SECTOR BRIEFING number DBS Asian Insights DBS Group53 Research • November 2017 Property More (Land)-Bank For Buck 19

DBS Asian Insights SECTOR BRIEFING 53 02

Singapore Property More (Land)-Bank For Buck

Derek TAN Equity Analyst [email protected]

Mervin SONG, CFA Equity Analyst [email protected]

Rachel TAN Equity Analyst [email protected]

Singapore Research Team [email protected]

Produced by: Asian Insights Office • DBS Group Research

go.dbs.com/research @dbsinsights [email protected]

Goh Chien Yen Editor-in-Chief Jean Chua Managing Editor Geraldine Tan Editor Martin Tacchi Art Director 19

DBS Asian Insights SECTOR BRIEFING 53 03

04 Executive Summary Sustainable Volume Growth To 05 Lead Recovery In Prices Wild Card: Prices Will Rise Further When Foreign Interest Returns Land-Banking – Going All Out 16 To Win Developers Pricing In Rise In Launch Prices What Should Developers Do? Offices: On the Cusp of a 27 Multi-Year Recovery Demand To Remain Robust Demand For Physical Real Estate To Continue DBS Asian Insights SECTOR BRIEFING 53 04

Executive Summary

Gain of 6-10%? he time has come. Recent market indicators point toward a property market inflection in 2017 and an eventual rise in property prices from 2018 onwards. 1H17 total property sales have increased 46% y-o-y and if the sales momentum continues, volumes will reach a five-year peak. In our analysis, we found that 94% Tof home buyers in 1H17 are Singaporean households. A wildcard to a further acceleration in price is when the wave of buying from foreigners return, especially for homes in the Core Central region.

Market absorption rate Supporting a rise in the property price – unsold inventories are at 16-year lows at 29k units. When compared against current transaction levels, we found that market absorption rate (ratio of unsold units and new sales) stands at 2.1x and it is the tightest in the suburb (Outside Central region). Even if we were to include the more than 3k unlaunched new units from the recent government land sales (GLS) and en-blocs, we believe the market can absorb them easily.

Potential S$1.4bn Assuming developers achieve a 10% profit margin on their projects, that could translate in profits to an internal rate of return (IRR) of 9% but returns could be as high as 40% if pre-sales do well. As such, we expect developers to come out in force to bid for residential land and expect prices to continue inching higher in 2H17.

Office sector to Limited commercial sites and the gradual turnaround in office sector has prompted robust improve in 2018 bids for commercial sites and transactions of Grade A office buildings at compressed yields, pushing returns closer to 3.0% level, one of the tightest we have seen in recent times. This supports our thesis that office REITs (which are trading at a P/NAV of 0.8x-0.9x) are cheap and trading below replacement costs. Expectations of robust bids for upcoming commercial GLS will reiterate our belief that office REITs (such as CapitaLand Commercial Trust and Keppel REIT offer good value for investors.

Economic environment Demand for property is typically driven by buyers’ perception of job security and income growth. At this moment, our economist projects the Singapore economy to still grow steadily in 2018, while unemployment rate has turned the corner.

Will the government While we do not envision a change in current policy stance by the government, a faster- tighten? than-projected rise in property prices could result in the government raising the number of land sites in 2018 and thus taper some of the enthusiasm seen in the land tenders. DBS Asian Insights SECTOR BRIEFING 53 05

Sustainable Volume Growth To Lead Recovery In Prices

Sales volume to hit he lift in sentiment following the government’s move to relax property measures five-year high at the beginning of the year led to strong sales volume in 1H17, up 46% y-o-y. If the sales momentum holds, annualised 2017 total sales (primary and secondary) could reach 29,000 units, which would be the highest since volumes peaked in T2012. It has surpassed the historical average of 22,000 units and is 68% of the historical high of 42,000 units recorded in 2012. The sales volume was largely led by primary sales (1H17: +52% y-o-y). Similarly, secondary sales showed strong growth (+39% y-o-y) but at a smaller quantum compared to primary sales.

Contrary to popular belief that sales only rebounded after the relaxation of property measures, we note that sales volume had rebounded in FY16. FY16 sales grew 20% to 21,000 units, close to the historical average, and FY16 primary sales of 12,000 units surpassed the historical average of 11,000 units.

Take-up rates The take-up rates within the month of new launches increased to 41% in 2016 and hit a high of 47% in 1H17 from the low of 29% in 2015, implying a pickup in interest for new property launches.

Diagram 1: 2017 annualised sales volume has surpassed the historical average

Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 06

Strong sales momentum Despite the numerous headlines about strong sales of new launches, sales from new in unsold inventory launches in 1H17 only comprised 23% of primary sales vs the peak of 72% in 2011 and 2008. This means that the strong sales momentum was from previous launches.

No recovery in prices Historically, sales volume tends to lead property prices movement by two to three quarters. Despite sales volume having bottomed in FY15, PPI has yet to bottom and continues to decrease from its peak in FY13, though the decline has started to moderate since 4Q16. We believe the recovery in property prices is imminent, with sustainable robust sales volume.

Diagram 2: Sales volume leads prices by 2-3 quarters

Volume PPI bottomed No. of Q Volume PPI changes bottomed / / peaked before PPI changes after one year peaked turns 3Q03 1Q04 2 11% 2% 3Q07 2Q08 3 -47% -25% 4Q08 2Q09 2 47% 38% 4Q12 3Q13 3 -25% -4% 1Q15 Yet to turn 9* 74%* -6%*

Source: URA, DBS Bank * volumes increased and PPI decrease from 1Q15 to-date (2Q17)

Diagram 3: 2017 annualised primary sales volume has surpassed the historical average

Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 07

Diagram 4: 2017 annualised secondary sales volume close to historical average

Volume PPI bottomed No. of Q Volume PPI changes bottomed / / peaked before PPI changes after one year peaked turns 3Q03 1Q04 2 11% 2% 3Q07 2Q08 3 -47% -25% 4Q08 2Q09 2 47% 38% Source: URA, DBS Bank 4Q12 3Q13 3 -25% -4% 1Q15 Yet to turn 9* 74%* -6%*

Wild Card: Prices Will Rise Further When Foreign Interest Returns Significant rise Although 1H17 foreign buying volumes rose 49% y-o-y (largely in the secondary market; 1H17: +69% y-o-y), the proportion of foreign buying remains low at 6%, below the historical average of 9%. The historical peak was 19% in 2011 when foreign buying volumes peaked at 5.7k units. Majority of buyers hail from China, comprising 28% of total sales and up 33% y-o-y in 1H17. Malaysian and Indonesian buyers slumped 44% and 34%, respectively, while Indian buyers soared 88%.

