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Thread: Singapore Real Estate Starts to Slow Down; Watch This Space

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    Default Singapore Real Estate Starts to Slow Down; Watch This Space

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    Global Equity & Income

    Singapore Real Estate Starts to Slow Down; Watch This Space

    By Alex Frew McMillan

    May 05, 2016 | 8:00 AM EDT


    These have been dark days for Singapore. Annual growth will soften to 1.8% according to the International Monetary Fund's latest forecast. China's slowdown is flowing through Asia and creating a crisis of confidence. And real estate has been the hardest-hit sector as a result of the loss of faith.

    The hardest-hit stocks in terms of local developers are those such as CapitaLand and its affiliates like CapitaMalls Asia. Other major Singaporean developers, such as Global Logistics Properties have most of their portfolio overseas, in the case of GLP in warehouse space in China and Japan. But all three of those companies have major backing from the Singaporean government. It's not like they'll ever go bust, however bad things get -- so don't feel too heart-broken!

    Quite why the Lion City has become so pessimistic is something of a mystery. Growth, after all, is still growth. It appears that fears about China's crackdown on corruption and excessive spending is casting a pall over the market at the same time that the Singaporean government has imposed harsh "cooling measures" in property. Those include a 15% extra tax on any non-nationals buying real estate, in a market where they are already restricted to condominiums and property that is not "landed."

    The harsh terms for foreigners have been seen as an effort to stem the capital flow out of mainland China. It appears to be working. There are a lot of other places that Chinese capital can flow to, and much like Hong Kong, which has imposed a similar 15% tax, there has been a substantial shift in direction that is having a major impact.

    Total investment sales in Singaporean real estate, according to DTZ, fell to S$1.75 billion ($1.29 billion) in the first quarter of this year, down from S$6.7 billion ($4.9 billion) in the final three months of last year. That makes Q1 the slowest quarter since the first three months of 2009, at the height of the global financial crisis. For 2015, property investment sales dropped to S$16 billion, also the lowest figure since 2009.

    Another key factor in this property-transaction decline is that Singapore investors are shifting their buying interest overseas. According to Real Capital Analytics, Singaporean buyers invested a total of $27.6 billion in overseas properties last year, 47.9% higher than the $18.7 billion in 2014. The United States, the United Kingdom and Australia are the top three destinations, accounting for nearly 80% of the total overseas real estate investment out of Singapore.

    The brokerage Savills expects between S$15 billion and S$17 billion worth of deals to occur within Singapore in 2016. Challenges such as near-term growth prospects, volatility in the financial markets, and the uncertain direction of interest rates in the short- to mid-term, could leave institutional investors out of contention for many of the competitive tenders. The silver lining is that this creates opportunities for equity-rich investors benefiting from a relatively low cost of capital to make a foray into the market.

    Office rents are now down 9.4% year on year, according to figures from Jones Lang LaSalle (JLL) for the last quarter, the most recent available. It notes that vacancies are only likely to increase in the next few quarters. There is a substantial amount of new top-line office space in the works, and global economic headwinds are likely to impact the main occupiers, most notably those in the financial services industry. At the same time as the arrival of new buildings, banks are also looking to give up existing space.

    Capital values are declining at a slower pace, as you would expect for an illiquid asset class. That could change if interest rates start to rise rapidly. Singapore maintains a regime for the Singapore dollar that is managed against a basket of currencies, including the U.S. dollar. This would create opportunities for institutional buyers, and even individual owners. So property in the Lion City is a sector to watch as we move through the rest of the year.

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    our minister believes otherwise ...

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