Private ResidentialEncouraging Q1 2023 performance though market to cool in subsequent quarter
Buying activities picked up moderately in Q1 2023, as new launch activities picked up after festive activities in the early part of the year. Developers sold 1,256 units in Q1 2023, marking a 82.0% qoq increase. Though on a yoy basis, new sales volumes are down 31.2%. Secondary market (subsale and resale) sales volumes remained tempered at 2,865 units in Q1 2023, registering a 1.1% qoq drop and 18.6% yoy drop. In sum, total private residential volumes rose by 14.9% qoq, reaching 4,121 units in Q1 2023, albeit from a low base. On a yoy basis, total private residential volumes declined by 22.9%. The market is still adjusting to the effects of a slew of cooling measures introduced over a relatively short period of time.
Nonetheless, private residential prices have continued to increase by 3.3% qoq, marking a twelfth consecutive quarter of growth. The increase in prices was broad-based with the landed segment leading growth, at a 5.9% qoq increase. The non-landed segment, which drove a majority of market transactions (over 90% of total volumes), rose by 2.6% qoq in Q1 2023.
The jump in landed prices could be due to fairly thin volumes in Q1 2023 which skewed towards the new sales landed market. Landed prices could potentially moderate in Q2 2023. Nonetheless, the sustained growth in landed prices is a testament to continued underlying local demand amidst resilient economic conditions. Buyers remain price takers as sellers are in no hurry to sell due to limited landed supply in land scarce Singapore.
For the non-landed segment, all three market segments saw price growths. The Rest of Central Region (RCR) outperformed with 4.4% qoq growth in Q1 2023, while the Core Central Region (CCR) and Outside Central Region (OCR) grew 0.8% and 1.9% qoq respectively.
RCR outperformance was driven by the new sales market that saw RCR new sale prices grow by an estimated 5.1% qoq to $2,651 psf in Q1 2023, based on current caveat data (pulled 28/04/23). According to caveat data, the bulk of RCR new sale transactions were attributed to Terra Hill, a freehold project that drive about 38% of RCR new sales in Q1 2023. Terra Hill sold about 94 units at a median transacted price of $2,695 psf, according to caveat data. RCR resale prices rose moderately by 1.5% qoq in Q1 2023.
For the OCR, prices grew similarly across both new sales and resales markets, at about 1.7% qoq and 1.8% qoq respectively. OCR demand remains underpinned by first timer owner occupiers for private condos as well as HDB upgrader demand as HDB resale prices continue to rise (+1.0% qoq in Q1 2023 vs +2.3% qoq in Q4 2022), albeit at a slower pace. Similarly, in the CCR, both new sales and resale prices grew by 0.8% and 1.9% qoq respectively in Q1 2023.
While all segments saw a qoq increase in volumes in Q1 2023, CCR was notably the only market that saw a yoy increase in volumes, suggesting increasing buyer interest as CCR prices have lagged the broad market. From 2021 to Q1 2023, CCR non-landed prices have risen by only 9.7% as compared to RCR and OCR non-landed prices which have grown by 33.2% and 21.1% respectively. CCR total volumes reached 1,091 transactions in Q1 2023, rising by 21.1% yoy. This compares to the RCR (1,092 transactions) and OCR (1,938 transactions) markets which saw volumes fall by 40.3% and 25.8% yoy respectively.
However, the implementation of new cooling measures on 27 April 2023, where ABSD was largely increased across the board, is expected to have a chilling effect on the CCR market. Notably, the sharp increase of ABSD for foreigners and entities, is likely to cool foreign and investment demand in the CCR. The CCR has a larger exposure to foreign demand at about 10% of the total non-landed transactions from 2021 to 2022, as compared to the 4% and 2% of RCR and OCR respectively.
We remain cautiously optimistic that private residential prices may still end 2023 on a positive note with overall prices ending at 2%-5% higher compared to 2022. Price growth remains supported by resilient underlying demand, fueled by local aspirations to upgrade to a private property, stable jobs market, rising
HDB resale prices and heightened construction costs. Also, the latest cooling measures are only expected to affect about 10% of residential property transactions, which would consist of mainly investment demand. As such, the RCR and OCR markets which typically drive about 80% of private residential transactions, and are largely underpinned by owner-occupier demand, could see limited impact from the latest measures. However, the increasing weight of cooling measures and higher levels of new private residential completions would dampen market sentiments and sales volumes. Some buying demand in the next quarter is expected to move to the sidelines in anticipation of lower prices.
Developers may push back new launches especially in the CCR
Although developers’ unsold inventory rose slightly by 1.9% qoq, it remains low at 16,464 units in Q1 2023 as compared to a five-year annual average of 24,576 units. We do not anticipate significant price cuts for new launches especially in the RCR and OCR, given that unsold inventory remains low and construction costs stay high. Nonetheless, some developers could offer slight discounts to offset higher ABSD rates for Singaporeans and permanent residents.
Following the latest increase in ABSD for residential properties, developers are largely expected to adopt a more cautious approach. Land acquisition activity should slow temporarily as developers evaluate the impact on market demand. This could have a stronger impact on potential sites in the CCR or in close proximity to the CBD. Amidst heightened development risks, we could see lower land prices achieved for GLS sites, while the enbloc market would face a wider gap in buyer-seller expectations. This could lead to slower activities in the enbloc market.
