Allianz lease at ASB Tower marks upturn in office rental market

According to market sources, Allianz is understood to have entered into a lease at ASB Tower, the new development coming up on the former CPF Building site in Robinson Road, at a gross signing rental of around S$11.50 per square foot (psf) a month.

The deal is said to reflect a gross effective rent of close to S$10 psf a month after taking into account the rent-free period and other incentives.

Office industry players noted that this is a substantial increase from the low-S$8 psf gross effective rent that new office space in the area used to fetch about 18 to 24 months ago.

As pre-commitments and occupancies rise in Grade A office developments, landlords have been raising rents. “After three years of high volume of new office completions – from 2016 to 2018 – the pace of supply is expected to ease from 2019 to 2020,” said CBRE executive director for office services, Michael Tay.

At Frasers Tower in Cecil Street, which received its Temporary Occupation Permit in the second quarter of this year, more than 80 per cent of the 38-storey development’s 663,000 sq ft net lettable office space has been committed.

A few months ago, China Construction inked a lease for about 16,000 sq ft on a high floor at about S$10 psf gross effective monthly rental.

At ASB Tower, Allianz is understood to have leased two low floors totalling slightly over 50,000 sq ft with an option to take up an adjoining floor. The 29-storey building is slated for completion in 2020.

Word on the street is that the leading global insurance and asset management group may renew the lease for part of the 85,000 sq ft that it occupies at Asia Square Tower 2. This lease ends around mid-2020.

Office market watchers said that Allianz’s decision may be complex. About a dozen entities in the group with various reporting lines operate out of Asia Square. The bulk of these entities have decided to relocate to a new development with the rest possibly remaining at Asia Square Tower 2. Allianz is among a few MNCs that are likely to have taken a pro-active approach to address their future Singapore office lease expiry exposure, given the common market view that 2020 is likely to be the peak of the current office rental cycle, before new completions start to pick up again in 2021, said observers.

ASB Tower is being developed by Ascendas-Singbridge Group, Mitsui & Co and Tokyo Tatemono Co.

Ascendas-Singbridge’s coworking concept, thebridge, is also expected to operate in the building.

Data from JLL shows that its average gross effective monthly rental value for overall CBD Grade A office space has risen 15.5 per cent from the recent trough of S$8.41 per square foot in the first quarter of 2017 to S$9.71 psf in Q2 2018. JLL’s Marina Bay Grade A average office rental value has risen at a faster clip of 20.3 per cent over the same period, from S$9.39 psf to S$11.30 psf. “Grade A rents are expected to stay on the growth trajectory on the back of tightening supply amid steady demand,” said Tay Huey Ying, head of research and consultancy at JLL Singapore.

Song Seng Wun, economist at CIMB Private Banking, said that despite rising trade tensions, macro fundamentals remain supportive of office rental growth. “Why do companies need office space in Singapore? It is to expand business here or in the region or both. At current levels, Singapore office rents are a manageable proportion of total business cost. What has been a bigger concern for companies operating here is sourcing for labour and the cost of getting the right talent.”

Indeed, office rents here are much lower than they were during the pre-Lehman peak in 2008. JLL’s overall CBD Grade A rental was S$15.27 psf and its Marina Bay Grade A rental at S$19.15 psf in Q2 2008.

CBRE’s Mr Tay highlighted that although landlords are using tightening office supply to jack up rents, demand fundamentals are not broad-based enough.

“One should be mindful that growth in rental demand for offices is still emanating from two main sources – tech companies and co-working operators,” said Mr Tay.

“Office demand from financial institutions, traditionally the major occupiers of CBD offices, is still slow by and large. Globally, banks are taking a conservative stance for their real estate footprint amid the disruption to the sector.”

Chris Archibold, head of leasing at JLL Singapore, noted that typically when new buildings come on the market, they have high vacancy rates and therefore offer some below-market rentals to secure occupancy. This, coupled with the cost savings on the back of efficiency gains from relocating to new buildings with bigger-floor plates, has driven a lot of leasing demand over the last 12-18 months.

“Now that many of these prime grade A buildings have high occupancy rates and are therefore charging normal market rents, the efficiency savings are often not enough to justify relocation as they are negated by higher rental rates and capital expenditure.”

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