Will foreign interest When the Singapore property market went through a period of lacklustre demand due return? to a series of tightening measures implemented prior to 2013, foreign buyers flocked to major cities such as Hong Kong, Sydney, Melbourne and Vancouver in droves, causing prices to rise.

Hence, these cities recently started implementing aggressive cooling measures such as raising stamp duties to curb a potential overheating in their property markets. The hike in stamp duties have now brought the cost of buying in these markets to comparable levels. For example, taxes / stamp duties for foreign buyers in Hong Kong could be up to 30%, Canada has raised it to 15%, and Australia has doubled its rates. These rates now look more comparable to Singapore’s buyer stamp duty of up to 18% for foreigners. DBS Asian Insights SECTOR BRIEFING 53 8

Singapore’s property remains attractive to foreign buyers given its strong and stable currency. As such, we believe foreign interest may return to Singapore now that sentiment has turned and local demand has seen strong growth. If foreign interest continues to rise, we believe this may boost demand which could lead to a quicker and stronger-than-expected recovery akin to what we saw in 2009 to 2011. However, the caveat to a weaker-than-expected recovery in foreign interest would be capital restrictions from their home countries.

Diagram 5: Sales largely driven by local demand; foreign buying still low

Source: URA, DBS Bank Diagram 6: Foreign buying remains low despite recording 49% growth y-o-y in 1H17

Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 9

Diagram 7: Property measures in major cities Country City/Region Stamp Duties / taxes Loan-to-value Additional measures Australia NSW Foreign Investor Surcharge Duty: 8% Offshore foreigners: 50% cap on (from 4% previously) effective 1 July max 70% foreign ownership 2017 for new property developments Annual land tax surcharge: 2% (0.75% Onshore foreigners: previously) 80-90% Victoria Additional stamp duty for foreign Offshore foreigners: buyers: 7% (from 3% previously) max 70% effective 1 July 2016 Annual land tax surcharge: 1.5% (0.5% Onshore foreigners: previously) 80-90% Canada Vancouver Foreign buyers will be taxed at 15%, Empty homes tax: exempted on pre-sale purchases 1% Toronto Non-Resident Speculation Tax: 15% in the Great Golden Horseshoe region China Hong Ad Valorem Tax - step-up rates range < HK$10m: 50% Risk-weighted Kong from 1.5-8.5% for first-time buyers; flat mortgage loans at rate 15% for non-first time buyers (>1 25% property) Buyers’ stamp duty: 15% for non-HK PR > HK$10m: 40% buyers Special stamp duty (SSD): 10% (sold Corporates: 40% within third year of purchase) to 20% (sold within six months of purchase)

Beijing Loan-to-value (LTV) – 60-65% for first-home purchase 70% for subsequent home purchases Shenzhen LTV – 50-70% for first- home purchase 30% for subsequent home purchases Guangzhou LTV - 30% for subsequent home purchases UK London Step-up rates range between 2-12% for owner-occupied property 5-15% for investment property Surcharge of 3% if buyer owns another property anywhere in the world

Source: Media reports, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 10

Unsold inventory at its lowest since 2001 Unsold inventory at 16- Unsold inventory stood at 29,000 units as of 1Q17, the lowest in 16 years, following the year low supply restriction in the past two years. After the implementation of the cooling measures, the government restricted new supply, reducing the number of residential units from the GLS list to 7.4k units in 2016 from the peak of 14.3k units in 2011.

Potential undersupply? Despite falling demand, the contraction of supply in the market has reduced the absorption rate (number of years to sell all unsold inventory) from a high of five years to 2.1 years as at 1Q17. The low absorption rate raises a potential near-term undersupply issue against current transaction levels.

While sales volume and market sentiment are the more common drivers to property prices, historically, we saw property prices rise when absorption rates are below four years. We believe the three- to four-year time period is critical as this is the typical timeframe to construct a new residential development in which the developer receives progressive payments from home buyers. However, we note that the recent low absorption rate has yet to be translated into increasing property prices though the decline in property prices have moderated in the past 2-3 quarters.

Outside Central Region Based on the unsold inventory and absorption rate, OCR and RCR appear to be the most and Rest of Central undersupplied with absorption rate at one year and 1.9 years, respectively, while CCR Region appears to have more room at 10 years’ absorption rate.

Diagram 8: Unsold inventory at 16-year low; absorption rate at its lowest of 1.5 years as at FY17E

Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 11

Diagram 9: Low inventory levels (absorption rate <4 years) is driving the increase in prices

Source: URA, DBS Bank Diagram 10: CCR region

Source: URA, DBS Bank Diagram 11: CCR region

Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 12

Diagram 12: RCR region

Source: URA, DBS Bank Diagram 13: RCR region

Source: URA, DBS Bank Diagram 14: OCR region

Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 13

Diagram 15: OCR region

Source: URA, DBS Bank Diagram 13: RCR region Influx of supply To capitalise on the positive sentiment, developers are now competing for opportunities to replenish their landbank either via government land tenders, en-bloc or M&A opportunities. In the 2H17 GLS list released recently, the government injected more supply (+9% h-o-h) to slightly more than 8,000 residential units. En-bloc transactions have increased since last year, with 12 deals inked to-date from zero between 2012-2015.

Based on GLS and en-bloc transactions to-date, we estimate that new supply from these segments could increase to 11,000 units in 2017E and grow at 26% and 28% in 2018E and 2019E, respectively.

In addition to the primary market, the secondary market could see another influx of supply as the seller stamp duty (SSD) period on new primary sales made in 2012 (where sales volume hit a historical high of 27,000 units) has expired in 2016.

Diagram 14: OCR region Can the sales velocity be Concerns are rising over the market’s ability to absorb the influx in supply over the next 1-2 maintained? years. Given the undersupply situation as shown above, we believe the market is capable of absorbing the increase in supply even if sales volume were to fall back to 2016 levels.