Given an expected chill in demand for the CCR, we could see stronger developer interest in the OCR market where it currently has the lowest levels of unsold inventory (4,652 units) amongst the three regions.
Residential rental market show signs of moderation
While private residential rents remained on the uptrend for a tenth consecutive quarter, the rental growth has shown signs of moderation. In Q1 2023, private residential rents rose by 7.2% qoq, easing from previous quarter’s 7.4% qoq growth. A broad-based increase was recorded across the non-landed residential segments, of which the high-end CCR non-landed market recorded the strongest rental growth at 6.4% qoq. RCR and OCR rents rose 6.2% and 6.1% qoq respectively. While rents still locked in relatively strong performance, islandwide private residential vacancy rates edged up to 6.0% in Q1 2023 from 5.5% in Q4 2022. This suggests that pandemic-driven factors, such as a surge in local demand entering the rental market while waiting for their homes to complete, have started to unwind as construction backlogs clear. Rental demand could ease as the uncertain economic climate weigh on market sentiments. Coupled with increasing tenants’ resistance and higher levels of completions of 17,690 units in 2023, which would be 40.5% yoy higher than the ten-year annual average of about 12,600 units, the pace of rental growth is expected to ease for the rest of 2023.
OfficeRental growth to taper off amidst economic uncertainty
Central Region office rents grew 5.1% qoq in Q1 2023, marking a sixth consecutive growth in office rents. The growth in rents fuelled by a continued flight to quality amidst a relatively limited supply of quality office space. In Q1 2023, median rentals of Category 1* office spaces rose to a new high of $10.77 psf pm since Q4 2017, as compared to median rentals of Category 2* office spaces that settled at $5.80 psf pm. Landlords of Grade A developments have largely held on to their rental expectations. Rental growth in Q1 2023 was driven by both Central Area and Fringe Area office rents which climbed 3.9% and 8.8% qoq respectively.
Given an uncertain economic outlook alongside tightened financing conditions, some cost-conscious tenants are looking at lower cost options outside the CBD. This could have driven office rents in the fringe area higher. This is also evidenced by vacancy rates in the Fringe Area and Outside Central Region that tightened to 7.8% and 15.8% respectively in Q1 2023, from 8.4% and 16.6% in the previous quarter. On the other hand, Central Area vacancy rates rose slightly to 11.8% in Q1 2023.
On a whole, the demand for office spaces registered a healthy performance in Q1 2023, with islandwide net demand reaching 226,000 sf, predominately driven by Downtown Core. The Downtown Core saw positive net demand of about 291,000 sf due to the completion of Guoco Midtown which reportedly achieved strong pre-commitment rate of 80%.
Following robust rental growth in Q1 2023, office rental growth are expected to taper off amidst still-cautious business sentiments and lingering concerns around the fragility of global banking sector. That said, a sharp correction in office rents is unexpected as overall supply in the mid-term looks tight. Demand for new office towers remains persistent. IOI Central Boulevard Towers, the only major office development completing this year, is witnessing encouraging pre-commitment rates. Sources of office demand could come from non-bank financial and professional services sectors, which could help partially mitigate the temporary pullback in tech demand. Office demand from Chinese companies could also rise amidst the China’s reopening.
* According to URA, Category 1 refers to office space in buildings located in core business areas in Downtown Core and Orchard Planning Area which are relatively modern or recently refurbished, command relatively high rentals and have large floor plate size and gross floor area. Category 2 refers to the remaining office space in Singapore which are not included in “Category 1”.
RetailTourism recovery to augur well for the Orchard retail market
Retail rents in Central Region fell again by -0.3% in Q1 2023, albeit this was the most modest drop in five quarters. Underpinned by a tight supply pipeline, we expect the Central Region retail market to bottom out towards end-2023 with fuller tourism recovery and clearer economic trajectory.
Within the Central Region, Orchard retail vacancy rates increased to 13.9% in Q1 2023, after tightening for two straight quarters to 9.8% in Q4 2022. Orchard retail net supply of 54,000 sf in Q1 2023 outweighed its net demand which retracted to -258,000 sf from a positive level of 97,000 sf in the last quarter. Some retailers in Orchard could have call it quits amidst rising cost of operations and pared down revenue. Sinapore total retail sales as of February 2023 has already dipped by 4.4% ytd given the GST hike and a slowdown in consumer spending post-holiday.
Nonetheless, the tourism recovery, especially a rebound in Chinese visitors due to China’s reopening, would augur well for the Orchard retail market. The number of visitor arrivals in Singapore landed at 2.9 million in Q1 2023 and looks on target to reach Singapore Tourism Board’s forecast of about 12-14 million visitors in 2023, with monthly visitor arrivals expected to consistently cross the million mark. Although growth may be more prominent in the second half of 2023 onwards when more international flights from China resume.
Outside Central Region, retail net demand remained positive at 65,000 sf in Q1 2023, extending positive net demand of 377,000 sf last quarter. Although Outside Central Region retail vacancy rate edged up slightly to 4.1% from 4.0% in the previous quarter, this vacancy rate is still less than half the pre-Covid rate of 8.4% in Q1 2019. Retail spaces in Outside Central Region remain highly sought after by retailers given their steady footfalls from nearby residential catchments.