quarter real estate highlights Highlights The litany of setbacks experienced in 2008 points to a far from glitzy performance for Singapore s private residential sector, at least until the dust has settled and the economy shows some signs of recovery. The retail market was fairly stable for the whole of 2008, with rents and occupancy staging modest increases compared to The financial meltdown, which developed into a worldwide economic crisis, caused office rentals to come under downward pressure in The industrial property market, which achieved encouraging growth in the first three quarters of 2008, showed a decline in rents and prices in 4Q has been a disappointing year for the investment sales market in Singapore, with investment sales totaling only S$14.7 billion, only about a third, or 37%, of the investment sales in A total of 852 properties were put up for auction in 2008, reflecting a 35% decrease compared to 2007.

2 oct-dec 2008/4th quarter real estate highlights Residential Property Market As the global economy appears to be coming apart at the seams, the litany of setbacks experienced in the past year have set the stage for markets grappling with what is to come. This points to a far from glitzy performance for Singapore s private residential sector, at least until the dust has settled and the economy shows some signs of recovery. Private Residential Sector Sluggish Launch Market The private residential market was unusually quiet in 2008, in terms of both launch and sales activity. There were only 713 private residential units launched in 4Q 2008, barely 30% of what was achieved in the last quarter. As such, the total number of units launched in 2008 was 6,100 units, below half of that in 2007, haltering the pace of growth of launches in the past three years. Based on launch activity in the last quarter of 2008, the 707 units launched during the period was 68.5% lower than the preceding quarter and the lowest quarterly figure attained since the first quarter of Of the three regions, the prime Core Central Region proved to be the most affected submarket for launches. Despite accounting for the majority of developer launches in 4Q 08, the entire 2008 saw launches in this submarket cool just as quickly as it heated up in Specifically, the prime Core Central Region accounted for 23% of all launches in 2008, a smaller proportion than the approximately 36% achieved in This was also lower than that in the mid-tier Rest of Central Region and mass Outside Central Chart 1 Private Home Launch and Sales Volume Islandwide 45,000 40,000 35,000 No. of Units 30,000 25,000 20,000 15,000 10,000 5, New Sales Secondary Sales New Launches Source: Urban Redevelopment Authority, Knight Frank Research 2

3 Region, which accounted for 38% and 39% of units launched in 2008 respectively. Nevertheless, some high-end properties were still launched in the fourth quarter, catering to the luxury residential market, targeting selected high-net-worth individuals who may still be unaffected by the financial crisis. These launches include 18 waterfront villas at Sandy Island in Sentosa Cove that was launched in mid-october The fall in residential project launches is largely due to dispiriting investor sentiments in 2008, which prompted developers to generally withhold the number of launches. These brought the number of private residential homes launched in 2008 to total barely above 6,000 units. This was less than half of that launched in 2007, and was also lower than the figures in 2005 and 2006, where at least 8,000 units were launched in each of these years. However, compared to previous downturns, the 6,100 units launched in 2008 was still above figures in 2003 and 1998 by 17% and 15% respectively. Dwindling Primary Market Sales With fewer choices, developer sales activity also declined drastically in 4Q 2008 although this was actually exacerbated by a sudden deterioration of worldwide economic conditions in October URA s statistics have also indicated that 4Q 2008 was the quarter with the least number of units sold by developers in 2008 there were only 419 units sold by developers in 4Q 2008, way below the next highest quarter in 2008, i.e. 1Q 2008, where 762 units were sold in the primary market. This was also the lowest figure since 1Q 2003 when only 427 units were sold. In particular, there was only a meagre 131 developer sales in December 2008, and this was among the least units sold per month since such data has been made available in July In 2008, there were a total of 4,300 new sales, representing one of the lowest primary market transactions since such data was available. The mass market accounted for the majority, or 39%, of all units sold in 2008, higher than the high-end market which accounted for 24%. The mid-tier market accounted for 34% of all units sold by developers in There were several reasons underpinning the sluggish developer sale. Besides the poor economic conditions and employment prospects which affect homebuying sentiments, this was largely due to a mismatch in the price expectations between buyers and sellers of private homes. The mismatch arises as 2008 was the year where property market sentiments drastically deteriorates and home-seekers were increasingly cautious in their home purchasing criteria, looking at mere functionality, instead of housing aspirations. Home-seekers were also hesitant to buy unless prices had factored in the risk of further price decline. However, developers have not actually re-priced projects, and generally prefer to withhold project launches to monitor the market situation. Private Residential Projects that are Expected to be Completed in 2009 Projects Tenure District Developer Location Units Paradise Island 99-year 04 Ho Bee Homes Pte Ltd Paradise Island (Sentosa Cove) One-North Residences 99-year 05 Vista Development Pte Ltd North Buona Vista Road/ One North Gateway / Slim Barrack Rise Botannia 956- year 05 City Developments Ltd/Leonie Court Pte Ltd West Coast Park 493 Carabelle 956-yr 05 Sim Lian (West Coast) Pte Ltd West Coast Way 338 Lynnsville 331 FH 05 Kim Leong Development Pte Ltd Pasir Panjang Road 19 RiverGate FH 09 CapitaLand & Hwa Hong Corporation (Riverwalk Promenade Pte Ltd) Martin Road 545 One Jervois FH 10 FCL Joo Chiat Place Pte Ltd Jervois Close / Jervois Road 275 Lornie 18 FH 11 Clydesbuilt Capital Pte Ltd Lornie Road 18 Casa Merah 99-year 16 Choice Homes Beta Pte Ltd Tanah Merah Kechil Avenue 556 The Centris 99-year 22 Prime Point Realty Development Pte Ltd Jurong West Street 64 / Jurong West Central Source: Knight Frank Research 3