Based on our sensitivity analysis of potential increase in new supply and the annualised 2017E sales volume (figure 19), the absorption rate would fall to 1.3-1.5 years in the next three years. For scenario 1, we assume sales volume to decline back to 2016 levels (assuming the optimism in 2017 is short-lived) and the absorption rate, despite the increase to 2.7-3.3 years, is still below four years. Scenario 2 assumes that sales volume declines marginally to halfway between 2016 and 2017’s sales volume, and the absorption rate is 1.9-2 years. Hence, we believe the increase in supply can be absorbed by the market against current demand levels. DBS Asian Insights SECTOR BRIEFING 53 14

Diagram 16: Estimated new supply from GLS and en-bloc sales

Source: URA, DBS Bank Remarks Key Assumptions: • 2017E GLS supply is based on sites awarded / launched year-to-date, 2H17 GLS confirmed list and half of 2H17 GLS reserve list • 2018E / 2019E GLS supply is based on a 20% increase from 2017E GLS sites • 2017E en-bloc supply is based on en-bloc sites in 2016 • 2018E en-bloc supply is based on 1H17 en-bloc sites • 2019E en-bloc supply assumes 20% increase in 2018E en-bloc supply and 2H17 en-bloc sites (total +57%)

Diagram 17: Sensitivity analysis if supply can be absorbed – Base case

Base case: Assume annualised 2017E 2016 2017E 2018E 2019E % increase sales sustainable in 2018E/2019E Total sales (based on annualised 2017E) 20,377 28,900 28,900 28,900 42% Primary sales 11,971 17,712 17,712 17,712 48% Secondary sales 8,406 11,188 11,188 11,188 33%

Unsold inventory (total) 41,143 37,631 30,808 27,957 Unsold inventory (primary) 33,191 26,533 22,708 22,829 Est. new supply in secondary market 7,952 11,099 8,101 5,129 (assume 50% of previous new sales)

Est. new supply in primary market 11,054 13,887 17,833 (as per figure 18) % increase 154% 26% 28%

Absorption rate (total) 2.0 1.3 1.1 1.0 Absorption rate (primary) 2.8 1.5 1.3 1.3

Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 15

Diagram 18: Sensitivity analysis if supply can be absorbed – Scenario 1

Scenario 1: 2016 2017E 2018E 2019E % increase Assume sales falls to 2016 levels Scenario 1: Assume sales falls to 2016 2016 2017E 2018E 2019E % increase levels Total sales 20,377 20,377 20,377 20,377 0% Primary sales 11,971 11,971 11,971 11,971 0% Secondary sales 8,406 8,406 8,406 8,406 0%

Unsold inventory (total) 41,143 43,372 42,290 45,180 Unsold inventory (primary) 33,191 32,274 34,190 40,052 Est. new supply in secondary market 7,952 11,099 8,101 5,129 (assume 50% of previous new sales)

Est. new supply in primary market 11,054 13,887 17,833 % increase 154% 26% 28%

Absorption rate (total) 2.0 2.1 2.1 2.2 Absorption rate (primary) 2.8 2.7 2.9 3.3

Diagram 19: Sensitivity analysis if supply can be absorbed – Scenario 2

Scenario 2: 2016 2017E 2018E 2019E % increase Assume sales moderates to between 2016 sales and 2017E annualised sales (~ +20%) Total sales 24,639 24,639 24,639 24,639 21% Primary sales 14,842 14,842 14,842 14,842 24% Secondary sales 9,797 9,797 9,797 9,797 17%

Unsold inventory (total) 41,143 72,775 70,739 76,620 Unsold inventory (primary) 33,191 29,403 28,449 31,440 Est. new supply in secondary market 7,952 43,372 42,290 45,180 (assume 50% of previous new sales)

Est. new supply in primary market 11,054 13,887 17,833 % increase 154% 26% 28%

Absorption rate (total) 1.7 1.6 1.5 1.5 Absorption rate (primary) 2.2 2.0 1.9 2.1 Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 16

Land-Banking – Going All Out To Win

Intense competition for ith dwindling property inventory on their books, most developers are land facing challenges in restocking land in Singapore, given lower returns amid strong competition - largely from new players and foreign developers; the returns are worsened by a lack of available land sites for tender in the Wgovernment land sales (GLS) programme.

In addition, the increased presence of new foreign players in land tenders whose motivations go beyond profit margins – they seek to “plant their flag” in Singapore as well as deploy their internal excess capital and resources – has also resulted in land prices remaining elevated. Average bids per tender have increased from 10 bids per tender in 2015 bids to 12 bids per tender in 2016. 2017 started strongly, with an average 13 bids per tender with a high of 24 for a tender at Toh Tuck Road.

Tender prices for land sites that were awarded in 1H17 have surprised investors, with a number of “record bids” for selected residential and mixed-use4-cum residential sites that exceeded S$1bn and topped consultants’ estimates. According to our estimates, average bids have exceeded S$800 psf in 2016 and so far in 2017. The increase is also partially due to a rise in the availability of centrally located land sites.

Diagram 20. Competition for land tenders has been increasing

Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 17

Diagram 21. Tender prices have been inching higher to cross S$800 psf

Source: URA, DBS Bank

Developers Pricing In Rise In Launch Prices

Margins under pressure Over time, we have found that the costs of construction have continued to remain high, mainly because cost components have stayed high – i.e. cost of labour and materials have stayed stable over time while the authority’s push for the use of pre-fabrication, pre- finished volumetric construction (PPVC) at selected GLS sites and most future GLS sites has meant that the total costs of construction are likely to remain high going forward.

With developers’ inability to raise prices, coupled with upward pressures from the rising costs of construction, developers’ net margins have been compressing over the past few years. Meanwhile, some mid-sized developers have also teamed up with contractors to keep their overall project costs down in order to compete. Therefore, going forward, we believe that mid-sized developers are likely to be increasingly crowded out in land tenders and will likely either focus on smaller sites which are lower in quantum or on collective sites as land-banking alternatives.

The intense competition for land has resulted in narrowing margins. Based on our estimates, developers’ average net margins have fallen over 2006-2012 from an average of 20% – ranging from 18%-26% - to an average of 9%-15% from 2013 onwards According to our assumptions, we estimate that average net margins are expected to turn negative for a majority of projects awarded in the later part of 2016 to the first half of 2017, implying the zealousness in developers’ bids, with most imputing higher DBS Asian Insights SECTOR BRIEFING 53 18

launch prices when these projects come to the market sometime in 2018. This is based on the assumption of a 10% net margin and current prices for newly launched projects in the vicinity.

