Q2 2021
Never let a good crisis go to waste…
~ Winston Churchill
Even pre-COVID, structural shifts have begun to alter real estate. These changes have since been accelerated, and this playbook offers some insights into how real estate players can ride on these trends post-COVID.
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A RECOVERY PLAYBOOK
SINGAPORE REAL ESTATE
01 Recovery underway
02 Office
03 Retail
04 Industrial
05 Summary
CONTENTS
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Recovery underway
Office
Retail
Industrial
Summary
Various leading indicators have shown that an economic recovery in Singapore is well underway.
GDP growth y-o-y was at 1.3%, from -2.4% in Q4, the first quarterly growth since 4Q 2019. The Ministry of Trade and Industry (MTI) has maintained its GDP forecast for 2021 at between 4 to 6%.
(Part 1)
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Source: MTI, CBRE Research
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The number of net new business entities formed has since recovered to 5,489 from a low of 1,877 in 2Q 2020, which will is likely to translate into demand for real estate.
(Part 2)
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Source: Singstat, CBRE Research
The quarterly change in employed persons has improved to +6,700 in 1Q 2021 from -113,500 during the depths of the pandemic in 2Q 2020. The unemployment rate has also dropped to 2.9% in 1Q 2021, a second consecutive quarter of decline after peaking at 3.5% in 3Q 2020.
(Part 3)
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The STI has been a leading indicator for the economy as it belies investors confidence and expectations. As of end March 2021, the STI has risen 28.3% from its trough in Q3 20.
(Part 4)
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Source: CBRE Research
The CBD Incentive (CBDI) Scheme and Strategic Development Incentive (SDI) schemes aim to incentivise developers to redevelop existing older buildings to mixed-use developments.
Post-pandemic, these schemes have become even more pertinent and timely due to space rationalization and flexible working trends.
The take-up of these schemes are likely to result in the long-term reduction of office stock in the CBD, which plays a part in the government’s decentralization strategy.
The government has also realised the importance of planning for more mixed-use projects in the city centre.
The Urban Redevelopment Authority (URA) has given six in-principle approvals for applications under the CBDI scheme, while three approvals were given under the SDI Scheme.
CBDI & SDI schemes to facilitate redevelopment
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Eligibility for the CBDI scheme includes:
Qualifying properties will be allowed to intensify their GFA by 25-30%, depending on the proposed land use.
1. Building age of at least 20 years old from the date of the last TOP
2. Predominantly office developments
3. Located in selected parts of Anson, Cecil Street, Robinson Road, Shenton Way and Tanjong Pagar.
The CBDI scheme
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*78 Shenton Way Tower 2 does not meet the age criteria, but may be redeveloped with Tower 1
The Strategic Development Incentive (SDI) Scheme is intended to redevelop and transform precincts in strategic areas across Singapore. Eligibility for the SDI scheme includes:
1. Building age at least 20 years old from the date of the last TOP
2. Commercial or mixed-use developments with predominantly commercial use
3. The inclusion of a minimum of two adjacent sites
In particular, applications to redevelop existing developments in Orchard Road, CBD and Marina Centre areas are encouraged.
The SDI scheme
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Office transactions motivated by redevelopment potential
Of which, office transactions have increased from 6.0% of total investment sales to 24.2% (Fig 7).
Real estate investment volumes have seen a strong sequential pick-up in the past few quarters.
This is likely driven by an anticipated recovery in rents, and the redevelopment potential of some of these assets (Fig 8).
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The continued downward revisions to commercial development charges, will further improve the economics of redevelopment under these schemes.
2019 and 2020 saw robust office transaction values.
The government has not been releasing sites for commercial development, prompting developers to turn to the private market.
The resurgence in sales underscores the stability and ‘safe haven’ reputation of Singapore.
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DUO TOWER & GALLERIA
$2,549 PSF/NLA (Jul 2019)
KH KEA
$3,592 PSF/NLA (Dec 2019)
ODEON TOWER
$2,429 PSF/NLA (Dec 2020)
SOUTH BEACH TOWER
$2,900 PSF/NLA (Dec 2020)
GUOCO MIDTOWN
$1,706 PSF/GFA (Land rate, Oct 2017)
SHAW TOWER REDEVELOPMENT
SUNTEC OFFICES
Average $2,907 PSF/NLA since 2019
Ophir-Rochor precinct values and rents to get uplift
Leveraging on the SDI Scheme, UOL acquired KH KEA Building, to amalgamate with the adjacent Odeon Towers.
With limited land available for commercial development, redevelopments will drive long-term value creation.
Click to reveal
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There has already been strong interest for the office space in Guoco Midtown, which is scheduled to complete earlier in 2023.
The area is also expecting two upcoming integrated developments: Guoco Midtown and the redevelopment of Shaw Tower.
The Ophir-Rochor precinct looks set to be revitalised; hence, prices and rents in the area are likely to move even closer to core CBD Grade A values (Fig 10).
