Singapore - gateway to Southeast Asia

Singapore August 2017 JLL Research Report Singapore - gateway to Southeast Asia

How to invest into this theme Buy Singapore office assets Singapore prime office rents have declined by 27% over the last 2.5 years, but rose for the first time in ten quarters in 2Q17. JLL just upgraded our rent forecasts for 2017-2021 and now expect office rents to rise over the next four years. We expect demand for office space in Singapore to be driven by economic activities in Southeast Asia, which is growing by 5% annually. We think Singapore may be targeting annual employment growth of 3.5-4.5% in technology, business services and financial sectors that play to its strengths and serve the wider Southeast Asia region. Supply of new office space is likely to stay low for the coming decade, in our view. For the first time since 2004, the Government Land Sales Programme for 2H17 has no available office sites for sale on either the Confirmed or Reserve List. We expect the Singapore government to focus on selling sites outside the CBD in the next few years, as part of the stated strategy to bring jobs closer to homes (Figure 1). Buy Singapore retail assets Singapore nominal retail sales (excluding motor vehicles) rose by 3.2% yoy in 2Q17 after three years of decline in 2014-2016. We expect retail sales to grow 1-3% annually over the next five years as inflation recovers to 1% p.a. and wage growth continues at 3-5% annually. Supply of new retail malls for the next five years is low as the government has curtailed new initiations from 2013. Figure 1: CBD office building completions until 2023E 3.5 3.0 2.5 2.0 1.5 1.0-17 avg CBD: 1.46msf 2018-2023E avg CBD: 0.67msf 0.5 0.0 2011 2012 2013 2014 Office NLA (msf) 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E CBD Strata Outside CBD Source: URA, JLL estimates 2 JLL

Southeast Asia is the fastest growing region globally Southeast Asia is the third largest contributor to the Asia Pacific economy after China and Japan. Southeast Asia has a population of over 620 million people and a market of USD2.6 trillion. Strong underlying social-economic trends underpin the demand for real estate in this region. The median age in Southeast Asia is young at 30 years old, and 40% of the population are 15-39 years old. Due to high growth, PricewaterhouseCoopers (PwC) expects Indonesia to be the fourth largest economy in the world by 2050 with the Philippines and Vietnam at 19th and 20th. ASEAN would be similar in size to Europe as the fourth largest economic zone in the World, after China, India and the US (Figure 4). This provides for strong population growth of 1.3% in 2017-2021 and average GDP growth of 5.0% in this period (Figures 2 and 3). Figure 2: Top economies in Southeast Asia Figure 3: Southeast Asia GDP growth (%) 12% 12% 1% 1% 0% 2% 8% 37% Indonesia Thailand Philippines Malaysia Singapore Vietnam Myanmar 7.0 6.0 5.0 4.0 3.0 2.0 6.4 6.2 5.6 4.0 3.6 2.8 12% 15% Brunei Cambodia Laos 1.0 0.0 Philippines Vietnam Indonesia Malaysia Thailand Singapore 2012-2016 2017-2021E Source: IMA Asia Figure 4: Top economies in 2050 and annual growth rate in 2016-2050 70,000 60,000 China GDP USD bn (PPP) 50,000 India 40,000 US 30,000 Europe Southeast Asia 20,000 Germany Brazil Egypt 10,000 Russia UK Indonesia Japan Turkey Mexico Pakistan France S.Korea S.Arabia Iran Nigeria Philippines 0 Vietnam 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% Annual growth rate Source: PWC, JLL estimates Singapore gateway to Southeast Asia 3