A risk of losses According to our base-case scenario of a two-tier market recovery in 2018 led by the luxury end of the residential market, we believe that there is a possibility that selected projects that were won in recent tenders could see losses if a more sustained recovery in prices is underway. Developers could also time their project launches to capture rising buyer sentiment to maximise returns.

Time-to-market Over time, developers have calibrated their project launch schedules to suit market to shorten? demand. A typical project time-to-market ranges <10 months to 13 months, depending on the prevailing buyer sentiment. We have found that the average time-to-market has been close to 12 months, and with developers typically aiming to achieve strong pre-sales in order to lock in profits and optimise project returns, we believe that time-to-market could shorten going forward, if the market’s transaction velocity remains high.

Diagram 22. Average net margins (after tax) will be negative if prices stay flat

Source: URA, DBS Bank *2017 margins are estimated using current prices. In recent land tenders, developers have been pricing in a recovery in selling prices. DBS Asian Insights SECTOR BRIEFING 53 19

Diagram 23. Land prices form a substantial c.60% of total construction costs

Source: URA, DBS Bank

Diagram 24. Average time-to-market could be shortened to catch the “wave” and the current positive buyer sentiment

Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 20

Strong pre-sales can greatly improve returns Qualitative aspects such as connectivity to public transportation, as well as historical and potential competing supply in the submarket are key attributes that a developer will consider when deciding to bid for a site. This will inevitably have an impact on home- buyers response and the level of pre-sales the developer can achieve when the project is launched. Based on our estimates, strong pre-sales can substantially lower the overall costs of development and a developer’s return-on-equity (ROE).

Below is an illustration of a bid, based on the following assumptions. Assuming a land bid of S$1,000 psf ppr, we estimate that development costs could range between S$461 and S$789 psf, depending on the quality of the product that a developer would like to build. Assuming a project with medium-quality furnishes (our base-case scenario) and achieving an average selling price of S$1,700 psf, we estimate the project to achieve a net margin of c.8.3%. Every S$100 increase in the selling price will raise margins by 4 percentage points.

Assuming that the project sells out by year five, the development will achieve a project rate of return (IRR) of 9%. Assuming an even more positive response from buyers, the IRR could improve to 40%. Assuming a 65% funding for the land purchase, return-on-equity is fairly decent at close to 40%.

Diagram 25. Breakdown of a potential land-tender exercise Site Assumptions: Cost of development: S$psf S$'m Land Size (Sqm) 10,000 Land Cost 1,000 301.4 (Sqft) 107,640 Construction Cost 300 90.4 Plot Ratio (x) 3 Professional Fees, Sales & Marketing, and Other Fees 104 31.4 GFA/NSA (Sqft) 301,392 Agency Commissions - 5.1 Assumed Land 1,000 Cost of Development (Before Financing) 1,421 428.3 Bid (S$psf ppr) Construction S$psf Cost of Financing (land) 5 years 89 26.9 cost* range Construction Loan (5 years) 19 5.7 Medium Quality 250-315 Cost of Financing 108 32.7 Good Quality 315-400 Total Cost of Development (With Financing) 1,529 461 Luxury Quality 410-560 GFA/NSA (Sqft) 301,392 Profit Analysis: Assumed Land 1,000 Launch Price 1,700 512 Bid (S$psf ppr) Less: total development cost (1,421) (428)

Less: total Financing cost (108) (33) Profit Before tax 171 51

* Estimates are obtained from Rider Levett Profit After tax 142 43 Bucknall (RLB) 1Q17 construction estimates Source: URA, DBS Bank Net Margin (After tax) 8.3%

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Diagram 26. Sensitivity of project IRR to pre-sales

Source: DBS Bank

Diagram 27. Sensitivity of net margins to selling prices

Cost of development: S$psf S$'m Land Cost 1,000 301.4 Construction Cost 300 90.4 Professional Fees, Sales & Marketing, and Other Fees 104 31.4 Agency Commissions - 5.1 Cost of Development (Before Financing) 1,421 428.3

Cost of Financing (land) 5 years 89 26.9 Source: DBS Bank Construction Loan (5 years) 19 5.7 Cost of Financing 108 32.7 Total Cost of Development (With Financing) 1,529 461 “Margin of error” diminishing, given intense competition With improved market sentiment amongst buyers and in a climate where competition Profit Analysis: for new sites is expected to remain intense, we believe that developers will continue remaining optimistic in their bidding strategy going forward. However, we are wary of Launch Price 1,700 512 taking an all-out-to win stance, especially when the “margin of error” for development Less: total development cost (1,421) (428) sites are now thin, with selected sites already pricing a rise in selling prices in order for Less: total Financing cost (108) (33) the project to break even. While we believe that property prices remain on the road to Profit Before tax 171 51 recovery, the pace of increase is expected to be on a more gradual path of 3%-5% per Profit After tax 142 43 annum in the coming few years, rather than accelerate. The gradual pace of growth could mean that selected projects, if launched at their target prices that are above current Net Margin (After tax) 8.3%

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market clearing levels, will see slow absorption at the start before gaining momentum as the projects approach TOP.

Amongst the tenders awarded in 1H17, we highlight two sites which we believe offer the most talking points, given differing market expectations when these sites were offered.

Sterling Road site The tender for the Sterling Road site was awarded to a JV between Logan Property and Nanshan Group for a record S$1.03b, implying a price of close to S$1,050psf ppr. Assuming construction costs of S$320 psf, other professional fees, stamp duties and miscellaneous costs of S$161 psf, we have come up with a breakeven price of close to S$1,600 psf. Assuming a 10% margin, the developer will have to launch the project at close to S$1,750 psf, which is slightly above the price of comparable developments in the vicinity; Commonwealth Towers and Queens Peak are selling at an average price of S$1,600-S$1,700 psf). Unless the developer is able to keep its construction costs down (compared to our estimates), at current market prices, we estimate that the developer is likely to make a loss. The IRR for this project ranges from 1% (current market prices) to as high as 15%.

