How will the expected higher core inflation affect the real estate sector

Core inflation is expected to rise 3.5% in 2024.

The strong correlation between the URA Private Residential Price Index and Nominal GDP has brought forward the question of whether residential prices will increase in 2024, given the expected 3.5% growth in core inflation this year.

Savills said that whilst an increase in the Nominal GDP is likely to pull the  URA Private Residential Price Index, it underscored that the “ climbdown from the 4.8% inflation registered in 2023 would probably mean residential prices would not get that strong tailwind this year.”

“We are forecasting private residential prices to remain flat in 2024,” Savills stated.

Commenting on the office and retail sector, Savills underscored that these two are “affected by different dynamics.”

 “Office rents are driven more by the vacancy rate for a particular grade of building than by inflation. With vacancy rates still relatively low, we do not expect any blowout in office rents this year. We maintain our -2% to -3% YoY change for CBD Grade A rents,” Savills commented.

 On retail, Savills said the effect of inflation “will depend on whether tenants can pass on the rising cost of goods to buyers."

“For suburban malls, there is probably a limit that tenants can do that as their selling prices (retail and F&B) have already moved up quite a fair bit in the past two years. However, for prime Orchard Road malls, the expected increase in tourist numbers this year would more than offset the price impact felt by locals. Prime Orchard Road mall rents are expected to rise 3% to 5% this year with Suburban malls remaining unchanged,” Savills stated.