SINGAPORE: An Introduction to Real Estate
PRACTICE AREA OVERVIEW – SINGAPORE REAL ESTATE
General
The COVID-19 pandemic continued to impact Singapore’s business climate in 2022, but failed to dampen real property transaction volume or appetite.
2022 brought proliferate interest in all asset classes; overall the Singapore real estate market is surprisingly robust and expected to hit a compound annual growth rate in 2022 of 3.2%.
In late 2021 the Singapore government introduced cooling measures for residential transactions, and implemented real property-related tax increases in 2022. More loom on the horizon in 2023 and 2024.
Increased interest rates have sidelined institutional investors as potential purchasers of certain real estate assets; an increasing number of family offices are the primary beneficiaries of their absence, and continue to be proactive buyers across all market segments.
Market Snapshot
Office
Office space leasing picked up considerably with Singapore’s reopening, and remains quite healthy. CBD premium building rents climbed in 2022, Quarter 3 for the sixth consecutive quarter. Vacancy rates are low, and rents are now at their highest level since 2008, Quarter 4.
Several high-profile Grade A buildings are under construction or in the planning phase; these new developments should be well received by the market and result in current Grade A buildings sliding to Grade B, causing a glut in this market segment.
While healthy quantities of sizeable office building purchases were made in early 2022, higher interest rates have slowed down activity in this sector. The three-month SORA was only 0.53% in June of 2022, but stood at nearly 2.47% five months later, exerting significant downward pressure on yields.
Residential
In 2021, residential sales transactions rose by 57% over the previous year, but 2022 brought some pull-back due, inter alia, to increased Additional Buyer's Stamp Duty ("ABSD”) rates, relatively few new housing launches and higher loan interest rates. Prices are expected to keep climbing, however, albeit at a slower rate, due to strong economic fundamentals, scarcity of unsold units, and high occupancy rates.
The residential rental market is booming.
In 2020, Singapore’s population was approximately 5.69 million, with 1.64 million expatriates. The expatriate population, however, decreased significantly in late 2020 and 2021, resulting in an increase of available rental properties and lower rents.
With the brunt of the pandemic seemingly in the rear-view mirror and entry restrictions lifted, expatriates have started to return, increasing demand for rental properties. Hong Kong residents wanting to relocate and Singaporeans needing temporary accommodation to complete renovations delayed by the pandemic further supplemented this appetite and resulted in a hefty 20-40% increase in residential rents in the latter half of 2022.
Staged real property tax increases on both owner and non-owner-occupied residences will be implemented in 2023 and 2024, but as the tax is based on the estimated annual rental value of a home and not its market value, many observers expect these tax hikes to have a minimal chilling effect on the overall market.
Industrial
Strong demand and limited supply for warehouse and logistics space drove rents up in this sector, increasing in 2022 Quarter 3 for the sixth consecutive quarter. Some analysts, however, expect tenant pushback, and rental rates accelerating at a slower pace.
Notwithstanding forecasted downward pressure on rental rates, limited supply of quality buildings and continued growth of the logistics industry continue to make this sector an attractive investment option.
Hotels
2022 witnessed strong performance in the Singapore hotel sector. Occupancy rates remained low early in the year due to travel restrictions. When travel restrictions were lifted in March, both occupancies and room rates surged. In July 2022, ADR for Singapore hotels rose to a near-decade high, and occupancies hit 79%, just short of the 83% pre-pandemic rate of January 2020. Renewal of the Singapore Formula 1 race in September considerably boosted performance: ADR and hotel gross revenues hit 14-year highs. Per key asking prices for hotel sales indicate the Singapore hotel sector has not cooled off, with the increased revenue of the end of the year season expected to further support this trend.
Construction is ongoing at a brisk rate after substantial delays caused by the pandemic in all market sectors except hospitality, as the scarcity and high cost of suitable land makes hotel development problematic. Seven “new” hotels opened or were scheduled to open in Singapore in 2022, but most replace older properties or are simple rebrandings.
Growth in new hotel room supply is expected to be sluggish, with a compound annual growth rate of only 2.4%, down from 3.3% between 2015 and 2019. Approximately 5,415 rooms of imminent supply are projected to become available over the next few years, including two “white” sites in Marina View and River Valley listed on the government land sales reserve list.
In July of 2022 CapitaLand Investment Limited announced the acquisition by The Ascott, its wholly owned lodging business unit, of serviced apartment operator Oakwood Worldwide from Mapletree Investments. The acquisition increased Ascott’s global portfolio by 81 properties, to 900 in 39 countries.
Regulatory Measures
In December of 2021 the Singapore government implemented “cooling” measures for residential property. ABSD was increased across the board for all buyer profiles other than first-time purchases by Singapore citizens and permanent residents. ABSD is imposed on top of the 1 to 4%, stamp duty payable on the higher of property valuation or the selling price, and is calculated on the same basis. These ABSD hikes ranged from 41-100% increases of the previous rates and included an effective 35% surcharge on property purchases by an entity, with an additional 5% for purchases by a housing developer.
The government also tightened the permitted debt servicing ratios for residential property purchases and lowered the loan-to-value limit for Housing and Development Board loans.
In March of 2022 the Urban Land Authority prohibited strata subdivision of commercial components of certain buildings in prominent areas of Singapore’s CBD to encourage consistency in the upkeep and quality of future development in these strategic locations, eliminating financing and development options for some new CBD projects.
In August of 2022 the Land Betterment Charge Act entered into force, replacing three older schemes for taxing the increase in land value from development, and increasing tax rates by an average of 5.4% for commercial projects, 2.3% for industrial projects, 10.2% for residential, landed projects, and 12.9% for residential, non-landed projects.
Reflecting ESG trends, from January 2022, listed companies, including property developers, are required to issue sustainability reports with mandatory climate reporting on a "comply or explain" basis.
Investment Environment
The combined effect of these measures and rising interest rates has noticeably deterred investment activity by institutional investors who have taken a back seat to private investors and family offices with a lower percentage of debt in their capital stack in real property transactions exceeding SGD 500,000,000.
Lower cap rates and non-aligned seller and buyer expectations often result in a 10% to 20% price gap between buyers and sellers across a variety of asset classes, and are especially pronounced in the hotel market segment.
Conclusion
Although Singapore has one of the most highly regulated property markets in the world, the combination of the country’s prosperity, political stability, desirability as a place to live and work, and positioning as the financial centre of Southeast Asia, continue to make investment in Singapore real estate assets attractive. In many cases the returns are low but usually steady and risk-free compared to other nations in Southeast Asia or the greater Asia Pacific region.
This phenomena is evidenced by SGD20.2 billion of investment in Singapore real estate in the first half of 2022, up by 89% from the same period in 2021. Despite relatively high interest rates and a constantly changing regulatory landscape, real estate investment in all market segments is expected to continue at a solid if not spectacular pace.
Authored by: BH2I Pte Ltd.
Michael B. Evanoff, Senior Counsel
Predee Pravichpaibul, Legal Director
The article original source - Chambers and Partners - SINGAPORE: An Introduction to Real Estate
