Banking crisis: How will real estate capital markets be hit?

/ EdgeProp Singapore |
From left: Henry Chin, Moray Armstrong and Tricia Song. According to Armstrong, Singapore can absorb shocks better than most markets, as it’s not overly geared towards any one sector (Photo: Samuel Isaac Chua/EdgeProp Singapore)
Join our  Telegram  channel and follow our  Facebook  for the latest update.
SINGAPORE (EDGEPROP) - At the start of the year, the top three concerns among investors in the Asia Pacific region — as outlined by the CBRE Asia Pacific Investor Intentions Survey 2023 — were fear of a recession, central bank policy changes and mismatch in buyer and seller expectations.
The recent banking crisis has amplified these concerns. “We need to watch out for refinancing risks as banks become even more cautious,” says Henry Chin, CBRE’s global head of investor thought leadership and head of research for Asia Pacific.
Banks had already adopted a more conservative stance towards lending for real estate by offering higher rates and lower loan-to-value-(LTV) ratios last year.
Advertisement
Advertisement
Chin, however, does not see the banking crisis escalating into a full-blown financial meltdown on the scale of the Global Financial Crisis (GFC) of 2008. “Banks are well-capitalised today compared to the GFC period,” he observes. “Governments have also acted swiftly to prevent contagion. Real estate companies are also not as over-leveraged as before.”
CBD SKYLINE - EDGEPROP SINGAPORE
Singapore is still the preferred destination among “the Chinese upper class”, according to Chin (Photo: Albert Chua/EdgeProp Singapore)
In 2H2022, capitalisation rates (cap rates) in the US expanded due to rising interest rates. “The real estate capital market will be weaker this year due to the current credit-related issues and decline in mortgage approvals,” says Chin.
With the US Federal Reserve expected to continue to raise interest rates, Chin anticipates global commercial real estate transaction volume in 1H2023 to remain muted. “It’s a similar story for the Asia Pacific region; the first half of the year will be quiet,” says Chin. “Beyond high- er interest rates, cap rates haven’t expanded much across our region.”
Except for Australia and South Korea, most markets in Asia Pacific saw “very marginal movements” in cap rates last year, says Chin. “That’s why investors were generally taking a wait-and-see approach.” But things will change as banks turn cautious.
“Cap rates across real estate markets in the Asia Pacific are likely to expand sooner rather than later”, he warns. Chin forecasts cap rates across the region to increase by 75 basis points (bps) to 150 bps from the peak to the trough of the cycle. The two exceptions are mainland China and Japan, where he sees cap rates remain unchanged. Meanwhile, his forecast is for cap rates in Australia and South Korea to move further up.
SG PRIME VS INTEREST RATES - EDGEPROP SINGAPORE

‘Price discovery’

In Singapore, CBRE managing director Moray Armstrong sees “an element of price discovery”. He adds: “Based on past precedents of these pullback moments, I don’t think this phase will last long.”
Advertisement
Advertisement
Holding power is the key, adds Armstrong. “Would-be-buyers excited about the prospects of a deep discount may be disappointed. Singapore has value propositions that will make it a very vibrant market, particularly in the second half of the year.”
Even though private equity funds and property developers will be less active, one group continues to prowl for trophy assets, says CBRE. These are high-net-worth individuals, family offices and private investors.
CBRE’s head of research for Southeast Asia, Tricia Song, sees this group of investors motivated by wealth preservation. “Things that are rare, with a unique charm, will appeal to them, regardless of the prevailing yields,” she says. Song sees such investors drawn to luxury residential, commercial buildings, shophouses, strata offices and increasingly boutique hotels. (Find Singapore commercial properties with our commercial directory)
TOP 10 CITIES 2023 - EDGEPROP SINGAPORE