Singapore and Southeast Asia growth are recovering from 2017 Singapore s economy has been closely tied to Southeast Asia s growth. Singapore experienced a strong decade of growth in 2000- with GDP expanded by 5.8% annually. However, annual growth slowed to 4% in -2016 and Singapore s growth lagged Southeast Asia s due to policy changes and global economic challenges (Figure 5). In 1Q17, Southeast Asia GDP grew 4.8%, up from 4.5% in 2016 as the region benefitted from the global export recovery. Exports in USD terms grew 12% yoy in 1H17 and we expect Southeast Asia s exports to continue to grow 7% annually over the next five years. For Singapore, the economy expanded by 2.7% yoy in 1H17 and economists expect Singapore s GDP to grow by 2.9% annually over the next three to five years amid Southeast Asia growth of 5.0% annually (Figures 6 and 7). The recovery of Southeast Asia is a contributing factor to Singapore s growth as global companies that are seeking to grow in Southeast Asia continue to base their regional headquarters in Singapore. Despite its high exposure to the global business cycle, Singapore s economic risk is reduced by excellent fiscal and monetary policy, a large current account surplus and high foreign reserves. Singapore consistently ranks 1st in the World Bank s Ease of Doing Business survey, due to low taxes, an absence of corruption, and minimal red tape. Figure 5: GDP growth in Singapore and Southeast Asia 20 15 10 5 0-5 2005 2006 2007 2008 2009 2011 2012 2013 2014 2016 2017E 2018E 2019E ASEAN Singapore Source: PWC, JLL estimates Figure 6: Exports growth in USD terms 25 19 20 15 14 14 15 Exports growth in USD % 10 8 8 5 5 5 8 7 6 7 0-5 -10 Malaysia Vietnam Indonesia Thailand Singapore Philippines Source: IMA Asia 2013-2016 1H17 2017-2022 Figure 7: Southeast Asia GDP growth (%) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2012 2013 2014 2016 2Q17 Indonesia Thailand Malaysia Philippines Singapore Source: IMA Asia 4 JLL

Singapore is focusing its strategy towards being the hub of Southeast Asia Singapore is strategically positioning its economy to leverage on Southeast Asia s growth as a manufacturing hub, urbanisation and rising consumer demand. The city state is also investing in start-ups and nurturing innovation. The ASEAN Economic Community (AEC) allows businesses in ASEAN to trade and gain market access to the region bearing almost zero customs duties. Restrictions have also been eased in at least 80 services sectors. ASEAN countries now allow majority foreign ownership in many sectors. For instance, Singapore companies can now own a 100% stake in Indonesia s engineering design and advisory services, as well as in Myanmar s engineering and construction services sectors. Our companies can also benefit from legallybinding guarantees of preferential services market access in the ASEAN region. Healthcare Infocomm technology and media Wholesale trade Financial services Professional services These sectors are required to serve the wider Southeast Asia region and play to Singapore s strengths: high education levels, strong legal framework, ease of doing business, low taxes and an absence of corruption. We think this translates to annual employment growth of 3.5-4.5% for these sectors even as Singapore s overall economy grows at 2-4% annually. This will boost office demand as these sectors are large occupiers of office space. In -16, employment grew by just 0.6% p.a. or 16,000 per year, but the Singapore government has stated a target of growing employment by 25,000-40,000 jobs annually over the next five years. These jobs are focused on five sectors: Figure 8: Southeast Asia and Singapore employment growth in financial, infocomm and professional services 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2005 2006 2007 2008 2009 2011 2012 2013 2014 2016 2018-2025E Southeast Asia growth Financial Service Infocomm Business Service Source: PWC, JLL estimates Singapore gateway to Southeast Asia 5

