Right on track but returns have to wait

While the billions poured into Marina Bay are expected to bring in the crowds, the recession and asset re-pricing means it will take a while to recoup that investment.

LAST TUESDAY MORNING, wearing a hard hat, safety harness, safety boots, and accompanied by an entourage of executives from the Urban Redevelopment Authority, Minister for National Development Mah Bow Tan, toured some of the key areas of Marina Bay, Singapore’s equivalent to Canary Wharf in the UK and other major urban development projects around the world.

Sites that Mah visited included the US$5.4 billion ($8.1 billion) Marina Bay Sands integrated resort, the 3.5km double-helix bridge, the rejuvenated Clifford Pier (now Sino Land’s Fullerton Heritage development) at Collyer Quay and the 70-storey The Sail@Marina Bay, considered Singapore’s tallest residential tower.

The tour served as an assurance to the rest of the world that the ambitious transformation of Singapore has not been derailed by the global economic slump. “What we have seen today shows that the progress on Marina Bay is very much on schedule and on track,” said Mah to a group of reporters at an interview at the end of the tour.

Total investment in new developments at Marina Bay today amount to a whopping $22 billion, of which $16.3 billion is from the private sector. The remaining $5.7 billion is in infrastructural works for the bay area. A further $1 billion will be pumped into infrastructure in the longer term.

There is no doubt Singapore’s skyline is going to change in the next two years with the completion of the Marina Bay Sands and the first phase of the Marina Bay Financial Centre (MBFC) by next year, and the progressive completion of the double-helix bridge, the Art Park, and the Gardens by the Bay by 2011.

Three to four years ago, when property markets around the world were booming, the maxim was very much, “If you build it, they will come”. That maxim is now undermined by a global recession in full swing and real-estate prices deflating, especially at the top end of the market. Developers and investors who embarked on multi-billion dollar projects are now facing a much starker reality, far different from the projections made in rosier times. “I don’t think that maxim applies today,” concedes Donald Han, managing director of property consulting firm, Cushman & Wakefield. “The issue now is to build confidence in a market that is dealing with an oversupply situation.”

The Marina Bay Sands resort has a total of 2,600 hotel rooms, of which 1,800 will open by year-end. Meanwhile, the $6.59 billion Resorts World at Sentosa will have six hotels with a total of 1,800 rooms, of which 1,350 will be soft-launched in 1Q2010. The two integrated resorts will contribute the bulk of the 8,000 hotel rooms scheduled for completion over the next two years. Last Tuesday, Resorts World gave a preview of the showrooms for Maxim Tower, Hotel Michael, Festive Hotel, and the Hard Rock Hotel, which will be opening next year.

In the meantime, Singapore’s tourist arrivals and hotel-occupancy levels continue to plummet. Last Thursday, the Singapore Tourism Board reported that March tourist arrivals tumbled 13.2% to 790,000 compared with March 2008. Hotel-room revenue dropped 33.3% to $125 million compared with the same month last year, while average room rates slipped 18.5% to $196 per night. Occupancy rates last month were 74%, a 13.1% drop from March 2008.

However, the government is pinning its hopes on the two integrated resorts and their economic spin-offs in terms of job creation and other sectors of the economy. “It will be a catalyst for tourism because it will be something new for visitors, and I’m sure visitors will come and visit the resorts in Singapore,” says Mah. He acknowledges the inevitability of belt-tightening among tourists given the current recession, but “when it comes to travel and leisure, even in a recession, people will want to enjoy themselves and relax”.

Source: Corporate Locations

Apart from the Marina Bay Sands, the other key development in the bay area is the MBFC, developed jointly by Cheung Kong (Holdings)/Hutchison Whampoa, Hongkong Land and Keppel Land. When fully completed, the entire mixed development will have three million sq ft of Grade A office space, two residential towers with a total of 649 apartments and 176,000 sq ft of retail space.

The first phase is expected to be completed by the end of 2Q2010, and will contain two office towers and the 428-unit Marina Bay Residences condominium tower. “We have 61% of the office space pre-committed to blue-chip tenants some one to three years ahead of completion,” says Wilson Kwong, general manager of Raffles Quay Asset Management on behalf of the consortium. Anchor tenants include Standard Chartered Bank, which has committed to taking up 500,000 sq ft of space and DBS, which is taking up 700,000 sq ft, adds Kwong.