4 oct-dec 2008/4th quarter real estate highlights Diminishing Secondary Market Activity The secondary market was not spared by the financial turmoil either when the last quarter of 2008 witnessed a decline in the number of secondary market transactions. Figures indicated that the number of transactions has decreased by approximately 55% to circa 1,200 units in 4Q 08. Showing signs of wavering, secondary market activity had gradually dwindled since the onset of financial instability in global markets, aside from the mild increase experienced in 2Q 08 when secondary market transactions crept up by 6.9%. On a yearly basis, secondary market transactions have reached around 9,300 units in Representing a steep 64.8% yoy (year-on-year) fall, this figure is also of a similar level to that of secondary market transactions in 2005, when the market was expanding at a faster pace. The start of the financial turmoil in 2008 marked the end of increasing property speculations seen in 2006 and 2007, as investors become cautious amid growing tensions in the current market. Speculative property sales persisted to decline in the fourth quarter of 2008 when the proportion of subsales islandwide registered at 12.8%. In spite of this 1.3 percent-point fall from 3Q 2008, the proportion of sub-sales in the private residential market is still substantial as it is well above the quarterly average of 3.2% between 2003 and While the proportion of subsales in the mass Outside Central Region held steady at 7.3% in 4Q 08, the mid-tier Rest of Central Region was the only sub market that saw resurgence in the proportion of sub-sales after easing slightly in 2Q 08 the proportion of subsales in this region stood at 20.4% in 4Q 08. In contrast, it was the prime Core Central Region that lost its steam, after continuing to ease in terms of sub-sale activity. The growth years ( ) saw an increased flurry in the prime sub-sale market, especially in 2007 when a considerable 2,535 units were transacted in the sub-sale market. Based on official figures as at 4Q 08, the number of sub-sales in 2008 for the prime sub-market accounts for a more mellowed 23% of last year s sum. The Marina Bay saw 98 sub-sale transactions in 2008 (compared to 317 in 2007; 199 in 2006; 544 in 2005) with the latest median sub-sale price transacted at S$1,581 psf, down 20.5% yoy. Ebbing Foreign Interest Foreign homebuyers were relatively inactive in Singapore s private residential market in 2008, although figures have indicated a slight climb in the share of foreigners (both PR and non-pr) that purchased both landed and non-landed private homes in 4Q Chart 2 Transactions by Foreigners Islandwide Percentage of Transaction by Foreigners 30% 25% 20% 15% 10% 5% 0% 18.39% % 2005 Source: Urban Redevelopment Authority, Knight Frank Research Numbers show that 277 transactions have been made by foreigners in 4Q 2008, which is barely 20% of foreign transactions made in the same period last year (4Q 2007). Numbers also indicate that for the whole of 2008, there are about 3,055 transactions made by foreigners. Nonetheless, the foreign homebuying interest is considered relatively reasonable - although the number of foreign homebuyers was smaller than the growth period between 2005 and 2007, the 3,055 sale transactions by foreigners in 2008 were well above an average of about the 2,000 sale transactions by foreigners in 2003 and Indonesians accounted for the majority of foreign homebuyers in 4Q 2008, with 25.2% of all transactions by foreigners made by them. Transactions by Malaysians also comprised a significant proportion, with 20.5% of all transactions by foreigners made by buyers from Malaysia. Over the years, these two categories of buyers have been predominant players in Singapore s private residential market. While Malaysians were actively purchasing properties between 1998 and 2003, buyers from Indonesia have crept up in recent years and in the past four years ( ) surpassed Malaysians, thus 23.46% % % 2008 (Prelim) 4

5 Chart 3 Proportion of Foreign Homebuyers Islandwide as at 1H 2008 Australia 4.3% China 11.2% Hong Kong 0.9% India 12.1% Indonesia 19.0% Malaysia 19.1% Taiwan 1.8% USA 2.2% United Kingdom 7.5% Others 21.8% Source: Urban Redevelopment Authority, Knight Frank Research forming the largest group of foreign buyers in the market. In 2008 however, Malaysians made up 31.8% of all transactions by foreigners, 0.1 percentage point ahead from Indonesians. Some projects that are situated in the Southern part of Singapore were popular with foreigners in These include Caribbean at Keppel Bay where foreigners participated in about 56% or 19 out of 34 transactions. Located at Tanjong Pagar, 61% of sales transactions of apartments in the Icon in 2008 were made by foreigners. In addition, foreigners also purchased 19 of the 20 units in Pebble Bay and 13 of the 22 units at Reflections at Keppel Bay in Residential Prices Took a Tumble According to the Urban Redevelopment Authority s (URA) quarterly statistics, overall prices in the private residential property market have eased by 6.1% quarter-onquarter (qoq) in 4Q 2008, steeper than earlier flash estimate figures that indicated a 5.7% qoq drop. Specifically, both overall landed and non-landed properties witnessed a more pronounced fall this quarter, by 4.8% qoq and 6.3% qoq respectively. With yearly growth rates registered at 4.7% year-onyear (yoy), this was the first time in over four years that prices have reflected a slowdown in the rate of growth. As the economic crisis has surfaced to be one that would have acute effects on the economy, overall prices of private homes have waned in tandem with the weakened economic outlook. In terms of the non-landed market segments, all regions saw prices letting-up in the fourth quarter. It was the prime market segment (Core Central Region) that saw the largest reduction in price growth from the previous quarter when rates deteriorated further by 6.5% qoq in 4Q Similarly, private home prices in the mid-tier (Rest of Central Region) recorded a smaller fall of 6.2% qoq this quarter. On the other hand, average prices in the mass-market private home segment prices decline by a milder 5.9% qoq. Despite experiencing the slightest decline in home prices, a drop in prices reflected that buying interest for massmarket private homes has waned. Prices of mass-market homes were initially thought to be able to hold better than high-end private residential properties in 2008, as some buyers settle for mass-market private homes for lower-cost alternatives. However, the cautious homebuying sentiments have become so significant that some homeseekers chose to purchase HDB resale flats. On the other hand, the decline in the performance of the private residential landed property market was more controlled. This was supported by limited supply of new quality landed homes, and lower speculative activity in 2008 when the private residential market was active. The fall in the median prices of landed residential properties was relatively lower at 4.8% qoq, compared to the 6.3% decline in the median prices of private non-landed homes. However, this was the first time over the four years that prices of landed homes registered negative growth, with median prices of semi-detached homes experiencing the largest quarterly fall of 5.3% qoq. 5