Stronger population growth expected in Singapore The target increase in employment to 25,000-40,000 per year also implies stronger population growth for Singapore over the next few years. In 2012-14, in response to public feedback, Singapore slowed down the inflow of foreign workers and built out more transport, health and residential infrastructure. However, population policy has been relaxed as infrastructure has been built and Singaporean labour participation peaked after 2014. In 2016, employment rose by 0.5% but employment pass holders increased by 2.3%. In the last 18 months, employment pass holders increased by 7%, compared to just 2% over the 36-month period in 2012-14. As Singapore targets to double employment growth to 25,000-40,000er year, we think the population could grow by 1.5-1.8% p.a. in 2017-25, from 1.27% in 2014-16. Figure 9: Increase in Singapore employment 250,000 200,000 150,000 100,000 50,000 0-50,000 2007 2008 2009 2011 2012 2013 2014 2016 Citizens PR Work Permits Employment Passes Source: JLL estimates, Singapore Department of Statistics 2017-2025E Figure 10: Increase in Singapore population 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0-10.0 2005 2006 2007 2008 2009 New citizens Expats 2011 2012 2013 2014 Perm residents Total Source: JLL estimates, Singapore Department of Statistics 2016 2017-2025E 6 JLL

Investing in start-ups and nurturing innovation Southeast Asia s e-commerce potential To support Singapore companies to deepen their innovative capabilities and drive research and development, the Singapore government initiated a S$4.5billion industry transformation programme in 2016, including: A targeted approach to guide sectors through customising productivity, technology roadmaps and internationalisation plans A National Robotics Programme (NRP) will provide over S$450 million over 2016-18 to drive development, testbedding and deployment of robotics technology Setting aside S$3.25 billion from the Research, Innovation and Enterprise 2020 fund, for research in advanced manufacturing and engineering capabilities Deployment of research scientists and engineers to small and medium enterprises Increase of S$200 million for Industry Alignment Fund (IAF) to catalyse more public-private research collaborations The spillover from new enterprises and manufacturing growth into business services is significant. The Ministry of Trade and Industry estimates that a S$1 billion increase in manufacturing value-add will generate about S$300 million of value-add and 2,400 jobs in the rest of the economy. According to Start-up Genome s third Global Startup Ecosystem Report in 2017, Singapore overthrew Silicon Valley as the world s No.1 city for start-up talent. Singapore also ranks 3rd in Asia (after Beijing and Shanghai) and 12th globally for its start-up eco-system. These results can be attributed to significant government funding and its easy access to talent pools and tech-markets in Southeast Asia. Over the last three years, Singapore has seen a six-fold increase of start-ups raising series A and in the last year, venture capital in Singapore doubled to USD1.7 billion. According to a Google-Temasek Holdings study, Southeast Asia is expected to be the fastest growing internet market in the world. The number of internet users is expected to grow by 14% CAGR in -20, faster than India or China. Furthermore, the e-commerce market is expected to grow 32% CAGR till 2025 to USD88 billion. Southeast Asia is already home to over 300 million Facebook users, higher than any other continent in the world. As e-commerce continues to grow in Southeast Asia, we expect more technology and business services firms supporting the sector to base their operations in Singapore. In the last five years, these companies have been a strong contributor of office take-up in Singapore, in contrast to the dominance of financial institutions historically. Figure 11: Large office leasing transactions (100,000 sq ft and above) 2017 Facebook, Grab, Microsoft 2016 BTMU, Julius Baer GSK, Abbott PWC Dentsu 2014 Mizuho Canon 2013 JP Morgan Oracle P&G NOL 2012 Cisco, EMC Shell 2011 Credit Suisse, SCB, Deutsche Bank Mercer MND Pratt & Whitney, DNV, Nike Manulife, BOA, ANZ, Nomura, Citi, BNP Paribas, Barclays Wong Partnership Rolls Royce 2009 Amex SP Lucasfilm 2008 2007 2006 2005 DBS, HSBC, Prudential, Unilever SCB, Merrill Lynch Credit Suisse Ernst & Young WPP SAP BHP 2004 ABN Amro, Deutsche Bank, Barclays, UBS 0 1 2 3 4 5 6 7 8 9 Financial Services Government Oil & Gas Business Services Pharmaceutial Communications & IT Others Source: IMA Asia, Singapore Department of Statistics, JLL estimates Authors Regina Lim Head of Capital Markets Research, Southeast Asia regina.lim@ap.jll.com Singapore gateway to Southeast Asia 7

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