Singapore’s Economy in 2005
The year started on a solemn note with several of Singapore’s closest neighbours struggling to come to terms with the devastation caused by the 2004 Boxing Day tsunami. The world also witnessed other adversities during the year, including natural disasters (such as Hurricane Katrina in the US and the earthquake in Kashmir) and terrorist attacks in London, Bali and elsewhere.

Fortunately, nonetheless, Asia’s economic progress on the whole remained steadfast, powered by the twin engines of China and India as well as encouraging signs of improvement in the Japanese economy.

Singapore’s economy, building from 2004’s solid base and benefiting from the favourable external environment and the government’s restructuring and upgrading efforts, continued to perform strongly particularly in the second half of the year. Gross Domestic Product (GDP) expanded by 6.4 percent for the full year, with the individual quarters recording year-on-year growth of 3.4 percent, 5.7 percent, 7.6 percent and 8.7 percent, respectively. The growth was broad-based, experienced across almost all sectors.

Reflecting the upbeat mood, Singapore’s main stock market barometer, the Straits Times Index, climbed 14 percent to end the year at 2,347 points, just a shade off 1999’s all-time year-end finish of 2,480 points.

Retail sales and catering sales in 2005 rose by 12.4 percent and 6.4 percent, respectively, over 2004. This was not surprising given the general increase in wages and wealth that accompanied economic growth, and glowing tourism numbers that saw a record 8.94 million visitors to the island (up 7.3 percent from 2004). The annual retailing highlight, the Great Singapore Sale (held from 27 May to 24 July 2005), generated record sales of S$5.0 billion compared with S$4.6 million in the previous year.

Retail Property Sector in 2005
Buoyed by the positive economic mood, the retail property sector was in a healthy state throughout the year, with high demand for space from both local and international retailers, and the entry of many new brands and retail operators into the market. Moreover, with a net addition of only some 75,000 sq ft (or 0.35 percent) in the private sector’s stock of retail net lettable area, supply was tight and occupancy and rents held up well.

According to market sources, prime retail rents rose by between 1 and 3 percent on average during the year, and prime retail malls generally maintained occupancies at or near 100 percent.

The year was highlighted by several major government land sales for retail-related developments, including a 360,000-sq ft site in Jurong West and the prime 200,000-sq ft Orchard Turn site. Keen competition for these sites by local and international property players bore evidence to the long-term optimism in Singapore’s retail industry and retail property market.

Outlook for 2006
Most Asian economies are expected to continue to do well in 2006, and Singapore will benefit from this. The current official GDP forecast for Singapore is a healthy growth of between 4.01 and 6.01 percent. Nonetheless, risk factors do exist that may get in the way of the region’s growth, including the threats of rising oil prices and terrorism.
Barring unforeseen circumstances, we believe that the economy is well on track to meet or even exceed the government’s forecast. This belief emanates from the sterling economic performance in the second half of 2005, which has created strong forward momentum for 2006. Indeed, among businesses and the population at large, there is widespread optimism regarding business conditions and the job market.

Further boosting the positive sentiments, the government’s recent Budget 2006 announcement carried a wide array of pro-business measures. In addition, the government intends to share its budget surpluses with all Singaporeans by way of cash and other bonuses to the tune of S$2.6 billion. Lower wage workers and lower income households are expected to benefit the most, and this will create positive impact on domestic demand and consumption.

In terms of new retail space supply, based on government data we estimate that in 2006 and 2007 a total of around 1.5-1.6 million sq ft of net lettable area will materialise in the private sector market. While the quantum appears sizeable, some 1.0 million sq ft thereof will actually be contained within a single development slated for end-2006 – ViVoCity in the HarbourFront area. Accordingly, we believe that the supply of retail space for the island at large will remain relatively tight, thus lending support to retail occupancies and rents in general.

Overall, we believe that economic and business conditions will be very positive this year, barring unforeseen circumstances. As such, we project that the retail property market this year will perform just as strong as, or even outperform, 2005.

The REIT Industry in 2005
2005 was another year of significant growth for the Singapore REIT industry. Mapletree Logistics Trust and Prime REIT (subsequently renamed Macquarie MEAG Prime REIT) were listed in July 2005 and September 2005, respectively. This increased the number of Singapore-listed REITs to seven, further adding to the depth and diversity of the market. By year-end, the total market capitalisation of the Singapore REIT sector had reached S$10.7 billion, an increase of more than 50 percent from S$7.0 billion a year ago.

In October 2005, the Monetary Authority of Singapore refined its Property Fund Guidelines to, among other things, strengthen the corporate governance of REITs and incorporate higher flexibilities in their investment activities. The key changes to the guidelines are:

1. More stringent and robust criteria for the entry of REIT managers and the investment by REITs into assets owned by interested parties such as the REIT’s sponsor, manager and trustee;
2. Clear provisions and stipulations to facilitate the acquisition of foreign property assets and the partial ownership of property assets by REITs; and
3. Greater flexibility for the capital structure of REITs, and yet concurrently more stringent controls on the use of financial engineering measures. More specifically, the previous 35 percent borrowing limit (measured against deposited property) has been replaced by a 35 percent leverage limit (measured against deposited property) encompassing both borrowings and deferred payments. Furthermore, the leverage limit may increase up to 60 percent subject to the REIT obtaining and disclosing a credit rating by a major rating agency.

More recently in the government’s Budget 2006 announcements in February 2006, two key measures were introduced with the aim of further developing the local REIT industry:

1. Granting of tax exemption on remittances of foreign-sourced interest and distributions received by REITs listed in Singapore; and
2. Allowing Singapore-listed REITs to recover Goods and Services Tax on expenses incurred in the setting-up of and operations of special-purpose vehicles for the holding of foreign non-residential assets, as well as in the acquisition of foreign non-residential assets by such vehicles.

The above are important incentives to encourage cross-border REITs in Singapore and also the acquisition of foreign assets by local REITs. These measures will stand Singapore in good stead in its continual development as a key regional REIT centre.

In the regional arena, the eagerly-awaited Hong Kong REIT market finally took off in late-2005 with a quick succession of three listings in the space of little more than a month. Leading the way was the Hong Kong Housing Authority’s LINK REIT which had an IPO market capitalisation of US$2.6 billion, the largest-ever in the world. Another of the Hong Kong listings, GZI REIT, is also noteworthy in that it is the first in the world with an asset portfolio comprising properties in mainland China. Elsewhere in the region, Taiwan also launched its first REIT and Malaysia saw several new listings under its revamped REIT guidelines.

Looking forward, we foresee that both Singapore’s and the region’s REIT markets will continue to grow strongly this year, given the high level of international interest in Asian real estate markets and regional governments’ commitment and efforts to develop their REIT sectors.