6 oct-dec 2008/4th quarter real estate highlights Share of units that will be completed in the year and have been sold with DPS Year Dec 2008 Slump in Rentals Despite a general weakening in the private residential market, the leasing market was quite active in Based on preliminary figures, there were a total of 32,100 leasing deals for both landed and non-landed homes. This was just 5.1% lower than the peak in 2005, where the largest number of leasing deals was concluded. Although leasing activity sustained in 2008, these deals were concluded at a lower rental level. Based on Knight Frank s research on non-landed property, rentals have generally decreased across the board in Rentals of luxury properties have dipped by 7.2% qoq in 4Q 2008, reflecting a 9.6% yoy decline. This was a stark contrast to the 25.6% yoy increase in rents of luxury apartments in Rents of non-landed homes outside the luxury segment fell as well, although there was a dichotomy in the performance of rents of such homes. Specifically, rents of non-landed homes in both Lower Bukit Timah and prime East Coast areas fell the most in 2008, plummeting by 27.9% yoy and 19.9% yoy respectively. The fall was partly led by a sharp escalation in 2007, where the two areas strengthened in their appeal to tenants. These include tenants who looked No. of current uncompleted units sold with DPS and scheduled to complete in the year , , , Total 10,450 Source: Knight Frank Research for alternatives to the prime residential districts 9,10 and 11, as prime rents were soaring. There were also some tenants who vacated from the prime residential districts as dwellings were demolished after being sold collectively. However, this trend had almost come to an end in 2H 2008 and tenants are increasingly cautious in this weak economic environment. There has been a resistance to commit to high rentals and some tenants are also more open to well-located suburban areas. Hence, nonlanded homes in the Yishun and Yio Chu Kang areas dropped the least, by about 5% yoy. Deferred Payment Statistics showed some relief In December, the URA released information on private housing units sold under the Deferred Payment Scheme (DPS), as there is some concern in the property market that a large number of the uncompleted homes sold under the DPS could be disposed at distress prices in 2009 and This may happen when buyers are required to pay the balance of the purchase price when the projects are completed in 2009 and The URA provided an estimate of the number of homes which were bought with DPS and scheduled to complete from Dec 2008 to each of the years in However, the statistics pointed to a slight relief. Although this problem will heighten in 2009 and 2010, as the number of such homes that will be completed in 2009 and 2010 account for 68% all such homes to be completed from Dec 2008 to 2013, most of the units that are scheduled for completion in 2009 and 2010 were probably purchased in 2005 and 2006 at prices that are still relatively lower than today s level or the level in Even if the property market continue to weaken in 2009, the owners of these 4,560 units bought under the DPS could either lease out the homes at relatively good returns or sell the homes at their breakeven level or with a profit. Given that the property market is expected to show some signs of stabilising or recovery in 2010, most of the owners whose homes will complete 2010 would also not be under pressure to sell at distress prices. In addition, owners who are not faced with extreme financial difficulties should be confident to hold the homes for investments as rental prospects should be more positive from Moreover, tenants usually prefer newly completed homes, especially those in Core Central Region (CCR). For residential units that are located outside the prime CCR, they are less at risk of default because a relatively higher proportion of these homes were bought for owners occupation. 6

7 Public Housing Sector Keeping Afloat Although the private residential market continues to be awash with less than cheery sentiments, Singapore s public housing sector seems to be able to remain afloat amid looming economic concerns. The Housing Development Board s (HDB) flash estimates suggest that while the increase of resale prices moderated, from 4.2% in 3Q 2008 to 1.5% growth in 4Q 2008, average resale flat prices are still some 1.9% higher than the last peak in end On a yearly basis, average resale flat prices grew by Chart 4 HDB Resale Transaction Volume and Price Index No. of Transactions 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Q07 1Q08 2Q08 3Q08 4Q08 3-room Flat 4-room Flat 5-room Flat Executive Flat HDB Resale Price Index Source: Housing Development Board, Knight Frank Research Chart 5 Median Resale Prices of 5-room flat $390,000 $380, % in 2008, reflecting that the public housing market is still holding firm amid the uncertainty. The price growth of the public housing market was largely due to a shift in homebuyers requirements as the economy headed for greater uncertainty. Some first time homebuyers are no longer emphasizing on housing aspirations from well-designed private homes, and are contented with HDB flats which can meet basic accommodation needs. Additionally, this can be seen from a stronger demand for smaller HDB flats and a subdued demand for pricier larger flats. This can also be seen from the recent HDB Resale Price Index 7.0% 6.0% Design Build and Sell Scheme (DBSS) flat Natura Loft at Bishan, which attracted only 600 applicants for its 480 flats as at mid November This was notably fewer than previous launches of DBSS projects, which attracted an influx of applicants, various times more than the units available. In addition, the interest for smaller flats has extended to beyond resale flats, which formed the traditional source of supply for smaller flats as HDB has suspended building two- and three-room flats for a while. There was tremendous response for the recent 150 (from studios to three-room) flats for sale, as these 150 flats received an overwhelming 2,426 applications. Given raised caution about the short term economic outlook, demand for such smaller sized flats are expected to increase, not only for low-income families but serving also as cheaper alternatives in troubled times. In 2009, 2,000 three-room and smaller flats will be constructed and a subsequent 2,000 is allocated for Rentals of HDB flats were still on an upward climb for all flat types in 3Q 2008, except for 2-room flats, where median subletting rents fell 9.1% qoq to S$1,000 per month. The largest climb in rentals was observed in the 1-room and 5-room market where median subletting rents increased by 10.0% and 5.3% qoq respectively to S$880 and S$2,000 per month. The increase in rents of larger flats could be partly due to some tenants who were priced out of the private residential market, not because of soaring private residential rents but because the uncertain economic outlook has affected some tenants willingness to pay for relatively more pricey accommodation. $370,000 $360,000 $350,000 $340,000 $330,000 $320,000 4Q07 1Q08 2Q08 3Q08 4Q08 5-room Flat Valuation Price Change (qoq) Source: Housing Development Board, Knight Frank Research 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Rental flats comprise only a small proportion of public housing flats in Singapore, and these have recently been entangled in issues surrounding the legality of some of its tenants. While such flats serve to cater to low income families, the boom times have sparked unlawful means to generate more income for some. To minimize such illegal acts, HDB has proposed to increase the stock of such rental flats from 42,800 to 49,860 by end