Top 10 markets

While Tokyo is still the preferred target market for cross-border investment in 2023, Singapore has moved to second place (from third in 2022). Benefiting from their “China-plus One” status are Ho Chi Minh City and Hanoi in Vietnam, at third and ninth spots, respectively. Both cities are in the top 10 target markets for the first time.
Australia is another market with two cities among the top 10 target markets: Sydney in fourth place and Melbourne in sixth (see chart). Meanwhile, the reopening of its border with mainland China and the more reasonable valuations are reasons investors again find Hong Kong SAR attractive, with the city ranking among the top five for the first time since 2020.
From a real estate investment point of view, Hong Kong has become very attractive as capital values have dropped significantly. “Many price adjustments are taking place, as prices have fallen so much,” says Chin. “Investors who had never looked at Hong Kong in the last 10 years have now turned around and found the Hong Kong market very attractive. The reopening of China has been a huge X factor for Hong Kong.”
Advertisement
Advertisement
While Chin expects a “moderate recession” in the US, he does not see a recession in the Asia Pacific. “China
will play a key role as a growth engine,” he predicts. Most economists have re- vised their GDP forecast for China to a range of 5.4% to 5.8% in 2023. Hong Kong’s GDP forecast is 3.5% to 5.5% in 2023. He adds: “China and Hong Kong will do the heavy lifting when it comes to growth. So, we don’t expect a recession in the Asia Pacific region. “However, he expects capital market transactions across the Asia Pacific to soften by about 5% y-o-y.
SG FOREIGN PRICE HOME COMPLETIONS - EDGEPROP SINGAPORE

‘Preferred destination’

Still, Chin sees Singapore being the preferred destination among “the Chinese upper class”. Loh Kia Meng, senior partner and COO of Dentons Rodyk agrees. “There has been an increase in enquiries from China,” he says. “I have met several family office service providers — private bankers, lawyers and intermediaries — who visited from China. Besides China, interest from Taiwan has grown too.”
CBRE Research notes that luxury residential sales in Singapore have strengthened in the first two months of 2023 after China’s reopening on Jan 8. “Despite weaker economic conditions and interest rate uncertainties, the return of Chinese buyers and Singapore’s haven status could support the luxury property market in 2023,” says the March 17 report.
In 2H2022,104 luxury apartment units with a total transaction value of $1.068 billion changed hands, holding firm from the 117 units worth $1.097 billion in 1H2022. This brings total luxury apartment sales in 2022 to 221 units worth $2.165 billion.
CBRE Research notes that average luxury apartment prices rose 6.1% to $3,328 psf in 2022 from $3,137 psf in 2021. CBRE forecasts a more moderate 3% to 5% rise in residential prices for 2023.
Singapore’s private rental market soared 30% in 2022, the highest since its peak in 2007. “And this is just average rents; some properties saw rental rates rise 70%,” adds Song. However, she expects rental growth to moderate to about 5% in 2023.
graph - EDGEPROP SINGAPORE

Office rents to ease

CBRE Research says that the effective gross rents for Core CBD (Grade A) office space in Singapore grew for the seventh consecutive quarter to $11.70 psf per month by the end of 2022, reflecting full growth of 8.3% and surpassing the 3.8% growth in 2021.
“We think the upward trajectory for office rents will ease back, so we will probably see very marginal or flatline rent growth,” says Arm- strong. “But if you take a long-term view, the underlying fundamentals in the office market will support long-term rental growth as well.”
While more people are returning to the office, the tech sector — which catapulted growth in the office market over the last few years — is consolidating, notes Song.
Meta, the parent company of Facebook and Instagram, announced on March 14 that it would lay off another 10,000 workers on top of the 11,000 last November. Meanwhile, Amazon announced on March 20 that it would cut another 9,000 workers after it had laid off more than 18,000 from November to January.
Google announced that it was laying off 12,000 employees on Jan 20. On Feb 22, Frasers Logistics & Commercial Trust said that Google, a major tenant at its industrial property Alexandra Technopark, will be giving up “a portion” of the space with effect from Feb 20, 2024. Google had taken up 344,000 sq ft of space at Alexandra Technopark under a five-year lease with effect from January 2020.
OFFICE TOP 10 SECTORS - EDGEPROP SINGAPORE

