IN SEARCH OF HIGHER RETURNS
Despite the transactions of sizeable and prominent assets such as DUO, Mapletree Business City II and 30 Raffles Place, investment volume for 2019 amounted to the lowest volume recorded since 2017. This could be a sign of investment volume declining; not due to deteriorating investor sentiment, but due to the diminishing supply of quality assets for sale.
In 2019, with the weakening of the global macroeconomic outlook, major central banks such as the U.S. Fed and European Central Bank (ECB) once again turned to accommodative policies; the U.S. Fed resumed lowering rates while the ECB resumed Quantitative Easing. Implicitly, interest rates are likely to stay lower for longer. Reflecting this global risk aversion, local 10-year bond yields have also started their decline, while asset yields have stayed flat or declined (Figure 22).
However, decent spreads over risk free assets still back the case for allocation to real estate. With the weight of capital targeting yields wherever it can be found, we expect to see property yields across sectors start to converge.
IN SEARCH OF HIGHER RETURNS
Lower yields means investors have to either lower their return expectations, and/or consider taking on alternative assets with higher risks. Such assets include co living, senior/student housing or data centres.
With the scarcity of quality core assets, there will also be more interest in value add strategies. This includes buying and enhancing older assets, especially under the CBD Incentive Scheme where bonus plot ratios are given to mixed developments, or the Strategic Development Incentive Scheme where smaller buildings can be amalgamated. Though lower than the past two years, commercial shophouse transactions have also remained robust, as they can be refurbished and are exempt from stamp duties.
FIGURE 22: NET YIELDS ACROSS SECTORS
EASY TO RAISE, HARD TO PLACE
Investments will be led by Singapore focussed close ended real estate funds, which have been actively fundraising in the past three years, according to Preqin (Figure 23). Assuming a leverage ratio of 40%-50%, CBRE Research estimates that Singapore focussed funds have more than US$50 bn to deploy over the next few years.
Lower and diminishing returns from mainstream assets such as equities and bonds have diverted more capital to real estate. Further, real estate offers a more defensive income stream and provides portfolio diversification. In the search for returns, investors are also likely to turn to assets to which they can value add.
REITs will account for another significant source of demand as they acquire assets or merge for size to get onto the radar of investors. Given the favourable costs of debt and equity, it will not be difficult for them to raise capital.
Moreover, the backdrop of lower interest rates for longer will support robust capital flows into real estate, with cheap debt and active fund raising in the capital markets. This readily available capital will likely support more merger and acquisition activities or portfolio transactions.
However, the lack of investible quality assets might create challenges in deploying capital, which may result in fewer large-sized transactions. With rental growth slowing, investors will also have to contend with lower yields given this late cycle dynamics.
FIGURE 23: FUNDS RAISED BY SINGAPORE-FOCUSSED CLOSE-ENDED REAL ESTATE FUNDS
HIGHER FOREIGN INFLOWS
Analysing the origin of buyers’ capital, foreign capital flowing into Singapore as a proportion of total capital increased to 30.5% in 2019 from 24.3% in 2018, with demand coming primarily from foreign domiciled funds (Figure 24). This reflects Singapore’s status as a perceived haven, as well as investors’ increasing attraction to Singapore.
Ever since punitive measures were meted out in the residential sector, investor attention has shifted to strata offices as well as commercial shophouses, given their palatable prices.
Singapore remains attractive as an investment destination for its macroeconomic stability, as well as conducive environment for long term capital value appreciation and preservation.
Further, there has been anecdotal evidence of more foreign inflows and interest in Singapore assets, which have yet to materialise into actual investment volume. These include enquiries from boutique developers, family offices and high net worth individuals for bite-sized investments, such as partial stakes, smaller buildings, strata offices, and commercial shophouses below the S$300 mil mark. In the medium to long term, Singapore will continue to attract capital with the stability of its market
FIGURE 24: FOREIGN CAPITAL AS % OF REAL ESTATE INVESTMENT IN SINGAPORE
CLOUDED BY UNCERTAINTIES
With the confluence of the above factors (lower returns, ample liquidity, and flight to safety), CBRE Research expects yields to compress. Rents are likely to peak even as investors face greater pressure to invest, resulting in yield compression for office, retail and hospitality assets.
In light of recent events such as political unrest and the COVID-19 outbreak (declared by the World Health Organisation as a global health emergency), more capital is likely to be diverted to Singapore.
With the lack of sizeable and quality assets on the market, there is still ample capital looking for safety and that will support asset prices. Against this backdrop, real estate investment volume is expected to be lower than that of 2019, not due to the lack of demand but rather, a dearth of investible assets.
For 2020, depending on the scale and length of this pandemic, and if any sizeable asset comes onto the market, real estate investment volume should come in around 20% to 30% lower than the S$18.228 bn recorded in 2019 (Figure 25).
Finally, market players will also have to be watchful and ride on long term structural trends which could impact their investments such as technology, sustainability and the sharing economy. These trends could impact returns, occupier demand and even lead to new asset classes which investors cannot afford to ignore.
FIGURE 25: SINGAPORE REAL ESTATE INVESTMENT VOLUME