8 oct-dec 2008/4th quarter real estate highlights Outlook for Private Residential Property Sector As the global economy appears to be coming apart at the seams, the litany of setbacks experienced in the past year have set the stage for markets grappling with what is to come. This points to a far from glitzy performance for Singapore s private residential sector, at least until the dust has settled and the economy shows some signs of recovery. Afflicted markets would contribute to price declines in the coming months. In 2009, overall average prices and rents of private residential properties are expected to fall by 15% to 25%. This would bring private home prices to about the level in the beginning of For the first half of 2009, launch and sales activity are expected to remain subdued, as the economic situation remains uncertain and banks continue to tighten credit. However, should more projects be attractively re-priced in 2009 to fit the budget of homebuyers, the number of units launched and take-up can expect to sustain or marginally improve in, as there is some latent demand from bargain hunters. However, in the short term, the highend segment is expected to continue to experience low sale volume in the primary market and prices in the secondary market would come under increasing pressure, especially for projects that are approaching completion of construction Outlook for Public Residential Property Sector Currently, the public housing sector is well placed to provide more affordable housing alternatives, as qualms over the economy and the job security issues have turned everyone more cautious in spending. Table 1 Rentals of Selected Private Residential (Apartment/Condominium) Units as at 4Q 2008 Locality Monthly Rent (psf) Districts 9, 10 and 11 (Luxury) S$ 4.60 S$ 5.20 Districts 9, 10 and 11 (Others) S$ 3.80 S$ 4.50 East Coast S$ 2.60 S$ 3.30 West S$ 2.30 S$ 2.90 Upper Bukit Timah S$ 1.80 S$ 2.00 Thomson, Toa Payoh, Bishan S$ 2.50 S$ 2.90 Yio Chu Kang, Yishun S$ 2.00 S$ 2.20 Source: Knight Frank Research Table 2 Capital Values of Selected Private Residential (Apartment/Condominium) Units as at 4Q 2008 Locality However, the HDB resale market will still be affected when these issues compound and thwart overall homebuying sentiments. As such, the prices of resale flats should hold in 1Q 2009, but a slight decline may follow after. Average prices of HDB resale flats may correct 7% to 13% in 2009, as the weakening economic conditions filters into the HDB market. Freehold Capital Value (psf) 99-year Leasehold Districts 9, 10 and 11 (Luxury) S$ 2,170 S$ 2,210 - Districts 9, 10 and 11 (Others) S$ 1,480 S$ 1,630 S$ 1,370 S$ 1,420 East Coast S$ 1,000 S$ 1,050 S$ 840 S$ 1,020 West S$ 760 S$ 775 S$ 610 S$ 730 Upper Bukit Timah S$ 620 S$ 690 S$ 560 S$ 710 Thomson, Toa Payoh, Bishan S$ 680 S$ 750 S$ 610 S$ 670 Yio Chu Kang, Yishun S$ 500 S$ Source: Knight Frank Research 8

9 Retail Property Market The retail market was fairly stable for the whole of 2008, with rents and occupancy staging modest increases compared to However, it should be noted that the marginal growth for the whole of 2008 was the result of the rental decline in 2H 2008, erasing most of the gains achieved in 1H Chart 1 Retail Sales Index at Current Price (Excluding Motor Vehicle) Retail Sales Index (Excluding Motor Vehicle) Mar 08 Apr 08 May 08 Jun 08 Jul 08 Retail Sales Index (Excluding Motor Vehicle) Source: Singapore Department of Statistics Consumer Sentiments Affected Overall prime retail rentals recorded a lower-than-expected increase of 0.8% year-on-year (yoy) for the whole of The retail sector performed impressively in 1H 2008, with prime retail rentals growing by 13.9% when compared to 1H However average rentals started to fall in 2H Yoy change in Retail Sales Index 16.0% 12.0% 8.0% 4.0% 0.0% -4.0% Yoy Change 2008, when the global economic slowdown adversely affected consumers sentiments, resulting in a decline in prime retail rentals in 2H Retail sales volume fell into negative territory as consumers cut back on discretionary spending amidst the deepening recession. Nominal retail sales, excluding motor vehicles, increased 7.9% and 3.1% yoy in September and October 2008 respectively. Stripping away price effect, real retail sales increased by only 3.8% yoy in September but declined marginally in October by 0.6% yoy. The number of foreign visitor arrivals and spending in 2008 fell short of the targets set by the Singapore Tourism Board (STB) earlier this year, despite a string of events aimed to boost visitor figures. Visitor arrivals for the whole year declined 2.0% to reach 10.1 million arrivals. Although tourist receipts set the record for highest tourist receipts by increasing 5.0% yoy to S$14.8 million, it was still short of the STB s target of S$15.5 million. Singapore remained popular among visitors from Indonesia, China, Australia India and Malaysia who made up around half of the total visitor arrivals for Based on the latest MasterCard Worldwide Index of Consumer Confidence 4Q 2008, the level of consumer confidence in Singapore dipped in 2Q 2008 but was generally still somewhat optimistic for the next 6 months. The twice yearly survey of 13 markets including Singapore, measures consumers outlook toward employment, the economy, regular income, stock market and quality of life over the next 6 months. The MasterCard index for Singapore consumer confidence also fell sharply from 87.3 points for to 62.3, the lowest since 4Q 2004 but still remained higher than the historical mean of