With the completion of the first phase of the MBFC next year, property analysts and consultants expect the market to be awash in new supply. In his April market review, Douglas Dunkerley, managing director of office specialists, Corporate Locations, notes that most new office developments this year, will only be completed in 3Q and 4Q and those within the CBD will collectively provide around 1.5 million sq ft of new space. This will be followed by a short lull until 2H2010 “when a massive wave of space arrives with two million sq ft due for completion inside the CBD and a further two million sq ft will be ready outside the CBD”, he says. On top of that, the secondary supply from major relocations will further exacerbate the situation of chronic oversupply.

Hence, Dunkerley expects the Singapore office market to continue experiencing major adjustments over the next two years as demand has fallen off at a time when massive supply is arriving — “just when it’s not needed”, he notes. “If only this supply had arrived in 2006/07.” That was when there was a chronic shortage of office space. The last time the office market bottomed out was in 2004, when prime rental levels were around $5 psf (or $6 psf for the very best space) in Raffles Place. With the glut of new supply available and fierce competition from new developments, Dunkerley predicts that top rates could come down to between $9 psf and $10 psf per month by year-end, and prime properties could see rental rates fall by another 30% to around $6 psf to $7 psf by the end of next year.

“Historically the office-rental market has lagged behind any recovery in the stock market by around 12 months,” observes Dunkerley. “If there is a firm recovery in the stock market by yearend, then one would normally expect the office-rental market to start recovery early 2011 but, with so much supply, this is likely to be delayed until later in 2012.” (See Charts)

According to URA data, office rents in 1Q2009 fell by 10.7% compared with a 6.5% drop in 4Q2008. The median rental rate for prime office space stood at $11.56 psf per month in 1Q2009, down from $13 psf per month in 4Q2008. Meanwhile, prices for office space are down 12% in 1Q2009, which is more than the 4.9% decrease in 4Q2008.

“If you’ve been around long enough you will know that there will always be cycles — there will be booms and there will be busts,” says Mah. “When we started this [MBFC site] in 2000 and 2001, there was similar apprehension that we were offering land for sale in Marina Bay when there was a glut. Then what happened? When we started building, suddenly we were running out of space, and everybody was saying, ‘Why didn’t you sell more land at that time? You remember that?’”

Mah notes that while there’s a need to be mindful of the economic downturn, and to find means and ways to cope with it, there is also a need to “prepare ourselves for when the economy recovers”.

In the residential sector, it is also a time of reckoning. According to URA’s 1Q2009 report last Friday, prices of non-landed homes (both apartments and condominiums) fell 15% in 1Q2009, compared with a 6.3% drop the previous quarter. Meanwhile, rentals in the core central region fell 10.3% in 1Q2009.

When the market was booming, and condominium prices were spiralling upward, investors were looking for capital appreciation, and rental yield took a backseat. However, with valuations and property prices on a downward trend, investors are once again looking at property fundamentals and rental yields are fashionable once again. At The Sail@Marina Bay, the benchmark for condos in the core central region, based on the caveats lodged in the URA Realis database, there were four transactions done in the week of March 30 to April 6. Of these, three were apartments of 657 sq ft to 678 sq ft sold in the resale market at $1,302 psf to $1,357 psf. A larger unit of 1,184 sq ft was transacted at $1,600 psf. When the first tower was launched in October 2004, prices started from $900 psf, and subsequently at the peak of the market from 2Q2007 to 1Q2008, over 150 units changed hands in the secondary market at $2,000 psf to $3,000 psf, with over six units sold at prices above $3,000 psf.

“The bottom line in any property portfolio is that if the purchase price was at $2,000 psf to $3,000 psf, the question is what kind of rent will you be able to get for your property?” says Cushman & Wakefield’s Han. In the central region, for condominiums like The Sail@Marina Bay and even those at Sentosa Cove, rental rates are now pegged at $5 psf to $6 psf per month, or up to $6.50 psf to $7 psf for fully-furnished apartments and serviced apartment-like offerings, notes Han. At those rental rates, people who bought units at $2,000 psf to $3,000 psf would be looking at rental yields of around 2% to 3% per annum.

There is no doubt that the Singapore skyline is going to change, but it’s taking place at a time of massive price and rental adjustments.

Source : The Edge – 25 Apr 2009

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