‘Different cycles’

CBRE’s Song sees the office sector in Singapore “taking a slight breather” this year and is projecting a 1% rental growth for 2023.
“There is a relatively limited supply pipeline of new office space,” says Armstrong. “The overall calibration be- tween supply and demand still looks quite balanced. I don’t think we’re looking at an oversupply because of sec- ond-hand space or the release of space due to some consolidation in the tech sector. That’s why we’re inclined towards very modest or flatline growth.”
On the other hand, the office market in Hong Kong has seen rents decline substantially over the last four years, mainly due to demand drying up after the borders between China and Hong Kong shut during the pandemic years. “Demand was weak and mainly driven by a flight to quality,” says Chin. “There was also a new supply of prime office space in Central, putting further downward pressure on rents.”
Now that the borders between China and Hong Kong have reopened, Chin expects to see a flight to quality continuing. “We are forecasting that rents will recover slowly,” he says. “Hong Kong is very vibrant. You can feel that the energy is back compared to four years ago. Before Covid-19, there was social unrest. But now you can feel that the city has transformed. You can see another wave of people entering China. So I am very bullish and very positive about Hong Kong.”
The two markets are also on different cycles: “Hong Kong’s rents have bottomed while Singapore’s have plateaued,” says Chin.
HK VS SG OFFICE - EDGEPROP SINGAPORE

A gap in top office rents

Song says there is still a gap in the top office rents between Hong Kong and Singapore. However, she sees the gap narrowing. She adds that the difference between the two markets is that Hong Kong has more decentralised office locations than Singapore.
Armstrong points out that the rental delta between out-of-town office space and the prime CBD in Hong Kong is quite large. “In Singapore, we don’t have that big an arbitrage — even if you go to Paya Lebar or Jurong, the rental delta is not as wide as expected,” he says. “Hence, it is less compelling in Singapore to move to the city’s fringes or decentralised areas, notwithstanding the government’s grand plan.”
Singapore will weather the current market turbulence relatively well, notes Armstrong. “Singapore has many cylinders in its engine,” he continues. “It’s not a one-trick pony. Besides the tech sector, we have other sectors — life sciences, medical and professional services — and an influx of highly qualified legal professionals. We have seen strong growth in wealth management and family offices.”
As of April 2022, the Monetary Authority of Singapore (MAS) approved 843 family offices. The full figures for 2022 have not been released, but Den- tons Rodyk’s senior partner Loh reckons it is likely to be 1,200 to 1,500. Another 200 single-family office (SFO) and one multi-family office (MFO) applications are pending approval, according to Senior Minister Thar- man Shanmugaratnam on March 20.
Loh expects the overall number of SFOs this year to increase “slightly” instead of at the exponential rate of the past two to three years. “It depends on how the banking crisis evolves and, more importantly, how Singapore reacts to it,” he says.
“Singapore can absorb shocks better than most markets, as it’s not overly geared towards any one sector,” adds CBRE’s Armstrong. “I’m bullish on the long-term position, I think Singapore will be able to come through a bear market environment and emerge as a safe haven.”
Tags:

Follow Us
Follow our channels to receive property news updates 24/7 round the clock.
EdgeProp Telegram
EdgeProp Facebook
Subscribe to our newsletter

Our Site

Edgeprop.sg (previously known as The Edge Property Singapore) is the best property portal for real estate agents, investors, home-seekers and sellers alike in Singapore. On EdgeProp, you will be able to find the latest and hottest property news, property listings, and access tools for your research and analysis.

Whether you are looking to buy, sell or rent apartments, condominiums, executive condos, HDBs, landed houses, commercial properties or industrial properties, we bring you Singapore’s most comprehensive and up-to-date property news and thousands of listings to facilitate your property decisions. Click into any listing to check out the new AI Redesign tool to envision your property based on your preferred style, be it Scandinavian, Minimalist or many others.

View More