10 oct-dec 2008/4th quarter real estate highlights Growth in Demand and Limited Supply in 2008 New demand for retail space in 4Q 2008 was positive, although it contracted by 140,000 sq ft in 3Q At 409,000 sq ft, this was due to encouraging take-up of newly completed retail space and relatively limited new completions. Net new retail supply also increased in 4Q 2008 by about 388,000 sq ft. A notable new completion in 4Q 2008 was Jurong Point s extension, comprising about 215,000 sq ft of retail space. Costing about S$720 mil to develop, the extension features many new retailers, bringing the number of retailers in the mall to 450. This is double the number of retailers before the extension. Besides enhancing the retail offerings, higher-tier brands, such as Bakerzin and Avant Garde were also introduced to the mall. With healthy demand, average occupancy of retail space increased 0.8 percentage-point in 2008, to 93.6%. Occupancy of retail space also increased marginally across all areas in 2008, except in the Downtown Core, which dropped by 0.7 percentage-point to 96.3%. Chart 2 Islandwide Demand and Supply Retail Space ( 000 sq m) New Demand New Supply Source: Urban Redevelopment Authority, Knight Frank Research The increase in occupancy was most significant for retail space in Outside Central Region, which increased by 1.4 percentagepoints in 2008, to 96.2%. The increase in occupancy for retail space Outside Central Region can be best seen from healthy occupancy of several suburban malls, including well-positioned REIT-owned malls, which achieved full occupancy. Suburban malls completed in 2008 also generally enjoyed encouraging leasing interest. These include re-positioned malls such as West Coast Plaza (formerly Ginza Plaza), which offer a more exciting shopping experience after the re-development. Meanwhile, occupancy of retail space in Rest of Central Area and Orchard Road also increased yoy by 1.1 percentage-points to 90.5% and 1.0 percentage-points to 96.7% in 2008 respectively. New demand for the whole of 2008 was 172,000 sq ft, but this is expected to be lower in 2009 as retailers become more cautious in their expansionary drives. As a number of retailers have opened multiple outlets in the same region, there may be some retailers who will consolidate business by closing the less profitable outlets when their leases expire. Net new retail supply fell in 2008 by 97,000 sq ft as some retail spaces such as Sembawang shopping centre and Meritus Mandarin Gallery were closed for additions and alterations works. 4Q07 1Q08 2Q08 3Q08 4Q08 Occupancy Rate 94.0% 93.0% 92.0% 91.0% Occupancy Prime Retail Rentals continue to Fall Overall prime retail rentals continued to fall in 4Q 2008, following the first decline in 3Q In the fourth quarter, the fall in overall retail rents accelerated slightly, as overall prime retail rents fell 1.6% qoq, compared to a 0.7% qoq fall in 3Q The decline in 2H 2008 have somehow offset the growth of retail rents in 1H 2008, as overall retail rents increased by only 0.8% for the whole of Prime retail rents fell the most for retail spaces in Orchard (Central) in 4Q Monthly gross rents of prime retail space in Orchard (Central) dropped by 2.9% qoq, to an average of S$47.14 psf per month. The fall was partly due to a strong growth in retail rents over the past three years, as new supply remained limited. However, as the economic conditions drastically weaken, and together with the expected completion of major new malls such as ION Orchard, Orchard Central and Somerset Central drawing near, rents of retail space in Orchard (Central) are under more pressure to correct. In addition, rents of prime retail space in Orchard (Central) were stable in 3Q 2008, amid an almost across-theboard fall in retail rentals in 3Q On a yearly basis, however, rents of retail space in Orchard (Central) still enjoyed a 3.7% increase. Similarly, rents of retail space in Marina Centre/City Hall/Bugis fell by 2.2% qoq in 4Q 2008, and this brought rents in the area to be 0.5% lower than in Although the rents of retail space in City Fringe did not actually enjoy significant increases over the past three years, rents actually fell in 4Q 2008, by 1.6% qoq in 4Q This brought rents of retail space in the area to be about 4.0% lower than the level a year ago. The fall, notwithstanding a muted growth in the previous years where property market sentiments soared, was largely because retail space in the area were mostly not conveniently located compared to those in the city centre. Some of these malls have 10

