Property Sector – Singapore - UOB Kay Hian 2018-01-19: Key Takeaways From The Built Environment & Property Prospects Seminar 2018

Property – Singapore - UOB Kay Hian 2018-01-19: Key Takeaways From The Built Environment & Property Prospects Seminar Singapore Property Sector Outlook 2018 Built Environment & Property Prospects Seminar 2018 CITY DEVELOPMENTS LIMITED C09.SI WING TAI HLDGS LTD W05.SI CDL HOSPITALITY TRUSTS J85.SI ASCENDAS REAL ESTATE INV TRUST A17U.SI CAPITALAND COMMERCIAL TRUST C61U.SI

Property – Singapore - Key Takeaways From The Built Environment & Property Prospects Seminar

  • At the Built Environment And Property Prospects Seminar 2018, industry experts echoed our bullishness in the residential and office segments, while noting mixed outlook for the industrial segment. 
  • We maintain OVERWEIGHT on Property and REITs, preferring stocks with exposure to the residential, hotel and office segments, as we head deeper into the upcycle. 
  • Our top picks are City Developments, Wing Tai, CDREIT, CCT and AREIT.


  • We attended the Built Environment & Property Prospects Seminar 2018 last week. nBelow are some of our key takeaways from the seminar.

Residential: Strong pick-up in sales momentum and pricing, led by the luxury segment. 

  • 2017 saw a first full-year growth of 1% in URA PPI flash estimates since 2013, with two consecutive quarters of 0.7% increase since 3Q17. The recovery has been led by the luxury segment, which according to Savills’ high-end non-landed private residential home price index (tracking selected developments across districts 1,2,4,9,10 and 11) turned as early as 4Q15. 
  • The overall sales momentum also picked up in 2017, with the luxury market (transactions above S$3,000psf) showing even earlier signs of recovery beginning in 2016.

Residential recovery has legs, fuelled by pent-up demand. 

  • Since the implementation of the Total Debt Servicing Ratio (TDSR) in 2Q13, market impatience has been building. While the average length of a down cycle has been 8.4 quarters (between 1975-2011), Savills noted that this one was an extended one with 14 quarters of consecutive price declines. During this time, the gap between URA PPI and liquid assets per household has also grown, and is pent-up, and somehow has to be released.
  • Using the Relative Strength Index (RSI), applied on private residential prices, Savills noted that current prices are near bottom, and are unlikely to suffer from further downside even if a Black Swan event occurs. Other concerns like the effect of interest rate hikes subduing the recovery are also likely overblown, as mortgagors can easily switch over from floating to fixed rate schemes which have been benign.

Residential Supply: GLS and Enbloc sites seeing keen interest. 

  • Flushed with a backwash of money returning from the 2011-13 GLS sites, developers have been ploughing money back. As a result, there has been too much money chasing too few GLS sites. In the collective sales market, there have been 100-120 sites at different stages of readiness, providing developers another source of supply, as of Sep 17. 
  • Based on our estimates, around 4,000 units have been taken out of the market through collective sales.

Office segment: Strong performance in 2017 led by tech, real estate, and coworking, despite record new supply and increase in shadow spaces. 

  • Due to the expansion of tech and real estate players (ie co-working and serviced offices), C&W has seen leasing demand grow from 14% to 50% during 2014-17. At the current pace of expansion, these players may extend their presence to outside of CBD area.

Office: Strong performance in 2017 led by manufacturing growth, despite record new supply and increase in shadow spaces. 

  • Overall, Grade-A CBD rents rose 6.6% (led by Marina Bay rents rising by 15.6%), despite 2.2 m sf of office space entering the market according to Cushman & Wakefield (C&W). 
  • New projects are also seeing strong performance, with high occupancies at Guoco Tower (99%), Marina One (80%), Duo Tower (80%), UIC Building (85%). Frasers Tower is also enjoying good leasing momentum (with 40% pre-leased). 
  • Due to the strong pick-up in GDP of 3.5% (vs 2% average in 2015/16), the positive sentiment had added about 16,100 jobs. As a growth driver, manufacturing has the greatest spillover to services, thereby creating demand for office space. 
  • C&W noted that with every S$1m value-add in manufacturing, S$0.29m of value-add in services is created. Every 100 new jobs in manufacturing also creates 27 new jobs in services. 
  • However, the market is also seeing an increase in shadow spaces, growing from an average of 112,000sf during 2014-16 to 172,000sf in 2017. Shadow supply are leased but empty spaces, due to downsized companies with more leased space than they need, or tenants stuck in long-term leases with more space than they need. The excess of shadow spaces may pose competition going forward, especially for older buildings.

