CapitaLand Development CEO Jonathan Yap on the housing market, Jurong Lake District and more

What has stood out for the CEO in the property industry this year is that there is a more discerning market

Jul 1, 2024

Is residential property development in Singapore worth going into? What are the risks and rewards of the Jurong Lake District master developer site? How do prospects look for Singapore’s office and retail sectors? CapitaLand Development CEO Jonathan Yap share his thoughts with BT senior correspondent Leslie Yee in the latest episode of PropertyBT, a podcast series by The Business Times. Here are excerpts from the podcast.

Leslie Yee: What has surprised you in the Singapore property market thus far this year? And how will the next six to 12 months play out? What is your appetite for housing sites?

Jonathan Yap: Rather than say surprised, what stood out for me is that we can actually see a more discerning market. En bloc sales have slowed down. We saw transactions that did not happen. We also see more transactions happening as far as government land sales (GLS) are concerned, partially because the supply of GLS sites has increased. We saw sites which got very few bids – in fact, in some cases, only one bid – and for the first time in more than 10 years, we actually had tenders ending up with no award.

And in terms of pricing, we start to see pricing either at the lower end of market price expectation, or even below market price expectation. So that again is pointing in the same direction. What we actually see now, is (that)… rather than increase in population, what is driving demand is probably change in lifestyle.

That said, the choices that buyers make today are going to be a lot more specific, more personal – not just (depending on) pricing, but also perhaps the location. That’s where the selection of site, as well as the design and execution of the housing projects, become more important. But we’re still very active and optimistic on the market.

LY: You referred to the fact that participation in land tenders has been relatively weak, but developers like yourselves have taken on new housing sites. This is in spite of high interest rates, high construction costs, uncertain housing demand. All these factors – do they worry you?

JY: Of course. I mean, we are a commercial entity. Of course, we look at the bottom line. It concerns us because ultimately, all investments that we make come with a certain risk. So that’s why it’s about how do we price in those risks? If interest cost is high, we just have to make sure that – in our underwriting – we price in interest costs.

Likewise, for commercial or retail property, we have to price in perhaps the catchment, the buying patterns and purchasing power of the location.

LY: Your group is also very active in the office and retail property segments in Singapore. What are the prospects and challenges for the office and retail property segments in Singapore?

JY: Work from home does change how office is in demand. I think the office is no longer the conventional place where you just work there. It’s really a place where people collaborate. So while it is true that we have seen some tenants give up space, we also see some tenants increasing their requirement.

The market has started to become a two-tier market. There will be a group of the market that’s still performing well. These are effectively well-located, well-specified office space. And the occupancy that we see there is still very high. On the other hand, we also start to see some older buildings – perhaps not as appropriately located – where we see vacancy creeping up.

In terms of retail space, I do think suburban and perhaps central retail spaces behave a little bit differently.

Obviously, suburban (malls) had the benefit, during Covid, of people working from home. People were, during the daytime, in a mall when previously they might not have the opportunity to do that. But now, more people are starting to return to the office. In fact, as you drive on the road, you can see that these days, the road is packed – that is to me a signalling of people going back to office.

For Orchard Road or central area retail, it’s a little bit different. I would say increasing tourism obviously helps. It does bring people there.

One strong argument for both office as well as retail is the new supply of land. It’s relatively more controlled, compared to, say, residential. So that gives a certain underpinning as far as your demand and supply is concerned. Just like how we mentioned that residential buyers are becoming more discerning, I think similarly, office and retail tenants – because of underlying demand – are also becoming more discerning.

LY: Let’s now talk a bit about your mega bet on the Jurong Lake District Master Developer site. The consortium of CapitaLand Development, City Developments, Frasers Property, Mitsubishi Estate and Mitsui Fudosan was the only party to have put up their hands to take on this site. This project will have a long gestation period. What is the risk and reward for the Jurong Lake District Master Developer site? Will Jurong work as a key office destination with rents that match the CBD?

JY: Clearly, it is a new location. It’s an area where demand is not well established. Decentralisation is not a new concept. Clearly, the planning authority does want to push decentralisation for distribution of traffic and a whole host of other considerations. But you’re absolutely right – it will be a long gestation project. It’s not a conventional government land sale site, where typically you just go plot by plot, then you price or underwrite based on an individual plot.

So, therefore. the risk we have to take is higher. But on the flip side, the opportunity is also more interesting – because now it’s not plot by plot. You have a whole six-and-a-half hectares of space. Now, we can decide how to plan the different uses within the project in a more seamless manner.

Indeed, it’s a new way of approaching urban planning in Singapore, and that’s something we’re very excited to work with the planning authority to execute. That’s assuming if we’re awarded the site.

The reason why we actually have five of us coming together is absolutely for the same reason you articulated earlier – because there are obviously risks that we need to underwrite.

But it’s fair to say, we are excited about the opportunity – so much so that we submitted two proposals with a slightly different approach and scheme.

LY: What kind of office tenants do you think will be attracted to the Jurong Lake District site, and do you think that the rental there will be… on a par with CBD, 20 per cent less? What kind of numbers are you looking at? You’re optimistic about this project, but do you see it giving returns on par with, say, a traditional residential project?

JY: Let’s go piece by piece... So you have the leasing piece, which is your office and your retail, as well as your residential-for-sale piece. As far as the leasing piece is concerned, clearly it has to charge a rental that’s lower than CBD.

We mentioned a little bit about the two-tier markets, especially with tenants today focusing more and more on sustainability.

The question would then be: Will there be enough stock within CBD that potentially can meet the sustainability as well as the new space requirement that users today expect? So as a result, we do see that there will be a group of customers or tenants that will want, as office tenants, to be in office space that meets that new level of space requirement.

But at the same time, they may not need to be in CBD. Therefore, they can afford to be somewhere else – perhaps at a rental that’s lower than CBD, and perhaps potentially less congested than CBD as well.

In terms of retail and say, serviced residences, the other supporting amenities will be largely driven by how well we can bring the residential crowd, as well as office tenants in there.

If you’re able to bring these there, then they’ll have a group of people that they can support and therefore make a business out of it.

As far as residential is concerned, we have tested Jurong – we launched J’Den last year. I would say we are very pleased and very thankful for the strong response buyers gave to the project.

And we do think over time, if we launch residential in a sensible manner, that is something that will be helpful as far as underwriting is concerned.

LY: There must be tons of issues that give you grey hair. Trends such as deglobalisation can be extremely worrying. Jonathan, which – among high interest rates, climate change, rise of artificial intelligence and geopolitics – worries you most, and why?

JY: I think all those you have mentioned obviously are areas that we need to pay attention to. I mean, the interest rate is obvious... Clearly, it’s high. It means that we have to price in the high interest costs. Not just in terms of when we execute, but also in terms of the returns that we expect.

You mentioned political tension, but that’s a harder one to price. We can hedge interest costs, but you can’t do likewise for political risk.

But that’s where we then need to make a judgment. That’s why we choose few markets, but we want to go very, very deep in those markets in executing our development investment. Because clearly as a developer we do need to go very hands-on to ensure that we have right people on the ground, to be able to not only deal with the day-to-day but help us to read the market.

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