OFFICE
According to URA statistics, Central Region office prices and rents fell in 2.4% and 3.5% qoq respectively in Q3 2021, reversing increases seen in Q2 2021. This reflects uncertainty in the office market amidst the evolving Covid-19 situation and uneven economic recovery across different industries, where finance and tech are expanding rapidly while the other sectors remain cautious.
This has led to a divergence in performance across the office market. Category 1 offices, which refers to office space in buildings located in core business areas in Downtown Core and Orchard which are relatively modern and have good building specifications such as large floor plate, saw their median rents (based on contract date) rise in Q3 2021, by 2.6% qoq, marking a second consecutive increase since the start of 2021. On the other hand, category 2 offices rents (rest of office space not included in category 1) fell by 1.7% qoq.
Nonetheless, we note that vacancy rates for both category 1 and category 2 offices have continued to increase, despite positive rental growth for category 1 office space. The increase in category 1 office rents despite the increase in vacancy rates reflects landlords’ optimism about the recovery of the office market especially for Grade A office spaces amidst the current flight-to-quality trend and economic recovery. Grade A office landlords have held on to their asking rents in anticipation of recovering demand. Financial and tech tenants are still looking to expand their office footprint as their headcount continues to increase.
However, a lot of this demand is gravitating towards the better quality office developments. We observed that some landlords of Grade B and C offices and even a few of the weaker and older Grade A developments, have become more receptive to offering incentives for new leases in the form of fit out subsidies to entice tenants and shore up occupancy rates.
Islandwide office net demand remains in negative territory, at -54,000 sf in Q3 2021 for the third consecutive quarter. However, the fall in net demand is flattening out, in comparison prior quarters which saw -248,000 sf and -205,000 sf in Q2 2021 and Q1 2021 respectively. A similar trend was observed in the downtown core market, which saw negative net demand of -118,000 sf in Q3 2021, compared to -377,000 sf and -312,000 sf in Q2 2021 and Q1 2021 respectively.
The flattening out of negative net demand could be indicative that the broad office market could be bottoming out. The growth in Grade A office rents, tight supply pipeline amidst ongoing redevelopments and expected stronger future office demand due to economic recovery and tenant displacements would provide tailwinds for the office market.
PRIVATE RESIDENTIAL
Private residential prices continue to rise amidst robust demand. Overall private residential prices edged up 1.1% q-o-q in Q3 2021 for the sixth straight quarter, extending the 0.8% q-o-q rise in Q2 2021. For the first nine months of this year, private home prices increased by 5.3%. Private residential prices continue to break records and are at an historical high. The increase in overall prices were led by the landed segment, which experienced price growth of 2.6% on the back healthy sales of landed homes during the quarter.
Non-landed properties saw prices rising at lower pace by 0.7%. RCR was the best performer among the three non-landed market segments with 2.6% q-o-q growth in prices whereas prices for non-landed homes in Core Central Region (CCR) and Outside Central Region (OCR) went down slightly by 0.5% and 0.1% q-o-q, respectively. We opine that price performance across segments in Q3 2021 were characterised by reversion-to-mean effects where segments which outperformed in Q2, saw a slight retreat in Q3. CCR and OCR prices grew by 1.1% and 1.9% qoq respectively while RCR grew only 0.1% qoq in Q2 2021.
In short, Q3 price movement were driven by short term volatility rather than a change in trend. Amidst rising prices, demand for private residential homes remained robust. A total of 9,083 private residential units were sold in Q3 2021, marking a 7.5% qoq increase. YTD, a total of 25,632 private residential units have been sold and already surpasses sales in the whole of 2020 of 20,909 units. Strong demand was seen in both primary and secondary markets which saw quarterly growth of volumes in Q3 2021. Despite lower launch volumes, new private homesales went up by about 19.7% q-o-q in Q3 2021, clocking 3,550 units sold as compared to 2,966 units transacted in the previous quarter.
