Colliers expect 14% full-year rise in CBD grade A office rents

Colliers International’s data shows average CBD premium and Grade A rental value rose 4.3 per cent to S$9.20 per square foot per month in the third quarter of 2018 over the previous quarter. The rental figure for Q3 2018 reflects an increase of 12.1 per cent from Q4 last year. The property consulting group is forecasting a full-year rise of 14 per cent – the first double-digit annual growth since 2011 and the fastest pace of increase since 2010.

The 4.3 per cent quarter-on-quarter (q-o-q) rental appreciation for Q3 this year was stronger than the 2.6 per cent q-o-q growth in Q2 2018. Commenting on the third quarter rental hike, Colliers said: “Strong headline rent growth and declining incentives probably underpinned the uplift in effective rents during the quarter.” The company’s head of research for Singapore, Tricia Song, said: “We expect the steady upward rental trend to persist over the next two years, with average rent rising an estimated 8 per cent year on year in 2019, and a further 5 per cent year on year in 2020.

However, we acknowledge the risk that our rent forecasts may prove too high if turbulence in stock markets continues and results in reduced demand from finance sector occupiers, which account for about 45 per cent of Grade A office space in Singapore’s CBD.” Colliers envisages a slight rental consolidation in 2021, before a rebound thereafter. In Q3 2018, the vacancy rate for CBD Premium and Grade A offices inched up 0.1 percentage point quarter on quarter to 5.6 per cent. Colliers expects the prime office supply pipeline to taper significantly over 2019-2021, with new supply completion averaging about 570,000 square feet per annum, or about 2 per cent of stock, in contrast to the large supply completion of about 2.16 million sqft in 2017 (around 10 per cent of stock). For 2018, the figure is estimated at around 800,000 sqft.

“The office supply drought over 2019-2021 should keep CBD Grade A vacancy tight, below the 10-year average of 6.2 per cent, even after accounting for the impact of slowing net absorption in 2020 and 2021 in accordance with consensus forecasts of a global economic dampening.” