Singapore is recovering from the COVID-19 pandemic, stronger than ever. In the next five years, the island nation is expected to experience a period of growth: economic growth is projected to average around 3% per year; wage growth could be more than double that of the past five years; and the city will be repositioned as a center for innovation, technology, and sustainability.
Private Residential Prices to Rise with Economic and Wage Growth
Private Residential Property Remains a Good Store of Wealth
Economic growth and rising incomes are likely to sustain demand for private homes in the medium term, with property prices expected to rise by an average of 2% to 5% annually.
Furthermore, the risk of a Singapore property bubble is negligible, as the Singapore government actively intervenes to ensure that property prices grow in line with economic fundamentals.
On December 16, 2021, the government raised the Additional Buyer’s Stamp Duty (ABSD) rates, tightened the Total Debt Servicing Ratio (TDSR), and lowered the loan-to-value limit for HDB housing loans. This was in response to the buoyant residential market, which, despite the economic impact of COVID-19, was characterized by high transaction volumes and strong price increases. If prices had run ahead of economic fundamentals and continued unchecked, there would have been a risk of a destabilizing correction.
Based on the experience with the July 2018 measures, which saw a cooling-off period where both buyers and sellers assessed the market before activity gradually resumed, we expect the market’s reaction to the December 2021 measures to be relatively similar.
Market activity is expected to slow in the short term as buyers and sellers take a step back to assess the situation; thereafter, sentiment will improve as market confidence returns, supported by economic recovery and wage growth.
Consequently, the increase in private residential prices in 2022 is expected to be more moderate; however, we do not anticipate a price correction given the current low unsold inventory, strong economic outlook, and healthy wage growth. The unsold inventory in the private residential market is currently at a low level, having decreased from a high of 37,799 units in Q1 2019 to 17,165 units in Q3 2021.
Following the latest measures, the moderation in demand, coupled with a tighter supply, will lead to a healthier supply-demand balance and a more stable residential market, which bodes well for homebuyers.
The government has consistently intervened in the private residential market to ensure that property prices rise in tandem with economic fundamentals. As property prices rebounded sharply after the 2009 economic downturn, outpacing economic and wage growth, the government introduced a series of cooling measures between 2009 and 2013 to prevent an asset bubble. When the trend reversed between 2013 and 2016, some of the cooling measures were relaxed in the first half of 2017.
In 2021, as property prices rose by 10.6%, far exceeding economic and wage growth, ABSD rates were increased, the TDSR was tightened, and the loan-to-value limit for HDB loans was lowered.
From 2022 to 2025, we expect Gross Domestic Product (GDP) to grow by an average of around 3% annually, and wages to increase by 5-6% per year. In the absence of additional interventions, property prices could appreciate by an average of about 3% per year.
Structural Change in CBD Office Rents
CBD Office Rents to Enjoy a Long Runway of Growth
The Central Business District (CBD) has a limited office inventory, with no new government land sales for office sites expected within the CBD in the next decade. At the same time, the government is encouraging owners to redevelop existing CBD office buildings into mixed-use projects with a greater residential component.
Over the past 30 years, Singapore’s office rents have undergone phase shifts as structural transformations elevated the economy:
In the 1990s
Recognizing the need to diversify its manufacturing and export-led economy, Singapore began to develop its modern services sector as a twin engine alongside manufacturing. The government also took gradual steps to open up Singapore’s financial services and insurance industries. This new economic direction spurred occupier confidence, driving Grade A CBD office rents to break through the single-digit barrier for the first time in history.
In the 21st Century
The economy entered another phase of growth as Singapore adopted a productivity-driven growth model to overcome resource constraints. Singapore promoted itself as a hub for financial and professional services to attract more global headquarters, investment banks, and wealth management businesses. The progress made by Singapore’s manufacturing sector in “digitalization” and “servitization” also boded well for its info-communications and business services industries. This shift triggered a new wave of demand for office space, with Grade A CBD office rents rising for 17 consecutive quarters to reach a new high in 2008.
In the Next Decade
Singapore is positioning itself as a global hub for innovation, technology, and sustainability to remain competitive in the new economy. This will ensure growth in demand for office space. However, with limited new office supply in the CBD in the future, Grade A CBD office rents will face significant upward pressure, which will only abate when new office supply outside the CBD, such as in the Jurong Lake District, becomes available. Considering the decentralization drive away from the CBD, the risk of government intervention to temper CBD rent growth is likely low, which could lead to Grade A CBD rents reaching unprecedented levels.
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