Toh Tuck site saw Another GLS tender that caught many by surprise is a low-density housing site which “bullish bid” saw a whopping 24 bids. The Toh Tuck Road site was awarded to SP Setia, a Malaysian developer for S$265m or S$939 psf ppr, a new record high for a land site in the ‘Outside Central’ region. The tender saw a whopping 24 bids and our assumed breakeven is close to S$1,400 psf, which is already above current transaction prices of close to S$1,100-S$1,200 psf. This implies that launch prices could top S$1,600 psf, which means that developer is expecting prices to increase fairly strongly for the sub-market when the project is launched sometime in 2018. What Should Developers Do?

Upcoming GLS We believe tender bids would remain buoyant and expect winning spreads to tighten offers interesting further. With the need for PPVC construction techniques, we believe that developers opportunities to land- might look to have collaborations with contractors who may help lower the overall costs bank of construction.

Meanwhile the GLS programme in 2H17 does offer interesting opportunities in our view, especially when there is a variety of available sites in the CCR and OCR region which should pique the interest of most developers.

Commercial sites in the GLS programme also offer interesting alternatives to add to developers’ recurring income, especially when new developments will be completed sometime in 2022-2023, when there will be no competing supply. DBS Asian Insights SECTOR BRIEFING 53 23

En-bloc market an An alternative is to enter the collective sales market (en-bloc deals) by whichdevelopers alternative could have interesting opportunities to restock land. These older properties are located at more established residential districts which could mean that there’ll be a ready buyer pool when these projects are re-launched. Downside to an en-bloc exercise are tighter timeline restrictions that developers would have to adhere to (qualifying certificate rules on top of additional buyer stamp duty (ABDS) on the land price); this could mean that developers will remain likely remain selective on pricing. In addition, time-to-market is typically longer for a GLS site, given time needed to vacate the existing households and additional feasibility studies to be conducted to prepare the site for redevelopment. A total of S$1.5b in en-bloc transactions have been completed YTD and we will likely see more deals in the coming year. Diagram 28. Summary of selected sites since 2016

Project Site Location* Developer Project Est. # mths Est Awarded Name launch from Units Date tender (Jul'17) Woodleigh Lane TBC RCR Chip Eng Seng N.A. Est 2018 N.A. 735 Upper Jun-17 OCR SPH N.A. Est 2018 1 825 Serangoon Road Lorong 1 Realty Jun-17 OCR Fantasia N.A. Est 2018 1 50 Park Investment Stirling Road May-17 RCR Logan Property & N.A. Est 2018 2 1110 Nanshan Group Tampines May-17 OCR City Developments N.A. Est 2018 2 715 Avenue 10 Toh Tuck Road Apr-17 CCR SP Setia N.A. Est 2018 3 325 West Coast Vale Feb-17 OCR China Construction N.A. Est 2018 4 520 Perumal Road Jan-17 RCR Low Kheng Huat N.A. Est 2018 5 200 Margaret Drive Dec-16 RCR MCL Land N.A. Est 2018 6 275 Fernvale Road Sep-16 OCR Sing Holdings & N.A. Est 2018 10 575 Wee Hur Anchorvale Lane Sep-16 OCR Hoi Hup N.A. Est 2018 10 635 (EC) Martin Place Jul-16 CCR Guocoland Martin Est 3Q17 12 450 Modern Bukit Batok May-16 OCR Qingjian Le Quest Est 3Q17 14 425 West Avenue 6 Jalan Kandis Apr-16 OCR Tuan Sing Holdings Kandis Est 3Q17 14 110 Residences Yio Chu Kang Feb-16 OCR Hoi Hup Hundred Jul'17 16 520 Road (EC) Palms Total launched 7,470 (GLS) *CCR: Core Central Region, RCR: Rest of Central Region, OCR: Outside Central Region Source: URA, DBS Bank

END END END DBS Asian Insights SECTOR BRIEFING 53 24

Diagram 29. Bid Analysis of sites

Projects # of Bids Winning GFA Land Price Est Prevailing Margins Bid (m’sqft) (S$psf) Breakeven prices (%) (S$psf) (S$psf) Woodleigh Lane 15 700.7 0.63 1,107 1,700 1,300 -19% Upper Serangoon Road 12 1,132.0 0.96 1,182 1,650 1,300 -21% Lorong 1 Realty Park 11 75.8 0.14 538 946 1,000 6% Stirling Road 13 1,002.7 0.95 1,051 1,521 1,550 2% Tampines Avenue 10 9 370.1 0.65 566 985 1,100 12% Toh Tuck Road 24 265.0 0.28 940 1,359 1,200 -12% West Coast Vale 9 292.0 0.49 592 1,012 1,150 14% Perumal Road 11 174.1 0.17 1,001 1,421 1,400 -1% Margaret Drive 14 238.4 0.24 998 1,418 1,550 9% Fernvale Road 14 287.1 0.56 517 937 980 5% Anchorvale Lane (EC) 16 241.0 0.68 355 725 800 10% Martin Place 13 595.1 0.48 1,239 1,759 2,300 28% Bukit Batok West 11 301.2 0.47 635 1,055 1,050 0% Avenue 6 Jalan Kandis 9 51.1 0.11 481 901 1,050 17% Yio Chu Kang Road (EC) 10 183.8 0.56 331 701 830 18% Total launched (GLS)

Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 25

Diagram 30. Available sites in 2H17 government land sales programme

No Type Site Zoning Location Land Plot GFA Est. Commercial Status Size Ratio (Sqm) Units (Sqm) (Sqm) (x) (no.) 1 Confirmed Serangoon Residential OCR 28,100.0 2.5 70,250 825 - Open North Avenue 1 2 Confirmed Chong Kuo Residential OCR 4,800.0 1.4 6,720 90 - Oct-17 Road 3 Confirmed Handy Road Residential CCR 5,200.0 2.8 14,560 130 - Nov-17 4 Confirmed Hillview Rise Residential OCR 28,000.0 2.8 78,400 535 - Dec-17 5 Confirmed Holland Commercial OCR 23,000.0 2.6 59,800 570 13,500 Nov-17 Road & Residential 6 Confirmed Sengkang Commercial OCR 36,300.0 2.1 76,230 700 13,300 Dec-17 Central & Residential 7 Reserve Bartley Residential OCR 4,700.0 2.1 9,870 115 - Available Road / Jalan Bunga Rampai 8 Reserve Yishun Residential OCR 21,700.0 2.8 60,760 805 - Available Avenue 9 9 Reserve Jiak Kim Residential CCR 13,500.0 3.8 51,300 525 1,500 Available Street 10 Reserve Fourth Residential CCR 20,200.0 1.8 36,360 445 - Available Avenue 11 Reserve West Coast Residential OCR 19,500.0 2.8 54,600 730 - Sep-17 Vale 12 Reserve Cuscaden Residential CCR 5,700.0 2.8 15,960 170 - Oct-17 Road 13 Reserve Canberra Residential OCR 41,100.0 2.8 115,080 765 - Nov-17 Drive 14 Reserve Mattar Road Residential OCR 6,400.0 3.0 19,200 255 - Nov-17 15 Reserve Silat Avenue Residential OCR 25,000.0 3.5 87,500 1160 450 Dec-17 16 Reserve Beach Road Commercial CCR 21,000.0 4.2 88,200 - 88,200 Open 17 Reserve Woodlands Commercial OCR 22,400.0 3.5 78,400 275 54,840 Available Square