11 Chart 3 Prime Retail Rentals in the Orchard Road (Central) Locality Prime Retail Rentals (psf pm) $55 $50 $45 $40 $35 $30 4Q07 1Q08 2Q08 3Q08 4Q08 Source: Knight Frank Research Prime Retail Rentals in the Orchard Road (Central) Locality Qoq Change in Prime Retail Rental 16.0% 12.0% 8.0% 4.0% 0.0% -4.0% Outlook The retail property market produced encouraging results for landlords in 1H 2008, with increasing occupancy and rising rents. However, the marginal drop in retail rents during the last two quarters of 2008 have indicated that retail rents have peaked and were increasingly affected by severe economic uncertainties. Many of the leases signed in 2008 were concluded before the financial meltdown in September that year and retailers have since reassessed their operations. This will affect their considerations for leasing new retail space in Leases signed in 2009 are likely to be done at notably lower rents and the number of pre-commitments is also expected to diminish. Table 1 Current Rentals of Prime Shopping Centre Space Locality Prime Monthly Gross Rentals 1 (psf) Orchard (Central) S$ Orchard (Fringe) S$ Marina Centre, City Hall, Bugis S$ City Fringe S$ Suburban S$ Based on pre-defined portfolio of properties; refers to prime shop space of between 400 and 800 sf typically located on ground level with good frontage; any yields implied refer only to such prime space and may not be reflective of the entire shopping centre Source: Knight Frank Research relatively low patronage, as they were located away from major activity centers and transport nodes, such as MRT stations. On the other hand, average prime rents of retail space in suburban areas were stable in 4Q It averaged $29.10 psf per month, reflecting a 0.4% yoy increase. The performance of suburban malls were fundamentally supported by shoppers in the immediate neighbourhoods, who served as ready consumer catchment. Suburban malls which were successfully re-positioned also enjoyed patronage from shoppers who live in nearby towns. For example, the successfully revamped Lot 1 Shopping Centre is popular among residents in Choa Chu Kang as well as those in Bukit Gombak and Yew Tee. There may also be some residents who stay in towns further north along the North- West MRT line and choose the mall over the others as a popular hangout. Likewise, Jurong Point is a favourite with residents who stay in towns along the West Line. In addition, the economic uncertainty is also discouraging some consumers from buying luxury goods. Suburban malls, which are conveniently located and provide a wide variety of cheaper retail offerings, are appearing as more popular alternatives. As the overall business environment deteriorates and job uncertainty lingers, consumer sentiments will continue to be adversely affected. Shoppers will be very cautious in spending, and may prefer cheaper alternatives, even for necessities, which may impact the earnings of certain retailers. Air traffic volume has also been substantially reduced, with a number of airlines reducing flights in response to subdued travelling interest. In particular, some Asian airlines have also cut down on the frequency of flights. As the number of visitor arrivals in Singapore persists to decline in 2009, this will affect the takings of retailers in some quality malls, which are positioned as tourist destination shopping places. However, landlords are expected to be more understanding towards retailers concerns and will be increasingly realistic in asking rents. There will also be some landlords who will be more flexible during lease negotiation with tenants and these will include mall managers who strive to maintain the occupancy of the mall. Retail rentals are likely to decline by a further 8% to 12% in 2009, with suburban malls expected to be slightly more resilient during this economic downturn. 11

12 oct-dec 2008/4th quarter real estate highlights Office Property Market The financial meltdown, which developed into a worldwide economic crisis, caused office rentals to come under downward pressure in Specifically, the average rent for Grade A offices have dipped by 18.8% qoq and 12.5% yoy in 4Q 08. Economic Performance Although it was intuitive that the record office rents achieved in 2007 have high risk of corrections, the financial meltdown actually exacerbated the fall of office rents in Of note, Singapore s GDP fell 4.2% in 4Q 2008, the largest fall in seven years. As a result, the Ministry of Trade and Industry (MTI) has to trim the forecast for 2008 s economic growth from 2.5% in November 2008 to 1.1% in February This is a sharp decline from the 7.8% GDP growth in The MTI has also forecasted that the economy may contract by -5% to -2% in The Economic Intelligence Unit (EIU) has also forecasted the Singapore economy will contract by about 0.1% in 2009, dragged by the world economic crisis. Although Singapore and some Asian countries are felt to have increasingly re-structured their economies over the years, the region is still highly open and will not be spared from the continued worsening of global economic conditions. A recovery for Singapore s economy is thus expected to occur after 2009, if economic conditions in the G-7 countries improve. The G-7 countries account for more than half of the world s GDP, and with their economic recovery by 2010, the Asian and Singapore economies can hope to enjoy moderate growths of about 4% in Hence, the Singapore office property market which is affected by the Singapore Chart 1 Economic Growth and Projections 7 Yearly Economic Growth (%) F 2010F 2011F 2012F 2013F G7 Economies Singapore Asia Source: Economic Intelligence Unit, Knight Frank Research 12

13 economic environment, will continue to see compressions in rental values in 2009, as the business environment further deteriorates. Chart 2 New Supply, New Demand and Occupancy Levels Islandwide (Private and Public Sectors) % 92.50% Demand and Supply Contraction in demand signals a softer market The office space market experienced a turning point in In 3Q 2008, the islandwide demand for office premises was at its highest, totaling about 65.7 mil sq ft of occupied net space. Although the demand for office space expanded by 172,000 sq ft in 3Q 2008, it contracted in the following quarter by some 366,000 sq ft. This is the first contraction in demand after four and a half years of growth. In addition to a slowdown in new demand, 2008 was a year where the situation of new demand outstripping new office supply has ceased. New demand has consistently outstripped new supply since 2004, lending support to increasing occupancy. In fact, there were periods in which new demand has grossly exceeded new supply in 2006 and 2007, which encourages some users to seek alternative office space such as those in business parks, as rents were soaring amid a supply crunch. However, beginning from 1Q 2008, the level of new demand has fallen to below that of new supply, and this continues throughout the rest of the year. With the completion of Merrill Lynch Harbourfront, 700 Beach Road and the transitional office new supply in 3Q 2008 was about 441,320 sq ft, versus a new demand of only 165,000 sq ft this leads to a fall of office space occupancy, from 92.2% in 2Q 2008 to 91.8%, and 91.2% at end This also reflects that islandwide occupancy has dipped 1.5 percentage-point year-to-date (ytd). Office Space ( 000 sqm) Q07 4Q07 1Q08 2Q08 3Q08 New Demand New Supply Source: Urban Redevelopment Authority, Knight Frank Research Dichotomy in New Demand across micro office zones Of note, the drop in overall demand was caused by a sharp fall in new demand for office space in the Central Area, specifically Downtown Core. Demand for office space in Downtown Core contracted 140,000 sq ft in 3Q 2008 and a further 366,000 sq ft Occupancy Rate 92.00% 91.50% 91.00% 90.50% 90.00% 89.50% in the following quarter, highlighting the results of companies who are consolidating business functions and some smallersized tenants who may have vacated as a result of business closures. Additionally, some companies have already committed to relocate to business parks, driving the occupancy of business parks to an all-time high of 93.8% at end Chart 3 New Supply and New Demand of Office Space in Downtown Core 000 sqm nett Q07 4Q07 1Q08 2Q08 3Q08 New Demand Source: Urban Redevelopment Authority, Knight Frank Research New Supply Occupancy Rate (%) 13

