Navigating Singapore’s Luxury Condominium Market: Investment Strategies for Emerging Real Estate Clients

As we retrospectively gaze upon 2022, it becomes evident that the majority of Asia Pacific markets – with the noteworthy exception of China – have started to mitigate the impact of regional COVID restrictions. Yet, looming over the horizon for investors as we venture into 2023 is a different, and arguably no less menacing, ensemble of challenges. Among these are escalating inflation, burgeoning interest rates, an unsustainable accumulation of public and private-sector debt, and the spectre of a global recession. This fusion of stagnation and inflation – a stagflationary environment – is largely unprecedented in modern times.

This complex economic landscape triggered a reticence among real estate investors in the latter half of 2022. Many chose to momentarily retreat from the market, biding their time as they waited for the tumultuous events to unfold. This strategic waiting game resulted in a marked downturn of Asia Pacific transactions, dropping 38 percent year-on-year to hit a 10-year nadir, as recorded by MSCI analysts.

However, the old adage of change being the only constant rings true. Investors must acclimatise to a shifting market reality that introduces a suite of fundamental changes.

Firstly, expect to see cap rates on the move. The era of abundant and inexpensive liquidity predictably influenced real estate, inflating asset prices and compressing yields. However, with interest rates now showing signs of reverting to the mean, it becomes imperative for property yields to concurrently rise. This is to ensure the maintenance of a spread over the cost of debt. The transition in rates has been a gradual process in the Asia Pacific markets, with Australia and South Korea already experiencing a degree of cap rate enlargement. Ultimately, expert voices foresee an average regional cap rate increase of 100 to 150 basis points in 2023. Japan, however, is predicted to sustain its ultra-low interest rate climate, which should result in relatively stable Japanese cap rates and could transform Tokyo into a hotspot for foreign investment funds.

Secondly, investor strategies are demonstrating a defensive pivot. There’s been a noticeable realignment towards more defensive types of property, with an emphasis on elements like rent indexation, shorter lease terms susceptible to easy upward revision, and reliable recurrent income. One sector attracting attention is the “bed space,” encompassing subtypes such as multifamily, hotels, senior living, and student housing. Another promising sector is logistics, buoyed by a structural undersupply and rent typically constituting a smaller portion of overall business costs. Specialist asset classes like data centres, cold storage, and life sciences also hold potential due to their “sticky” qualities, coupled with long index-linked leases and typically high rents.

In recent times, the rising risk has exerted pressure on development projects. The popular “build-to-core” strategies of previous years, designed to overcome shortages in high-quality building stock, are now facing challenges due to mounting construction costs, increasing interest rates, and weakening occupier demand. Consequently, several projects have been temporarily shelved.

Moreover, traditional mainstream assets are becoming less sought after. Despite offices consistently attracting the lion’s share of regional investment capital, uncertainties over occupier demand – primarily due to the persistence of remote work practices – have cast a shadow over their popularity. However, contemporary, high-quality buildings still command strong demand as employers aim to entice their staff back to the office.

Investors are also gravitating away from the retail sector, favoring new-economy sectors such as logistics. Interestingly, retail yields and values have adjusted to such an extent that prime, well-located retail assets are increasingly seen as an intriguing contrarian play.

While the prolonged COVID restrictions have strained cash flows, sparking predictions of a surge in distressed sales, this anticipated flood of assets has largely failed to materialize. As economies normalize, investor expectations are adjusting accordingly. Nevertheless, certain markets and asset classes – most notably hotels in Japan – still have considerable assets in need of refinancing or repositioning.

In China, the ongoing liquidity crunch affecting developers has triggered widespread market stress, yet the bid/ask spreads remain too broad to entice many foreign buyers. Similarly, South Korea’s fast-rising interest rates and high construction costs have ensnared recent buyers in uneconomical deals.

Amidst these changes, striving for net-zero carbon status is gaining traction as an integral element of regional investment strategies. This movement is propelled by a combination of government adoption of Paris Accord targets, tenant demands, and the fear of stranded assets failing to meet investor mandates. Therefore, adhering to international reporting standards, notably the European Union’s 2021 Sustainable Finance Disclosure Regulation (SFDR), is growing in importance.

Geographically, the real estate carbon efficiency standards remain disparate. While Australia and Singapore are far ahead of the curve, most other regions, particularly those with large stocks of older, carbon-intensive buildings, still have considerable progress to make. That said, the concept is gaining momentum in regions such as Japan and China, and we can anticipate an acceleration of compliance as we approach the 2030 deadlines.

Investment flows during the past year have favoured gateway cities, with international funds continuing to invest proactively, and domestic buyers showing less activity. Foreign investment notably surged in Singapore and Japan, placing them at the top of this year’s investment prospect rankings. Emerging Southeast Asian markets such as Indonesia, the Philippines, and particularly Vietnam, have also climbed in the rankings as investors are drawn to high rates of economic growth, emerging consumer classes, and the influx of foreign direct investment into new manufacturing facilities.

The years of abundant and cheap debt that fuelled over a decade of real estate investor outperformance are coming to an end. As interest rates normalize globally, securing bank lending has become more expensive, more challenging, and subjected to tighter terms. This will inevitably vary between markets, with China easing its monetary policy and Japan maintaining sub-1 percent bank financing due to government intervention. Conversely, other markets like Australia are experiencing higher borrowing costs as they follow the trend of Western markets.

On an asset class level, profound changes are underway. Office spaces, logistics, retail, residential, and hotels are all undergoing significant transformations. These range from the impact of remote work practices on office spaces, to the relentless demand for logistics space, the reinvention of retail assets, the rise of multifamily build-to-rent developments, and the recovery of the hospitality sector. Navigating these evolving dynamics will require savvy investment strategies, underpinned by comprehensive market understanding, to successfully invest in Singapore’s luxury condominium market such as the upcoming chuan residence new launch. Chuan residence price information is estimated to be release in the coming year together with the sales launch.