Global
and Singapore Real Estate Outlook
Global
real estate as an important asset class:
The real estate market is typically a medium-term investment as it tracks
the economic cycle very closely. One can invest in real estate directly (unlisted)
or indirectly via various investment vehicles such as real estate investment
trusts (REITs), real estate funds (listed/unlisted) and individual property
stocks. From a portfolio perspective, there is merit in including global real
estate as an asset class in a global portfolio as it provides good asset diversification
and stable yields. Such a portfolio enhances return with a corresponding reduction
in overall portfolio risks. Based on our internal study, depending on one’s
risk-return profile, an optimal allocation ranges from five per cent to 15
per cent (see chart 1).
Since the trough in the global economy in 2002, the global real estate market
has outperformed other asset classes with an average return in excess of 30
per cent per annum. As it stands currently, the total global listed real estate
universe is approximately a US$7 billion market. The US is the biggest, but
the most matured real estate market. Real estate markets in Europe and Asia,
excluding Japan, are fairly less matured, and thus provide opportunities of
growth and capital appreciation (see chart 2). In fact, in the coming years,
we expect to see more planned REIT launches in markets such as Costa Rica,
Finland, Germany, India, Italy, Mexico, Pakistan, Philippines and South Africa.
Structural and cyclical factors:
While valuations of global real estates have been creeping up, the fundamental
case remains supportive for continued decent performance. Structural factors
such as the opening of markets to foreign investors, launch of tax-efficient
REITs, increased market transparency, and positioning of listed and unlisted
real estate as separate asset classes all bode well for the medium term outlook.
On a cyclical basis, the current low interest rate environment, improved labour
market and economy leading to increased demand for space, and the reduced
risk premium boosting capital gains support current levels of valuation.
The Singapore real estate:
Singapore real estate market has seen a significant recovery in both volumes
and prices since its trough in 2003, in line with the strong pick up in employment
and economy. The pace of capital value appreciations varies, depending on
the segment, ie residential, retail, office or industrial. In view of the
sustainable good economic outlook in 2007, Singapore real estate market is
expected to remain fairly firm.
Residential - Are you on the preferred client launch list?
On the residential segment, the take-up rate of new units has been rather
high given the fairly limited supply. Last year, a number of both leasehold
and freehold projects launched were quickly being snapped up (see chart 3).
Thus, in 2006, a record 11,000 new units were sold with overall prices rising
by 10 per cent. This was mainly driven by strong demand in the luxury segment
with prices up by 17 per cent (+25 per cent if one excludes landed properties).
However, we expect to see a surge in new supply from 2008/2009 onwards, coming
from the more than 6,000 en-bloc transactions done in the past fourth and
fifth quarters. Thus, any overall price increases may be more muted although
the non-luxury segments may play some catch-up.
Office – Making new highs:
Rentals have been edging up decisively on the back of increased economic activities.
Prime office rental was up more than 50 per cent in 2006, and looks set to
surpass the last peak of S$10 psf/mth in 1996. Vacancy rate continues to decline
from the current level of around 10 per cent, backed up by the secular growth
in the services sector, especially in banking and finance. Supply of office
space in the next few years remains muted, and bodes well for rental outlook.
Between 2007 and 2009, we estimate an annual supply of around 500,000 sf/pa
versus a historical 10-year average supply of 1.5m sf/pa. Historically, the
average take-up rate has been around the 1.1m sf/pa. Consequently, we expect
a supply-demand disequilibrium only from 2010 onwards with the emergence of
the Business & Financial Centre Phase 1 (BFC1).
Retail – Watch out for the sharp supply from 2009 onwards:
The outlook for retail space remains buoyant with a strong economic environment,
an expected increased disposable income and retail sales coupled with the
various government initiatives to boost tourist arrivals. The hike in goods
and services tax from five per cent to seven per cent may be a slight dampener
in the short-term. However, we see an increased supply in the pipeline in
2009 and 2010.
Industrial – More room for recovery:
The sector has seen a surge in demand accompanied by a recovery in rental
rates. This is due in part to the rising office rentals in the central business
district causing rent-sensitive tenants to consider business park spaces as
cheaper alternatives. Thus, there is more room for higher rentals in this
space. In conclusion, we believe that global
real estate is an important asset class as it provides benefits
such as portfolio diversification and risk-return optimisation. Investors
can gain exposure either directly or indirectly using instruments such as
REITs, real estate funds and property stocks. As long as the global economy
is healthy, the outlook for global real estate is constructive.
Benjamin Yeo
UBS
Wealth Management