New home sales for the first three quarters of this year totaled 10,009 units, exceeding the whole of last year's sales of 9,982 units. This reflects optimism in the future prospects of the private residential market and healthy underlying demand for private residential properties. Resales volumes continued to strengthen in Q3 2021, with 5,362 units sold during the quarter as compared to5,333 units changed hand in the preceding quarter. YTD, resale volumes have reached 15,214 units, higher than 2020’s figures of 10,729 units. Resales volumes have been following an uptrend since Q3 2020, amidst healthy HDB upgrader demand and rising private residential rents.
HDB resale price have continued to grow and are up 9.1% YTD 2021.While private residential vacancy rates went up slightly to 6.4% in Q3 2021 from 6.3% in Q2 2021, rents continued to increase, rising by 1.8% q-o-q during Q3 2021, albeit at slower pace compared to rent growth of 2.9% q-o-q registered in Q2 2021. Rents could continue to trend higher in the last quarter of 2021 and the first half of 2022, amidst ongoing completion delays. But rental growth could slow as completions start to ramp up in 2022. In 2021 and 2022, a total of 6,456 units and 11,449 units are expected to be completed respectively. This remains below the 10-year (2011 to 2020) annual average of 13,281 units. Barring cooling measures, we still see further price growth for the private residential market, which is supported by multiple tail winds including, strong economic growth, a recovering labour market, robust HDB upgrader demand amidst rising HDB resale prices and relatively low interest rates.
New launch prices are expected to head north amidst heightened construction costs, rising land costs and diminishing unsold inventories. There were only 17,165 unsold private residential units as at Q3 2021, 11.6% lower than that in Q2 2021 and a significant 54.6% decline from the high of 37,799 units in Q1 2019, following 10consecutive quarters of decline. Unsold inventory has declined significantly and reached the record low since Q2 2017 where16,929 units were unsold. We also anticipate continued growth for resale prices amidst persistent HDB upgrader demand and a recovering enbloc market which would lure more investors into the resale market.
RETAIL
Central Region retail rents continued to drop by 2.7% q-o-q, marking the 7th consecutive fall in retail rents. The continued fall in rents reflects the evolving Covid-19 situation and diminished footfalls due to ongoing safe management measures.
Nonetheless, islandwide retail vacancy rates have improved to 8.1% in Q3 2021, driven by lower vacancy rates across all markets. Suburban vacancy rates maintained on a positive note, lowering for a fifth straight quarter to 4.8%. This is the lowest vacancy rate since Q1 2016 at 4.4%. Suburban malls have been an attractive retail location because of their steady footfalls from residential catchments, even prior to the pandemic.
They are now capturing more attention from international retailers due to the shift to remote work and consumers’ changing shopping behavior. The perception of suburban malls is no longer confined to neighbourhood centers, but also as a retail destination with offerings comparable to large malls in Orchard Road. While vacancy rates in Orchard improved to 11.6% in Q3 2021 from 11.8% in Q2 2021, this was driven by a fall in net supply (-32,000 sf) which overwhelmed a drop in net demand (-11,000 sf). Coveted brands are expected to continue selecting prime retail areas in Orchard, securing current appealing rents as they forge ahead in the gradual reopening of economy. Although Orchard is traditionally the flagship location for international brands, a spate of expansions has been observed for local brands that hope to boost their presence with a prominent location.
Aside from local F&B retailers who are used to expand in Orchard, local brands from other sectors have also taken up spaces in prime Orchard malls this year. Coupled with pilot schemes such as the new Vaccinated Travel Lane, the Orchard retail market will experience further upside from progressive reopening of borders. Notably, vacancy rates in the downtown core have improved to 11.2% in Q3 2021 from 11.9% in Q2 2021, despite WFH being the default for most of Q3 2021. Retailers are anticipating the return of office workers to the office as safe management measures are expected to be progressively relaxed. The retail market continues to face headwinds as footfalls remain capped due to ongoing safe management measures amidst a surge of Covid-19 cases.
We are sanguine about the recovery of the retail market which we expect to take place in 2022,as border restrictions and safe management measures ease alongside high vaccination rates and Singapore’s transition to endemic living.