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The Shaw Tower site at Beach road will offer about 440,000 sf of Grade A office space, as well as retail/F&B offerings on the ground floor by 2024.
Guoco Midtown will comprise a 30-storey office tower with around 770,000 sf of Grade A office space, three retail clusters, two condominium projects, as well as a business and social networking club.
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Source: Aedas
Source: Guocoland
Food for thought
Cloud kitchens are more economical and strategic, and allow F&B players to expand beyond their physical space as online F&B becomes the new norm.
Having food production in retail spaces allows restaurants to monetize the massive growth in online F&B (Fig 11).
These kitchens also serve as a launchpad for new-to-market players, allowing them to adapt quickly to customers’ responses and food trends.
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Older suburban malls, in particular, are seen as likely candidates due to their proximity to residential areas, as well as their cheaper rents.
Retail landlords with ageing malls can also capitalise on housing cloud kitchens, while shophouses approved for F&B could also be suitable.
Cloud kitchens in retail spaces with new dining concepts could help drive traffic to malls, and is set to be the new norm as F&B players shift their focus online.
With lower start-up costs and less manpower required, cloud kitchens are expected to grow and become the launchpad for many new eateries.
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Source: CBRE
Vacant retail space is increasingly being taken up by a variety of new uses, leading to a more complex tenant mix.
Retail landlords will need to look at creative ways to fill retail space and tweak their tenant mix.
One way is to look to incorporating work and living spaces in retail malls.
The new Funan DigitaLife mall is a successful example of a mixed-use development, which includes offices, co-working player WeWork, as well as Lyf, a co-living model for Ascott Hotels.
Refreshing tenant mix
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JustCo opened its first co-working space in a retail mall at Marina Square. The co-working operator has since opened another centre at Centrepoint Orchard, which also serves as its headquarters.
Switch is a workspace-on-demand platform which allows users to book work booths in malls or workspaces. These work booths can be found in islandwide malls, including suburban malls such as Northpoint and Century Square.
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Integrating online and offline
As these stores are either centrally located or in high density suburban malls, it enables retailers to leverage on the stores’ proximity to consumers.
Some retailers are increasingly using their physical stores as fulfilment centres or click-and-collect locations.
Online e-commerce platforms such as Lazada and Taobao have also taken up retail space as showrooms.
Decathlon, Pomelo, and Love, Bonito, have click-and- collect locations at various suburban and centrally located malls. NTUC FairPrice uses some of its stores as fulfilment centres, while also allowing consumers to self-collect from more than half of its supermarkets.
Online to offline
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It has also set up its first planning studio in Jurong Point mall, with plans to open up four more studios.
Ikea has set up a small-store concept store at Jem, without its regular furniture options and logistics space at other regular stores.
Ikea has discovered that e-commerce sales are higher in places where it has a physical store.
Offline to online
CapitaLand launched a digital mall platform, eCapitaMall, which largely features its own retail tenants; and a food ordering platform, Capita3Eats, to help boost tenant sales. Similarly, Frasers Property Retail has launched an e-commerce marketplace, Frasers eStore via an app, with a feature called Makan Master, to allow for easier food takeaways.
Other retailers such as Lendlease, have gone the extra mile, teaming up with Grab to launch a robot runner to consolidate orders across restaurants within its malls before handing them off to delivery partners at a central collection point.
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Source: Grab
Source:Capitaland /Facebook
Repurposing warehouses – Prime logistics
Underpinning the rise in investor interest are structural trends such as the rising demand for e-commerce, as well as food and healthcare logistics.
The industrial sector has seen the least impact from this pandemic, and is perhaps even a beneficiary.
Industrial space today in fact doubles up as modern retail space where goods are being bought and sold.
Industrial asset owners should take this opportunity to cater their buildings to these growth areas.
Medical logistics needs will drive demand for high-specification warehouses moving forward.
CBRE defines a prime logistics assets as:
100,000 sq ft or more per floor
Modern purpose-built warehouse space used principally to accommodate the distribution, storage and/or despatch of goods with the following features:
All loading is dock-height with dock-leveller
At least one loading dock per 10,000 sq ft
Minimum clear ceiling height 8-12 m
Homogeneous space and volumes, regular shapes and heights
Every floor is accessible by a 40-footer via a vehicular ramp
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The upper and ground floors of such properties fetch almost similar rents, as opposed to conventional warehouses, with ground floors commanding higher rents.
Out of Singapore’s total warehouse stock, CBRE estimates that less than 30% of them qualify as prime logistics.
Due to their stronger rents and occupancy, prime logistics are perceived as lower risk, and hence command lower yield expectations.
Out of the basket of prime logistics properties which CBRE tracks, occupancy is very tight at 99.3%.
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Repurposing warehouses – Cold storage
The complexities of cold-storage warehousing means that this operational experience primarily sits with end-users, or specialised cold storage companies.
Cold storage can be classified into two main types: chilled warehouses for keeping perishables fresh, and frozen warehouses for frozen goods.
To increase asset values, investors have to either secure a high quality operator, or have long-term tenants to fit out the space to suit their needs.
