Singapore’s Economy in 2004
Riding on the exceptional uptrend in the global economic environment in 2004, Singapore emerged strongly from an uncertain 2003 due to the global economic repercussions of the war in Iraq and the outbreak of Severe Acute Respiratory Syndrome (SARS).

Increases in both external and domestic demand helped to propel full-year Gross Domestic Product (GDP) growth to 8.4 percent, miles ahead of 2003’s slight 1.4 percent pick up; a level of expansion not seen since the 9.6 percent growth reported in 2000. With respect to each quarter of the year, year-on-year growths were 7.9 percent, 12.3 percent, 7.2 percent and 6.5 percent, respectively. The economic expansion was also a wide-based one, experienced across all major economic sectors with the exception of the construction industry.

Reflecting the upbeat mood, Singapore’s main stock market barometer, the Straits Times Index, climbed 17.1 percent to end the year at 2,066 points, the highest year-end finish in five years.

The vibrant economic conditions translated into strong employment creation, stemming the tide of retrenchments in recent times. By end-2004, the official preliminary estimate of the unemployment rate (seasonally adjusted) dropped to 3.7 percent from 4.6 percent a year ago. Income prospects also improved in tandem with improving labour demand.

With improved business conditions and employment prospects, total retail sales and total catering sales in 2004 rose by 12.4 percent and 6.4 percent, respectively, over the sales figures for the financial year ended 31 December 2003.

The Great Singapore Sale held in June and July was undoubtedly the retail highlight of the year, with retailers in general benefiting greatly from the strong return of consumer confidence and recovery in tourist arrivals on the back of the global economic revival. A survey by the Singapore Retailers Association revealed that the majority of retailers achieved higher sales during this year’s event than last year’s.

Retail Property Sector in 2004
The property market as a whole benefited from the economic revival, with major sectors including residential, commercial and industrial ending the year with a brighter note compared to a year ago.

The retail property sector was no exception. In fact, the prime retail space segment, which has shown exceptional resilience in the face of tough economic conditions in recent years, began to perk up as early as the second half of 2003.

The brightening outlook in the retail industry and improved consumer sentiments spurred the entry of many new local and international retailers and concepts into the market. Aggressive expansions by existing players to maintain or strengthen market share further added to the keen demand for prime retail space, and lent support to occupancy and rental rates.

Market reports indicate that island-wide prime retail rents grew by some 1-3 percent on average during 2004 and prime retail malls generally continued to maintain high occupancies exceeding 95 percent. Retail mall owners also benefited from the fact that there were no major completions of new retail space in 2004. In fact, the stock of private retail space in Singapore fell marginally by 1.4 percent (or some 300,000 sq ft) during the year.

Part of the space reduction can be explained by the current spate of redevelopment and refurbishment activities undertaken by building owners to improve the attractiveness of their centres to shoppers and retailers. Centres undergoing revamps include Clarke Quay, Centrepoint and Marina Square.

The Government launched the Warehouse Retail Scheme (WRS) in April 2004. WRS allows large-scale retailers to co-locate headquarters, logistics and retail functions in one centralised location on industrial land. In other words, new formats such as warehouse outlets and ‘big box’ retailing can now take place within industrial or warehouse developments, albeit only in outlying areas. In essence, such formats are, therefore, expected to complement, and not compete with, conventional retail developments.

The new scheme has generated keen interest among industry players and, if properly developed, can lead to innovative retail concepts that will improve the depth of the retail industry and offer shoppers more options and experiences. At the same time, property developers and owners will also benefit from additional business opportunities.

Outlook for 2005
While global economic growth is expected to moderate somewhat in 2005, it is nonetheless projected to be better than that seen between 2001 and 2003. Possible risk factors include a slowdown in the global semiconductor cycle, concerns over a potential hard landing for the Chinese economy and rising oil prices.

On the domestic front, the Government currently expects 2005 GDP growth to be within a more moderate, but still healthy band of 3-5 percent, in anticipation of lower external demand. Nonetheless, it expects the recent improvement in the employment situation and higher asset prices to sustain domestic consumption. This will provide support for the retail industry.

We are similarly optimistic on our outlook for the retail property sector. Recent history has shown that the sector rests on strong fundamentals that are resilient to economic volatilities, and 2005 should be no exception. We foresee tenant demand for prime retail space will remain strong on the back of good consumer confidence.

In addition, the tight supply of prime retail space will also help to support occupancies and rents. According to official statistics, the total new supply of private sector retail space in 2005 is expected to be below 250,000 sq ft (about the size of a typical mid-scale mall), or around 1.1 percent of total current stock.

REIT Industry
2004 witnessed tremendous growth in the Singapore REIT industry. There were two new listings, CapitaCommercial Trust and Suntec REIT, and by year end the total market capitalisation of Singapore-listed REITs crossed S$7 billion, nearly tripling that as at end 2003.

The growth of the industry has been phenomenal, considering that REITs only made their debut in Singapore with the S$708 million listing of CMT as recently as July 2002. The market capitalisation of CMT has grown to more than S$2 billion since then.

In the Government’s Budget announcement on 18 February 2005, an attractive package of incentives was unveiled that will, among other things, encourage the further expansion of the REIT market in Singapore and attract more foreign investment capital for REITs here. These measures include:

1. Waiving stamp duty (typically around 3 percent of property value) for the purchase of properties by REITs, for a five-year period; and

2. Halving the withholding tax on REIT distributions received by foreign institutional/corporate investors to 10.0 percent from 20.0 percent, for a five-year period.

Asia has truly become a new hotspot for REITs and real estate investments. After Japan and Korea’s foray into the REITs market in 2001 and Singapore following suit in 2002, Hong Kong announced its entry into the REIT market in December 2004 in a big way with the approximately US$3 billion IPO of The Link REIT, the largest-ever in the world. Though its listing was halted pending the resolution of certain litigation matters, we do not expect this incident to delay the eventual take-off of the Hong Kong REIT market for long.

Elsewhere, there have also been promising developments in relation to the advancement of REITs in Malaysia, Thailand, India and Taiwan, among others. Last, but certainly not least, there is currently tremendous international interest in the huge and largely untapped property market in China, which is increasingly opening up to foreign investors. All these augur well for the future of Asian real estate markets as a whole and the further development of REIT markets across Asia.