In a land-scarce country like Singapore, properties usually tend to do well due to high demand and limited supply. However, the property market is cyclical too.
Unlike the residential market, commercial properties have certain nuances that businesses and business owners may a better pulse on because of their own needs and requirements.
After waning demand for commercial property in 2020, a swift turnaround came in 2021. Singapore’s commercial property market rebounded strongly, with volume totalling $12.8 billion, according to a report by Real Capital Analytics.
Furthermore, with Singapore’s easing into endemic living, could 2022 be a good year for businesses to invest in commercial property?
The Current Low Interest Rate Environment Is On The Cusp Of Rising
The US annual inflation rate went above 7% in 2021, the highest since 1982. To curb rising inflation, the Fed raised the interest rate in mid-march this year. It has plans to initiate at least another six rounds of quantitative tightening by the end of this year.
It will have a consequential effect on the interest rates in Singapore, as they are largely determined by foreign interest rates, amongst other factors.
The borrowing rates for businesses buying commercial properties are not published by the financial institutions in Singapore. These rates are usually determined by various factors, such as the length of operation, make-up of ownership, and the financial health of the company. Regardless, they are likely to follow the overall interest rate environment which is likely to increase in 2022.
Businesses that are either considering investing in commercial properties in the near term or have a strong financial position could consider doing so in 2022. And it stands to reason that those businesses should lock-in a low interest rate now rather than later when interest rates rise.
Strong Demand For Commercial Space Is Expected From MNCs In Various Sectors
Singapore has prided itself on its status as a business hub that is attractive for multinational companies to use as their regional base. This was exemplified in 2021, with the Singapore Economic Development Board attracting $11.8 billion in fixed asset investments, despite the global pandemic challenges. These investments are expected to create more than 17,000 jobs and serve as new sources of demand for commercial real estate in Singapore.
Some examples of these sectors and the related companies are:
- Biomedical Sector: BioNTech has opened its office in 2021 and will operate the first mRNA manufacturing facility in Singapore by 2023. It requires office space and industrial-zoned land for its facilities and operations in Singapore.
- Mobility Sector: Hyundai Motor Group will open an innovation centre and production facility with an annual capacity of up to 30,000 cars by end-2022. It will take up approximately 474,000 sq ft of industrial-zoned land space in the Jurong Innovation District.
- Digital Sector: Big Tech companies such as Alibaba Group and Amazon have committed to take up around 140,000 sq ft in Lazada One and 100,000 sq ft in Asia Square Tower 1, respectively. Many other big tech companies including ByteDance, SEA limited, Tencent have also committed to office spaces in 2021 to house their operations here.
- Semiconductor Sector: GlobalFoundries is expected to take up 250,000 sq ft of clean-room space and new administrative office space by 2023 at the Woodlands Wafer Fab Park.
Singapore’s ability to attract new investments from new and existing growth industries will continue to drive the demand for commercial real estate.
A Stronger Economy Will Push Property Prices Higher
Broadly speaking, real estate moves in tandem with the performance of the economy. At the height of the pandemic year in 2020, Singapore’s economy contracted by 5.4%, its worst full-year recession since independence. According to the research note by Real Capital Analytics the commercial volume in 2020, was a low of US $3.2 billion.
A year later, when the GDP expanded by 7.6%, the commercial property volume also picked up to around US$9.6 billion.
For 2022, the Ministry of Trade and Industry (MTI) forecasts GDP growth of between 3 and 5%. It also expects the economic recovery to be more broad-based compared with last year. This can be seen as an indication that economic activity is set to pick up in the coming months, which bodes well for the demand for commercial properties.
Furthermore, construction costs are set to rise in the coming months due to higher raw material and manpower costs. Therefore, with the cost of replacing old commercial buildings going up, prices of built-up commercial properties may not stay at depressed levels for long.
Commercial Property Prices Are Lagging Residential Property Prices
Since the circuit breaker measures were lifted on 1 June 2020, both HDB and private residential property price indices have reached new highs. In contrast, the property price index for office and retail space in the central region has been on a downward trajectory for the past two years.
Some of the safe management measures (SMMs) like work-from-home (WFM) for office workers, reduce the need for an office environment. This consequentially affected retail spaces within the central region due to the lower foot traffic from the office crowd. Additionally, other SMMs, like small group sizes and limitations on dine-in, also impacted the retail businesses.
This trend may be reversed soon. On 29 March 2022, Singapore took a big step toward living with COVID-19. The existing restrictive SMMs on businesses were lifted. This also includes the opening of land borders between Malaysia and Singapore.
When these changes take full effect, we may see an increase in demand for office and retail space within the central region as more businesses resume their post-COVID-19 operations.
Rents For Retail Space Are Picking Up And Office Space May Follow Suit As More Workers Are Allowed To Return To Office Settings
The vacancy rate for both office space and retail space started to widen from 2Q2020, which was when the circuit breaker measures were first enforced.
Soon after the circuit breaker was lifted, the take-up rate of retail spaces also started to improve from 4Q2020. The vacancy rates have started to narrow from the highs of 9.6% to the current 8.1%. In contrast, the vacancy rate for office spaces is at its highest in the past three years.
In light of the recent announcement, we could see a more positive uptake in the rental of office spaces in the coming quarters. From 29 March 2022, up to 75% of work-from-home (WFH) workers are allowed to return to an office setting. This could spur the demand for office spaces as businesses undertake the transition to accommodate all their workers again.
Businesses looking to avoid higher rental rates may look to purchase a commercial property for their own use, especially when the commercial property cycle is still at the bottom.
Opportune Time For Businesses To Becoming Their Own Landlords
The majority of commercial properties in Singapore are owned by large developers, with only a small portion accessible to the average investor or SME-alike.
The current lower property prices and low interest rates may be an opportune time for businesses wishing to avoid uncertainties like rental rate hikes or non-renewals to consider buying a commercial property for their own use.
The downturn in commercial activity was induced by the unique and unprecedented measures taken to curb the COVID-19 infection. However, as we move towards an endemic stage of living with the virus, economic activities should resume as usual. An investment in commercial property in 2022 could also be seen as a play on the growth of Singapore in the coming years.
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