Confirmed 2,850 26,800 Reserve 5,245 144,990 Total 8,095 171,790

Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 26

Diagram 31. Potential en-bloc deals

Property Location Property Est land size Plot Est GFA Current no. of Potential Development Type (sqft) ratio (sqft) units no. of units Tampines Court Tampines Street 11 HUDC 702,458 2.8 1,966,882 560 2,610 Dunearn Court Bukit Timah Private 14,000 1.4 19,600 12 26 Villa D'Este Dalvey Road Private 55,480 1.4 77,672 12 103 Normanton Park Queenstown HUDC 667,368 2.1 1,401,473 488 1,860 Pearl Bank Apartments Outram Private 82,376 7.2 593,107 280 787 Cairnhill Mansion Orchard Road Private 38,220 2.8 107,016 61 142 Changi Gardens Jalan Mariam Private 200,080 1.4 280,112 60 372 Braddell View Braddell Hill HUDC 618,222 2.1 1,298,266 918 1,723 Florence Regency Hougang Ave 2 HUDC 389,236 2.8 1,089,861 336 1,446 Laguna Park Marine Parade Rd HUDC 677,493 2.8 1,896,982 528 2,518 Chancery Court Dunearn Road HUDC 123,139 1.4 172,395 136 229 Lakeview Estate Upper Thomson Rd HUDC 242,734 2.1 509,741 240 677 Ivory Heights Jurong East St 13 HUDC 825,500 1.6 1,320,800 654 1,753 Pine Grove Clementi HUDC 893,129 2.1 1,875,571 660 2,489 Lagoon View Marine Parade HUDC 535,330 2.8 1,498,925 480 1,989 Thomson View Bright Hill Drive HUDC 540,314 2.1 1,134,659 254 1,506 Lakeside Towers Jurong Private 153,237 2.1 321,798 427 The Claymore Orchard Private 246,000 2.8 688,800 914 Balmoral Road & Ewe Orchard Private 57,349 1.6 91,758 121 Boon Road Spring Grove Grange Road Private 263,513 2.1 553,377 325 734 Rangoon Road Farrer Park Private 6,879 3.0 20,637 4-storey mixed 27 used & 2-storey shophouses Riviera Point River Valley Private 14,580 3.4 49,266 33 65 Lakepoint Condo Jurong Private 560,000 1.4 784,000 304 1,041 Boon Teck Tower Balestier Private 57,588 2.8 161,246 78 214 Brookvale Park Clementi Private 373,000 1.6 596,800 160 792 Amber Park Amber Gardens Private 213,676 2.8 598,293 200 794 Cavenagh Gardens Cavenagh Road Private 128,256 2.1 269,338 172 357 Chuan Park Lorong Chuan Private 402,995 2.1 846,290 452 1,123 City Towers Bukit Timah Private 104,535 2.1 219,524 78 291 Crystal Tower Ewe Boon Road Private 60,482 1.6 96,771 28 128 Gilstead Court Gilstead Road Private 75,479 1.4 105,671 48 140 Hollandia Holland Road Private 53,507 1.8 96,313 48 128 Kemaman Point Jalan Kemaman, Private 43,826 2.8 122,713 89 163 off Balestier Road Pine Tree Condo Balmoral Park Private 41,361 1.6 66,178 50 88 Total 9,461,342 20,931,832 7,744 27,779 Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 27

Offices: On the Cusp of a Multi-Year Recovery

Healthy interest from nvestor demand for Singapore’s office properties has been firm over the past three years investors despite spot office rents being in a downturn. This can be attributed to investors taking a medium-term view of the office market and assets in Singapore being a potential store of value, given its stable government, rule of law, and a relatively stable currency versus other Iregional currencies.

An inflexion point? The Singapore’s office market has been experiencing a downturn on the back of sluggish demand and an increase in supply. As estimated by CB Richard Ellis (CBRE), Grade A CBD office rents have been falling for eight consecutive quarters, from a peak of S$11.40 psf/ month in 1Q15 to S$8.95 psf/month in 1Q17. Demand for office space has been soft as the financial services and banking industry, which traditionally represents approximately 40% of demand for CBD office space, has downsized on the back of slower regional economic growth, declines in Singapore’s residential market, and slower capital market activity. Partially offsetting the weakness of the financial services and banking industry has been the emergence of the technology sector, whose companies are basing themselves in the CBD instead of business parks, and the growth of the insurance industry.

However, data points appear to be bottoming out. According to Cushman & Wakefield, premium office rents rose in 2Q17, the first increase in nine quarters. 2Q17 Grade A CBD office rents was estimated to have risen 1.7% from 1Q17 to S$8.51 psf/mth but were still down 4% y-o-y. The key driver of the sequential improvement was a recovery in the Marina Bay area, where rents jumped 5.8% q-o-q and achieved pre-commitment levels of around 70%. In addition, rents at were reported to have increased 2.5%, following a decline of 1.9% in 1Q17. This is in line with our view that the recovery is likely to be led by Grade A office specs, given the current “flight to quality” that we are seeing from tenants looking to upgrade their own office specifications.

Supply will drop from Concurrently, as demand continues to be weak, supply has increased. Supply in the Downtown 2018-2020 Core area is projected to increase about.15.6% from 2015 to 2018, or c.5.3m sqft. The jump in supply is mainly concentrated in 2016 and 2017, with around 2.2m sqft p.a., primarily related to the following buildings - Duo Tower (570k sqft), (890k sqft), and Marina One (1.9m sqft). DBS Asian Insights SECTOR BRIEFING 53 28

Thereafter, new office completion will fall off to an average of 0.9m sqft a year, which in our view can be absorbed easily. With slower completion and less competition for tenants, we believe that the operating environment will improve and result in a rise in rents going forward.