Cold storage is seeing a rise in demand on the back of growing food consumption, increased trade in perishable products, omni-channel distribution of groceries, food loss and quality concerns, as well as higher medical and pharmaceutical usage.
In another benefit to investors, leases for single-tenant facilities are typically double-net.
However, cold storage requires the installation of additional machinery, insulation, air-proof doors and cooling systems. Operating expenses of cold storage facilities are also typically greater due to higher power usage.
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Chilled and frozen warehouses can command a substantial rental premium to conventional dry warehouses.
Cold storage facilities also command longer lease terms of as compared to typical dry warehouses.
Sourcing for suitable sites to develop such facilities is increasingly challenging in land scarce Singapore.
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Sale and leaseback
Asset owners could take advantage of the increased demand for industrial assets and higher prices now to do a sale and leaseback.
Industrial assets are seeing ongoing cap rate compression and higher asset valuations.
A sale and leaseback will not involve any operational change, as tenants can generally secure long leasebacks with renewal options to ensure business continuity.
Firms may have large amounts of capital tied up in real estate that can be tapped for higher yielding ventures.
BreadTalk HQ at Tai Seng was sold for $118.00 mil ($474 on GFA). BreadTalk Group has committed to lease back the property as an anchor tenant for an initial lease term of 10 years, with an option to either buy back the property at the end of the lease; or to extend the lease for a further five years at the prevailing market rent.
Sime Darby Business Centre was sold for $102.00 mil ($569 on GFA), on a partial leaseback arrangement, under which Sime Darby will lease back 70% of the building's total GFA for a period of 10 years, with annual rental escalation of 2.25%, and a four-year lease-renewal option at the prevailing market rate.
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Business parks
BPs allow the user to arbitrage the different costs of space, while achieving the same utility of good quality office space with relatively stable rents (Fig 14).
Business parks (BPs) can host a broad spectrum of occupiers, as long as their activities complies with the allowable use stipulated by the URA.
The demand for BPs will be even more acute with the increasing importance of the biomedical sector in Singapore.
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Most FGPFs are accompanied by related companies that provide supporting functions, such as logistics or sales and marketing.
Singapore is witnessing a rise in the prominence of factoryless goods producing firms (FGPFs), whose activities usually qualify them as BP tenants.
Since BPs are usually occupied by such established tenants (FGPFs, service firms, MNCs, government agencies, biomed and banks), there would be less concerns about their covenant strength.
Hence, quality BPs would make for attractive assets with stable rental yield and capital appreciation.
Further, BPs are tightly held by a small number of landlords, and have longer tenures compared to industrial assets.
The Sandcrawler was sold in early 2021 for $175.75 mil ($726 psf on site area). The modern building houses an established list of tenants (Lucasfilm, the Walt Disney Company, Govtech, ESPN) and is almost fully occupied.
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Source Marcus Oleniuk Photography
OFFICE
With a recovery underway post-COVID, investors and asset owners will have to be on top of structural trends, in order to invest in, or cater their assets to these growth areas.
CBDI and SDI schemes to facilitate redevelopment
These schemes aim to encourage the redevelopment of older office buildings into mixed-use projects, and have become even more pertinent and timely with flexible working trends.
Since the announcement of these schemes, office transactions have been robust; likely motivated by the anticipated rental recovery, and redevelopment potential of some major assets.
With upcoming developments and redevelopments, the Ophir-Rochor precinct looks set to be revitalised. As such, capital values and rents in the area are likely to get an uplift from these plans.
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RETAIL
With the massive growth in on-demand food delivery, having food production in retail spaces will allow restaurants to monetize this trend, as well as provide retailers the flexibility of expanding beyond their physical space.
As malls lose parts of their traditional tenant base, vacant space is increasingly being taken up by a variety of new uses, leading to a more complex tenant mix.
Retailers will have to integrate online and offline strategies to help their tenants, and provide customers with a seamless shopping experience.
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INDUSTRIAL
Repurposing warehouses – prime logistics and cold storage
With the rise in demand for specialized assets for e-commerce, food and healthcare logistics, industrial space will have to be repurposed to suit these needs.
Asset owners could take advantage of higher prices and demand to do a sale and leaseback to free up capital.
Business parks cater to growth sectors in Singapore, and allow users to achieve the same utility of good quality office space at lower costs, making them attractive assets for rental yield and capital appreciation.
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Contacts
Research
To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway
Michael Tay
Head of Capital Markets, Singapore
Rimon Ambarchi
Head of Industrial & Logistics Services, Singapore
Henry Chin
Global Head of Investor Thought Leadership & Head of Research Asia Pacific
Advisory & Transaction Services, Singapore
Catherine He
Director, Research South East Asia
Lay See Lim
Co-Head of Office Services, CBRE Advisory & Transaction Services, Singapore
David McKellar
Co-Head of Office Services & Head of Occupier, CBRE Advisory & Transaction Services, Singapore
Letty Lee
Head of Retail Services, Singapore
Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.Agency License No: L30021631