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Trends and outlook for Singapore’s office market

Following a stellar 2014, the office market was expected to grow further this year. In this issue, we look at how it has fared so far and what can be expected in the coming months.

With a sustained steady absorption of office space in the past year, the republic’s office market has started the year on a positive note. However, several reports revealed that the market has seen tepid growth in recent months.

In this issue, we take a look back at the past half year – and find out what can be expected in the months to come – for the market that is considered the star performer of the commercial sector.

The year that was

In 2014, the office market saw robust investment and leasing activities backed by high occupancy levels and robust rental growth.

Based on Savills’ office report in January, a net absorption of 713,000 sq ft was recorded in the past year with sustained broad-based demand from new set-ups and expanding existing businesses in industries including the IT sector, telecommunications, and legal services.
Rents for Grade A offices grew 14.3 percent in 2014 compared to 3.9 percent in the previous year, while office investment sales for the whole year stood at $4.2 billion, a 17.5 percent increase from the $3.6 billion recorded in 2013.

In terms of prices, real estate consultancy Chesterton reported that in Q4 2014, Grade A offices in the cental business district (CBD) averaged $9.80 per sq ft, reflecting a 1.4 percent year-on-year increase, while those in the suburban areas rose 7.8 percent year-on-year to $5.78 per sq ft.
With the stellar performance in 2014, industry experts believe that the office market will continue to shine this year.
In fact, Knight Frank’s Q4 2014 report said the office market is expected to see continuing rental growth in the first half of this year, with more tenants in the technology, media and internet sectors looking to relocate to prime office spaces.

Colliers echoed this in its 2014 office briefing, saying that Singapore’s office segment is “likely to experience a broadly similar pace of expansion in 2015 on the back of steady occupier and investment demand amid a cautious but still positive economic environment.”

The year thus far

In the first three months of the year, average monthly gross rents for Grade A and Grade B office spaces in most micro-markets across the city centre held firm while others posted gains such as the Raffles City/New Downtown micro-market, increasing 1.6 percent and 1.0 percent respectively, said Colliers.

With the steady demand and the leasing market holding firm, the city-state has seen growing investment interest in the office market.

In the first quarter, a Perennial Real Estate Holdings led-consortium acquired AXA Tower in Tanjong Pagar for a purchase price of $1.17 billion. Other big-ticket transactions for the quarter include the sale of the 41st storey at Suntec Tower One for $14.5 million and the 8th level at Samsung Hub for $42.6 million. The next three months then saw the sale of the 259-unit GSH Plaza in the Raffles Place/New Downtown micro-market, and the 86-unit Crown at Robinson in the Shenton Way/Tanjong Pagar micro-market.

However, with the slower economic growth and continued uncertainty in the global market, the office property market is beginning to react with rental growth for office spaces moderating in Q2. The pace of rental growth for Grade A office spaces in the same micro-markets, despite the quarter-on-quarter increase of 0.2 percent, slowed from 1.6 percent in the previous three-month period.

In addition, as the past half year saw the completion of South Beach which, in combination with the completion of CapitaGreen in Q4 2014, injected a sizable combined net floor area of more than 1.2 million sq ft in the CBD office market, a series of relocations reported in the area.

This resulted in slight downward movements in average occupancy rates in most Grade A office buildings. In its end-of-Q1 report, Colliers said average occupancy rates for Grade A office space in the Raffles Place/New Downtown declined slightly by 0.2 percentage point in the January to March period to register at 98.0 percent by the end of March 2015.

Moreover, capital values remained flat in Q2, said Colliers. As of June, the average capital value of Grade A CBD office space stayed unchanged at $2,532 per sq ft following a 1.7 percent increase in the previous quarter at $2,490 per sq ft.

On to the future

With the slowdown in rental growth in the first half of the year, market experts have seen investor wariness kick in.

The office market, according to Colliers, is “faced with slowing rental growth, toppish prices, rising interest rates and heated competition for buyers in the strata-titled office market due to the launch of a couple of new strata-titled office projects.”

With this, rents of Grade A office space in Singapore are expected to moderate further in the second half of the year as landlords slash their rents amidst the issues faced by the market, such as weaker demand from financial institutions—the biggest occupier of prime CBD space—with banks vacating office spaces there and relocating back-end staff to more affordable premises in business parks.

Another factor is the non-materialisation of demand from tech companies to replace those vacated by financial institutions. According to Cushman & Wakefield’s end-of-Q2 report, it noted that although some small- and medium-sized tech firms have plans to take up office space in Singapore’s CBD, the tech industry failed to fill the void. The property consultancy concurred with market indications that Grade A rents will moderate further in the latter part of the year.

Potential tenants are also waiting on the sidelines in anticipation of further rental drops in the near future due to the expected influx of supply in 2016. Completions for next year include Marina One in Marina Bay with 1.88 million sq ft of space, Guoco Tower (850,000 sq ft) in Tanjong Pagar, DUO Tower (570,000 sq ft) in Bras Basah/Beach Road/Bugis, and 5 Shenton Way along Shenton Way with 285,000 sq ft of space.

shutterstock_151020110v2 This will also contribute to the intensifying pre-leasing activities for developments slated to be completed next year. As such, Colliers Director of Research and Advisory Chia Siew Chuin noted* that “landlords – both new and old – are expected to increase incentives to compete and/or retain their tenants.”This, coupled with the earlier mentioned factors may result in rents remaining flat for the rest of the year.Meanwhile, on the sales front, market indications of transaction activities for the second half of the year are expected to pick up slightly due to supply-led demand from the launch of new strata-titled office units. These include GSH Plaza in the Raffles Place/New Downtown micro-market, and Crown at Robinson in the Shenton Way/Tanjong Pagar micro-market. The improvement was already evident in the caveats lodged for strata-titled office units in URA REALIS for Q2. At least 69 strata-titled units were transacted in Q2, significantly higher than the 40 caveats lodged in the first three months of the year.

However, following a rise of about 1.3 percent in the first half of the year, capital values for Grade A office space in the CBD is expected to remain largely flat for the rest of 2015 as competition for buyers as well as limited prospects for rental appreciation are expected to increase.

Source: CitiCommercial, 29 Jul, 2015

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