Resilience of office REITs in downcycle. 

  • C&W noted that in the last downcycle, even as Grade-A office rents declined, the overall NPI of REITs rose 2.2% between 2014 to 2016. The earnings resilience can be attributed to the stickiness of the business. Some tenants may not have enough capex to move out, and some may be staying put due to the staggering lease expiry.

Co-working has gained traction.

  • C&W noted that co-working has gained traction, due to its success in fostering higher productivity, forming larger business network, and increased incomes among its user base. 
  • WeWork, the world’s largest provider of shared work spaces, entered the Singapore market in end-17. The company has since leased three centres (Beach Centre: 28,000sf, 71 Robinson Road: 60,000 sf, Funan: 40,000 sf), and aims to open 10 more (averaging 30,000 sf) in CBD locations in the next 12 months. With its “Powered by We” product suites, the company manages 10m sf of space (with enterprise deals accounting for 30% of the new business). 
  • Using data collected from the co-working spaces, WeWork advises customers on customising their office interiors, help employees’ book conference rooms, and allow management to monitor staff-use of office space (and re-configuration to utilise space most efficiently and cost-effectively). According to Falkon, WeWork has been able to enhance the value of a building by about 25% in the US.

Industrial: Increase in demand, led by the electronics segment. 

  • Knight Frank noted the Purchasing Manufacturing Index (PMI) has recorded 15 consecutive months of expansion with a slight seasonal dip in December 2017, as total manufacturing output continued growing, powered by the electronics cluster (recording 33.2% y-o-y growth in Nov 17). The strong showing in electronics cluster has been due to a global boom in demand for electronic gadgets, which has boosted growth of the local semi-conductor industries. 
  • Although employment in the manufacturing sector has contracted for 12 consecutive quarters, that can be explained away due to productivity-gains reducing reliance for manpower. The longer-term demand for industrial space may be more worrying though. 
  • Although investment in fixed assets boomed in 2012, they have declined in the last two years, indicating that MNCs may not be looking to invest in Singapore as much as in the past.

Industrial segment: Increased supply leads to declining occupancies. 

  • Knight Frank noted that by 3Q17, industrial stock has exceeded 500m sf (more than five times Singapore’s office stock). The noticeable increase in stock has led to declining occupancies, which stabilised in 2017 (partly due to stronger growth from manufacturing).
  • Historically, low occupancies have also coincided with Black Swan events, like the Asian Financial Crisis, 2000s recessions, 2008 Global Financial Crisis, and the declining oil prices. The upcoming supply is expected to peak in 2018 and decline over the next few years, which hopefully will help to prop up occupancies going forward.

Industrial segment: Bright spots in Business Park; others remain challenged.

  • Business parks are experiencing an increase in rentals, amid the lack of new supply in the last two years. Knight Frank noted that demand has been supported, with certain trades like finance and technology growing into business parks (ie some financial firms have relocated their back-end operations to business parks, amid increases in office rentals.)
  • Warehouses led the decline in rents by (-4.9%), followed by multiple-user factory (-3.3%), and single-user factory (-2.7%), mainly due to the surge in supply. Although 2018 will see a surge in single-user factory supply, it is not of much concern. Single-user factories generally cater to generalist industrialists, and can attain higher occupancies (compared with multipleusers).

Construction costs expected to bottom out in 2018 (ranging from -1% to +2%). 

  • The Building and Construction Authority’s (BCA) Tender Price Index appears to have bottomed in recent quarters, likely on the back of imported inflation caused by higher steel prices, but any further increase could also be restrained by competition from the current excess building contracting capacity.

Vikrant Pandey UOB Kay Hian | Peihao Loke UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-19
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