14 oct-dec 2008/4th quarter real estate highlights However, as some companies in Downtown Core are also concerned about the suitability of alternate business locations, there has been some who are unwilling to relocate from the CBD to conventional office space in outlying areas, where either the space may not fit their requirements or the location may impact business transactions and branding. Hence, the Fringe Area, which form the outskirts of the Central Region and is considered well-located, enjoyed increases in new demand. The Fringe Area includes well-positioned towns and popular secondary business locations such as Toa Payoh, Tiong Bahru. Alexandra and Paya Lebar. New demand for office space in the Fringe Area increased 46% qoq in 2008 and averaged 161,500 sq ft per quarter in 2008, up from an average of less than 100,000 sq ft in Slump in Office Rentals As the economic predicament persists, office rentals took a tumble in 4Q 08. After four years of rental escalations, the office rental market has weakened in tandem with the stagnating economic growth and deflated business confidence. In terms of rental levels, sub markets across the board have registered significant decreases in rentals. Specifically, the average rent for Grade A offices have dipped by 18.8% qoq and 12.5% yoy in 4Q 08. It was Grade A offices in the Shenton Way/Robinson Road/Tanjong Pagar areas that had the most significant decline on a quarterly basis, when rental growth registered at 21.1% qoq. The Grade A offices in the Raffles Place area followed with a drop by 19.0% qoq. Grade B offices reflected prevailing sentiments with a reduction in average rent by 19.4% qoq and 6.4% yoy. It was Grade B offices in the Raffles Place area with the greatest fall of 19.0% qoq. Despite this, Grade B offices in other areas were just as dire with a drop by 18.1% qoq in the Shenton Way/Robinson Road/Tanjong Pagar area and a decline of 18.7% qoq in Orchard Road. Office rentals in non-cbd locations were not spared either, as the general abatement in rentals was mirrored in these sub markets. Average rentals of office space in the Beach Road/Middle Road areas plunged by 20% qoq, the steepest rate among the non-cbd locations. The smallest fall in office rentals was experienced in the Suburban West with a 14.1% qoq drop. As the rental rates in the CBD fell, office landlords in the non-cbd areas also had to reduce the rentals to retain their tenants. Chart 4 New Supply and New Demand of Office Space in Fringe Areas 000 sqm nett Q07 4Q07 1Q08 2Q08 3Q08 New Demand Source: Urban Redevelopment Authority, Knight Frank Research Chart 5 Average Office Rentals Rental ($psf) $20.00 $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 4Q 2008 (Grade A) Raffles Place : $14.29 psf Suntec: : $12.50 psf Shenton Way : $ 9.33 psf Orchard Road : $11.33 psf Suburban : $ 6.52 psf Raffles Place Grade A Orchard Road Grade A Source: Source: Urban Redevelopment Authority, Knight Frank Research As economies continue to contend with the floundering financial situation, landlords would seek to retain rental income, as tenant retention remains a fundamental priority with the economic situation weighing heavily on the office property market. Vacancy levels however, grew in 4Q 08 with the vacancy rate of Grade A offices climbing by 0.9 percentage points to register at 2.1%. It is anticipated that landlords will thus be more willing to retain existing tenants by renewing leases at lower rents, and offering more generous lease incentives such as longer rent-free periods, resulting in smaller rental income. New Supply 4Q04 4Q05 4Q06 4Q07 4Q08 Shenton Way/Robinson Road/Tanjong Pagar Grade A Suburban Areas Suntec/Marina/City Hall Grade A 14

15 Table 1 Effective Monthly Rentals in 4Q 2008 Location Effective Monthly Gross Rentals (psf) CBD (Grade A) Raffles Place S$ S$ Marina Centre / City Hall S$ S$ Shenton Way / Robinson Road S$ 8.50 S$ Orchard Road S$ S$ Non-CBD Beach Road / Middle Road S$ 7.40 S$ 8.90 Suburban (North) S$ 6.90 S$ 7.90 Suburban (East) S$ 5.40 S$ 6.30 Suburban (West) S$ 5.90 S$ 6.80 Source: Knight Frank Research Outlook The Singapore office property market experienced the turning points in rentals and occupancy rates in 2008, as the tumultuous financial crisis proved that the record office rents achieved in 2007 were unsustainable. Going into 2009, the performance of the office property market will continue to deteriorate, as economic conditions worsen and businesses have to strive to reduce operating costs. The first hit will be office space in central locations as some companies put their expansion plans on hold while others face the prospects of corporate downsizing. There are also some tenants who committed at high rentals in 2006 and 2007 and are hoping to alleviate the stress in occupancy costs. As it will be difficult to prematurely terminate leases, some tenants who had to consolidate business functions will try to sublet their excess office space even at lower rentals. This would result in the former tenants having to make up for the shortfall in rents. Additionally, the recession may cause some business closures, resulting in an increase in vacant business space. This will be aggravated by an increase in potential supply in Downtown Core, beginning from On a positive note, the sombre economic conditions will encourage office space providers to be more flexible towards occupiers business concerns. There will be more room for negotiation, even for quality office buildings. These include office buildings owned by institutional investors such as REITs and property funds, which have to maintain the occupancy of the buildings as part of asset management objectives. In other words, office landlords will be more realistic and willing to accept lower office rentals in order to retain existing tenants or attract new ones. As a result, it is expected that prime office rentals would continue to slide by 15% to 25% in the next six months, while rents of office space in suburban places will fall lesser, by 10% to 15% in the same period. The decline in rentals of price office space could accelerate if foreign financial institutions, which contributed to the boom in office demand between 2004 and 2008 were to down-size in this financial crisis. The corrections of office rentals should be viewed as active measures by landlords to adjust to changing market conditions, which can result in raising the competitiveness of doing business in Singapore. There has been increasing concern during the last property market boom that Singapore is losing its attraction for international firms as business costs, driven by soaring office rentals, increased. With the competitive element in place, this will attract foreign companies seeking business opportunities in Asia and complement strategic directives for Singapore s future growth. 15