Diagram 32: Singapore’s Downtown Core office supply and demand outlook

Source: CBRE, media reports, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 29

Diagram 33. Recent and upcoming office supply

Office (CBD) Location Developer Estimated Property Taken-Up/ NLA (sqft) Type Sold 2016 Guoco Tower Peck Seah Guocoland 890,000 Leasing 94% Street CPF Building Ascendas-Singbridge JV (324,000) Leasing - SBF Center Robinson Road Far East 353,480 Strata Sale 84% DUO Tower Rochor Road M + S 570,475 Leasing 50% GSH Plaza Cecil Street GSH/TYJ/Vibrant/DB2 282,000 Strata Sale 14% OUE Downtown 1 Shenton Way OUE 50,000 Leasing n/a 2,145,955 2017 Marina One Marina Bay M + S 1,876,000 Leasing 85% UIC Building Shenton Way UIC 277,540 Strata Sale 41% EON Shenton Shenton Way Roxy Pacific Holdings 101,045 Strata Sale 85% Oxley Tower Robinson Road Oxley Consortium 111,710 Strata Sale 75% Crown @ Robinson Robinson Road WyWy Developments 70,000 Strata Sale 14% 2,435,925 2018 Ex International Robinson Road Tuan Sing 194,380 Strata Sale n/a Factors Building and Robinson Towers Frasers Tower Cecil Street Frasers Centrepoint 645,000 Leasing 40% Limited 858,380 2019 Funan North Bridge CapitaLand Mall Trust 204,000 Leasing n/a Road 204,000 2020 CPF Building Shenton Way Ascendas-Singbridge, Mitsui and Tokyo 500,000 Leasing Tatemono Astro-Asia Shenton Way Afro-Asia Shipping and JV 154,000 Leasing Redevelopment 654,000 2021 Golden Shoe Market Street CapitaLand Commercial 635,000 Leasing Trust Central Boulevard Marina Bay IOI Properties 1,170,000* Leasing 1,705,000

* Maximum potential NLA but may be smaller due to incorporation of service apartments or residential units into the development Source: URA, Corporate Locations, CBRE, various REITs and corporate, press reports, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 30

Demand To Remain Robust

Record prices achieved While Grade A CBD office rents have fallen by 21% since peaking out in 1Q15 – deeper than for secondary sales the 14% decline experienced between 3Q11-3Q13 but shallower than 57% drop over 2Q08 and 1Q10 – investor interest in Singapore buildings has not diminished. Demand has been broad-based, coming from local and overseas investors, as well as SGX-listed REITs, sovereign wealth funds, insurance companies, corporates, and tycoons.

In fact, record prices have been achieved for some office properties in recent years. For example, the Straits Trading building, a 999-year leasehold property located at Raffles Place, was acquired by Mr Tahir, an Indonesian tycoon, for S$3,524 psf, the highest price ever paid on a psf basis for an office building in Singapore. As a consequence, effective cap rates are compressing, with a fall in spot rents.

Limited supply Beyond secondary sales of office buildings in Singapore, competition to buy land forthe development of new office towers has also been fierce. Beyond the established locally based developers, foreign developers have taken an active interest. Out of the top seven bidders in the recent tender for the Central Boulevard site, only one bid was from a Singapore developer, Mapletree Group, with the other bidders either a foreign developer or a consortium of a local and foreign developer. Incidentally, the site was won by IOI Property, a Malaysia-based developer, at a record price for land of S$1,689 psf, or implied S$3,000 psf of NLA when the building is completed, assuming a 10% development margin. The strength in demand for the Central Boulevard site is not an isolated example. This is illustrated by news that the reserve price for an office site at Beach Road (at the fringe of the CBD) has been triggered by a developer that implies a land price of c.S$1,200 or implied psf of completed NLA of S$2,100-2,200; this is the price implied by the equity markets for certain SREITs in the heart of Singapore’s CBD. Diagram 34. Grade A office transactions versus Grade A office rents

Source: CBRE, Press reports, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 31

Diagram 35. Recent office transactions

Date Property Name Tenure Attributed Price (S$) Rate per NLA Buyer Net Lettable Area (sqft) 1Q14 Finexis Building (50%) 999 LH 142,000 336,600,000 2,371 NTUC Income 1Q14 OUE Bayfront 99 LH (Nov 2106) 402,374 1,005,000,000 2,498 OUE Commercial REIT 2Q14 Straits Trading Building 999 LH 158,897 450,000,000 2,832 Sun Venture Jun-14 Prudential Tower 99 years (81) 221,080 512,000,000 2,316 KOP/KSH/Lian Beng/Centurion Global 2Q14 Cecil House 99 LH (2080) 50,045 110,000,000 2,177 Vibrant Group and DB2 Capital Aug-14 Equity Plaza 74 years 252,135 550,000,000 2,181 GSH Holdings remaining Jul-14 Anson House 82 years 76,362 172,000,000 2,252 SEB remaining Sep-14 MBFC Tower 3 (one 92 447,327 1,248,000,000 2,790 Keppel REIT third stake) Jan-15 AXA Tower 66.5 remaining 675,000 1,170,000,000 1,733 PREH (2015) Jun-15 99/FH 600,000 1,429,166,667 2,382 OUECT Jun-15 PWC Building (30% 99 LH 106,712 150,000,000 1,892 DBS Bank stake) Dec-15 ICS Building Freehold 67,550 210,000,000 3,109 Mr Zhou Dec-15 Suntec Tower Two -12, 99 LH 38,352 101,560,000 2,648 Suntec REIT 13 and 29 Floor Nov-15 CPF Building 99 LH (2067) 324,000 550,000,000 1,698 Ascendas Land Apr-16 78 Shenton Way 99 LH 181,100 301,500,000 1,665 Alpha Investment (50% stake) Partners May-16 Remaining 60% 57 remaining 703,122 1,600,500,000* 2,276 CCT interest in CapitaGreen expiring 31Mar2073 (2,700 assuming 99- year leasehold) May-16 Straits Trading Building 999 LH 158,897 560,000,000 3,524 Mr Tahir - Found of Mayapada Group Jun-16 Tower 1 99 LH from 2007 1,200,000 3,400,000,000 2,668 Qatar Investment office & Authority 40,000 retail Sep-16 110 Robinson Road FH 14,233 45,100,000 3,169 Mr Tahir - Found of Mayapada Group Jan-17 GSH Plaza Remaining 725,200,000 2,900 Fullshare Holdings 72 years Feb-17 PWC Building 78.5 years 355,704 747,000,000 2,100 Manulife (100% stake) May-17 Remaining 446,473 591,600,000 2,650 FWD Group (50% stake) 85 years *Based on 100% equity interest DBS Asian Insights SECTOR BRIEFING 53 32

