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Oversupply and poor economic conditions cast a shadow on overall business sentiment in Singapore, with the office market seeing falling rents in 2016.
By Nikki De Guzman
The sluggish economic conditions along with its downside factors continued to plague overall sentiment in Singapore’s office market this year, casting a cautious business outlook. With a supply glut looming as additional office spaces are set to enter the market next year, what can we expect from an already challenging environment?
Here’s a recap of the office sector’s performance this year, as well as a forecast for the year to come.
A year of declines
As more businesses turned to consolidation of office spaces to reduce cost amidst a challenging economic environment, and the demand for new spaces slowed in tandem, the year began with declines in rental prices, which have persisted since 2015. Rentals across the board fell by at least two percent in Q1 2016.
According to property consultancy Savills, based on a basket of office buildings the agency tracks, rents in the Marina Bay sub-market continued to lead the quarterly drop by 2.6 percent, followed by the Raffles Place, Orchard Road and City Hall market segments, which have eased by 1.8 percent, 1.2 percent and 0.5 percent from the last quarter of 2015.
But that was just the beginning. At the end of the second quarter, the Urban Redevelopment Authority’s (URA) statistics showed a further and steeper decline in rental prices of office spaces. Office rents fell by 3.5 percent, falling steeper that the 2.1 percent drop in Q1. This also marked the fifth consecutive and sharpest decline in office rents since its peak in Q1 last year.
In fact, Savills noted in their Q2 report that all micro-markets, with the exception of the Shenton Way area, witnessed rental declines. Specifically, the Marina Bay and City Hall areas saw rental declines accelerate by 4.0 percent and 1.4 percent, respectively.
The decline in office rents continued in the third quarter, albeit at a slower pace.
Based on the URA’s Q3 figures, office rental declines moderated across all regions tracked during the three-month period, following substantial corrections of between 12.6 percent and 13.2 percent across these regions since their respective peaks in early 2015.
Similarly, JLL’s research showed that the quarterly decline in monthly average gross rents for investment grade CBD office space moderated from 2.9 percent quarter-on-quarter (q-o-q) in Q2 to a milder 1.9 percent q-o-q.
Cost competitiveness
The price drop in office rents is not entirely negative for the market. In fact, one analyst noted that the declines allowed Singapore’s office spaces to become more competitive in terms of pricing when compared to prime office spaces in other regional cities.
“Office rents in Singapore continued to ease in 2016,” said Dr Chua Yang Liang, JLL’s Head of Research in Southeast Asia. “On the other hand, rents in other key financial hubs in Asia rose during the same time period. This has raised Singapore’s office occupancy cost competitiveness.
“For example, while Hong Kong’s office occupancy cost in US dollars was 181 percent higher than Singapore last year, the gap had since widened to 261 percent by September this year.” He also cited the rental gap between Singapore and Beijing, where rental prices in the Chinese capital was 104 percent higher a year ago, and grew to 114 percent by September.
Meanwhile, Singapore ranked 18th among the world’s priciest office locations this year, easing from the 11th spot last year, in JLL’s Global Office Rent Tracker.
Tenant’s market
As more businesses look to manage their office occupancy costs, landlords are now rolling out incentive packages such as longer rent-free periods to attract new tenants and retain existing ones.
The competition among landlords to backfill spaces has intensified, presenting more opportunities to tenants who, in turn, are looking to take advantage of the competitive leasing environment. The pursuit by newer office developments to secure tenants has gained momentum in recent quarters, with high pre-commitment levels in some upcoming office buildings such as Marina One being achieved.
“As Grade A CBD rents are already down (about) 15 percent from the peak, it is an opportune moment for companies who have been waiting on the sidelines to jump into the market and secure premium spaces at favourable rental rates,” said Cushman & Wakefield Director Christine Li.
This was proven true by pre-commitment leasing activities reported in the media in recent times.
Market chatter revealed that Swiss private bank Julius Baer will increase 28,000 sq ft from its current office space at Asia Square Tower 1 to a total 100,000 sq ft in the integrated development by M+S. It was also reported that Daiwa Capital Markets will increase its office space by about 10,700 sq ft from its current space in OUE Downtown 2 to 35,000 sq ft at Marina One.
Other pre-commitment activities were also reported for Guoco Tower, which has achieved pre-commitments of 80 percent for its 890,000 sq ft office space. Some of the committed tenants for Guocoland’s Tanjong Pagar development include Agoda, Amadeus, ASICS, Danone, Straits Trading and Teva Pharmaceutical Industries.
Despite strong leasing activity levels, however, analysts noted that overall net take up remains weak as a huge chunk of these rental movements were mere expansions than new demand.
Knight Frank expects tenants from Grade A buildings to take flight to newer prime office spaces, which the agency dubbed Grade A+, so a two-tiered performance is expected in the prime office market.
“Greater divergence in rental and occupancy performance is expected in the prime office market, as Grade A offices are expected to see larger rental and occupancy declines than Grade A+ offices in the upcoming quarters,” said Calvin Yeo, Executive Director and Head of Office at Knight Frank.
Outlook
Looking ahead, as the economic growth forecast remains subdued, the market is expected to soften further into the second half of next year.
As the current leasing activity is dominated by renewals and relocation rather than new demand, the next wave of rental declines are likely to hit older and lower grade projects in the CBD and city fringe areas, when occupiers who have committed to space in new CBD projects vacate their existing premises.
The large amount of available office space, and those entering the market next year is also expected to add further pressure on rents.
“In view of the upcoming completion of several large-scale developments such as Duo Tower in Q4 2016 and Marina One by Q1 2017, the looming upcoming supply of 4.5 million sq ft gross floor area (GFA) of new office space is projected to add further downward pressure on office rents in the CBD,” said Knight Frank’s Yeo. “As a result, prime office rents are expected to moderate by 6.0 percent to 9.0 percent year-on-year in Q4 2017.”
Knight Frank projects that average office rents will continue to decline, before bottoming out in 2018.
In the region, Singapore’s prime office rents for upper floors in skyscrapers, ranked eighth regionally, will stand more favourably with businesses looking to locate or increase their footprint in Singapore, as compared to other major cities in the region such as Hong Kong and Tokyo, which were ranked first and third respectively in Knight Frank’s Global Cities Report 2017.
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