16 oct-dec 2008/4th quarter real estate highlights Industrial Property Market The industrial property market, which achieved encouraging growth in the first three quarters of 2008, showed a decline in rents and prices in 4Q This was also the first drop after rents and prices of industrial properties achieved consecutive quarterly growth since Performance of Manufacturing Sector The slowdown of the industrial property market was partly due to shrinking manufacturing output in 4Q Total manufacturing output fell 12.6% year-onyear (yoy) in October 2008, and 7.5% yoy in November. This decline in October and November was due to a drop in global demand for numerous industrial outputs as global economic conditions drastically worsened from October. In addition, while the contraction of total manufacturing output in October was due to a cyclical drop in biomedical output, a resurgence in biomedical output in November did not contribute to an increase in total manufacturing output in that month. This means that overall manufacturing output shrunk amid the economic recession. The slowdown in total manufacturing output was exacerbated by a contraction in electronics manufacturing. Total output from the electronics cluster fell 16% yoy in October and November In addition, biomedical output fell by a sharp 30.5% in October 2008, after it surged 43.3% yoy in September. Although the fall of biomedical output was often caused by the volatility of the biomedical industry, where manufacturing facilities were periodically shut down for maintenance when production Chart 1 Industrial Production Index % 8.0% Industrial Production Index % 0.0% -4.0% -8.0% -12.0% Yoy Change 80 4Q07 1Q08 2Q08 3Q08 4Q % Industrial Production Index Yoy Change in Index Source: Singapore Department of Statistics 16

17 switches from one product to another, the biomedical output in October was relatively very low. It was the lowest monthly output since June Collectively, biomedical output in October and November 2008 was about 8% lower than the same period a year ago. However, the output from transport engineering and general manufacturing remained stable in October and November The former achieved an 8% yoy growth, while general manufacturing output remained stable. These two clusters have also generally experienced consecutive monthly growths in output in Chart 2 Demand and Supply of Factory Space (Private and Public Sector) Floor Space ( 000 sq ft) Q07 4Q07 1Q08 2Q08 3Q % 94.0% 93.0% 92.0% 91.0% 90.0% Occupancy Rate After falling to 49.5 in September, the Purchasing Manager Index (PMI) continued to fall to 45.8 in October and 44.3 in November. At 44.3, this was a record low since the PMI was launched in January The Singapore s Purchasing Manager Index (PMI) gives an outlook about forthcoming factory output, where a reading above 50 would be an expansion and a reading below 50 will indicate a contraction in upcoming factory output. Singapore s PMI has been modeled on the established US PMI, which is currently showing significant contractions. The US PMI also recorded the steepest drop in the past 26 years to hit 36.2 points in November. Demand and Supply The stock of factory space, comprising single-user and multiple-user factory space, as well as business parks totaled 307 million sq ft in 3Q Meantwhile, new demand for factory space totaled 3.7 million sq ft, reflecting a 38% qoq increase. As this new demand was 30% more than the 2.86 million sq ft of new supply, this resulted in a 0.3 percentage-point increase in the occupancy of factory space in 3Q As such, factory space enjoyed a 93.4% occupancy in 3Q New Demand Source: Urban Redevelopment Authority, Knight Frank Research 2008, the highest since 3Q 1997, near the beginning of the Asian Financial Crisis. This increased occupancy was partly backed by an increasing demand for business parks, where high office rents and the office space crunch led to firms occupying business parks for approved back-end business functions. The occupancy of business parks surged a sharp 4 percentage-points in 3Q 2008, to 93.7%. This brings occupancy of business parks to a record high. The increased occupancy was due to a growth in demand by 452,000 sq ft, while no new supply was added to the market. Total new demand for warehouse space continued to increase in 3Q 2008, from 1.16 million sq ft in 2Q 2008 to 1.36 mil sq ft in 3Q Against only about 893,400 sq ft of new warehouse supply, the occupancy of warehouse space rose 0.8 percentage-point to 92.8%. The growth of the warehouse industrial property market was partly due to Singapore s efforts to develop into a global logistics hub, as well as warehouse rents which are still considered low and remain affordable for most users. New Supply Occupancy Rate Government Land Sales Programme Two industrial sites were sold by URA in 4Q The first site, located at Ubi Ave 4, was awarded to Sim Lian for S$26.3 million, reflecting S$85.05 psf ppr. This site measures 134,655 sq ft and is zoned for light and clean industrial use. This was close to another neighbouring site which Sim Lian bought in April 2008, for S$23.9 million (S$88.75 psf ppr). Another site, at Kallang Pudding Road, attracted only one bidder when the tender closed in early October. The single bid by Orion-Four Development amounted to S$10.8 million or about S$70 psf ppr for the 61,800 sf site. In mid December, JTC also announced the award of the 60-year leasehold 4.7 ha site, Changi Business Park (CBP), for the development of an integrated Business Park facility with retail facilities and a hotel. The tender was awarded to Ascendas Frasers Pte Ltd, a joint venture between Ascendas and Frasers Centrepoint Limited. Assuming that the retail and hotel components were 17