Diagram 36. Previous land sales

Date Property/Site Land tenure GFA (sqft) Total land price Price per Developer (S$m) sqft (S$)

Jul-17 Beach Road 99-year leasehold 950,592 1,138 n/a n/a Nov-2016 Central Boulevard 99-year leasehold 1,520,874 2,569 1,689 IOI Properties Nov-2015 CPF Building 99-year leasehold 606,088 550 1,032 Ascendas- expirying 2067 Singbridge Aug-2013 Frasers Tower 99-year leasehold 830,564 924 1,112 Frasers Centrepoint (Expected completion Limited in 2018) Sep-2011 SBF Center 99-year leasehold 353,476 312 882 Far East Organisation Nov-2010 Guoco Tower 99-year leasehold 1,697,876 1,708 1,006 Guocoland Dec-2007 Asia Square 2 99-year leasehold 1,222,564 953 779 Macquarie Global Property Advisors Sep-2007 Asia Square 1 99-year leasehold 1,432,890 2,019 1,409 Macquarie Global Property Advisors Sep-2007 South Beach 99-year leasehold 1,580,431 1,689 1,069 City Developments, Dubai World and Elad Group Aug-2007 20 Anson 99-year leasehold 252,069 237 941 Firstoffice Jul-2007 Mapletree Anson 99-year leasehold 383,808 392 1,021 Mapletree

Jul-2005 MBFC 99-year leasehold 4,714,588 1,908 405 Keppel Land, Cheung Kong and Hong Kong Land

Source: URA, Press reports, DBS Bank

There remains an absence of transactions by Chinese investors in Singapore DBS Asian Insights SECTOR BRIEFING 53 33

Diagram 37. List of bidders and bid prices

Ranking Bidder Tendered Tendered Sale Breakeven costs for Implied S$ per sqft of Sale Price Price in S$ office NLA (S$/sqft) completed NLA (S$m) per sqft of GFA Low end High end Low end High end 1 IOI Properties 2,569 1,689 2,780 2,942 3,090 3,275

2 Mapletree Investments 2,207 1,451 2,461 2,623 2,727 2,911 3 Nashan Group 2,187 1,438 2,444 2,605 2,707 2,891

4 Hongkong Land & 2,126 1,398 2,390 2,552 2,646 2,831 Cheung Kong 5 CapitaLand & Great 2,005 1,318 2,283 2,445 2,524 2,708 Eagle Group 6 Yanlord 1,985 1,305 2,266 2,427 2,504 2,688 7 OUE Limited, 1,910 1,256 2,199 2,361 2,429 2,613 Guangzhou R&F Properties and Tang City Properties

Source: URA, press reports, DBS Bank

Demand For Physical Real Estate To Continue

A medium-term view Given the disparity between public and private markets on the valuation of Grade A office buildings, with the public markets ascribing a 10-20% discount to recent market transactions, the question has arisen: How long an investment horizon investors are prepared to take, given headline yields for these transactions, assuming current spot rates? Assuming a purchase price of S$2,700 psf and 95% occupancy, CBRE Grade A spot rents of S$8.95 translates to a cap rate of c.2.8%. With borrowing costs of, say, 2-2.5%, this leaves a tight spread of 0.3-0.8%.

As such, investors in the office sector are pricing in a recovery in rents, in anticipation of a recovery in office rents, given an easing in new supply over the next three years as well as other factors such as the Singapore dollar being a store of value. Based on the purchase price of S$2,700-3,000 psf for recent transactions, investors may be anticipating rents to eventually recover to S$12.75-$14.00 psf/mth, assuming a stabilised cap rate of 4%.

Chinese investors Despite an increase in foreign buyers from Malaysia, Qatar, Indonesia, and Hong Kong, there remains an absence of transactions by Chinese investors in Singapore. Chinese investors have been actively buying commercial assets in Hong Kong, the US, the UK, and Australia. While we understand that Chinese investors are looking at the Singapore market, the ability of these Chinese buyers to close transactions is partially curtailed by the lack of large Grade A DBS Asian Insights SECTOR BRIEFING 53 34

properties that are available for sale. A significant number of premium buildings are owned by a handful of owners who are unlikely to sell, given the difficulty in redeploying capital back into Singapore. Nevertheless, going forward, we believe it is matter of time before Chinese investors make a splash. Given the intense level of competition and potentially low cost of capital for certain investors, we would expect capital values for office assets to remain firm in the near term and bidding for any land released by the government to be fierce. This may have the unintended consequence of crowding out Singapore-based developers.

Actual recovery in While our base case is for office capital values to remain stable, given strong investor interest, office rents needed and we expect market rents to recover over the coming three years, primarily concentrated in Grade A offices, an actual recovery in spot rents will still need to take place to validate the views of buyers. If market rents do not recover, increase slower than expected to due to weaker-than-expected demand, or the impact of shadow space (space vacated by tenants who move to newer buildings) becomes more pronounced, the interest in office properties at current prices would likely moderate, tempering capital. In addition, a recession would put into question prices paid by investors currently.

Diagram 38. Office yield spread (cap rate less 10-year Singapore bond yield)

Source: URA, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 35

Diagram 39. Prime office capital values versus estimated prime office rents

Source: Press reports, various SREITs, DBS Bank

Diagram 40. Prime office capital values versus estimated cap rate

Source: Colliers, DBS Bank DBS Asian Insights SECTOR BRIEFING 53 36 DBS Asian Insights SECTOR BRIEFING 53 37 DBS Asian Insights SECTOR BRIEFING 53 38 DBS Asian Insights SECTOR BRIEFING 53 39

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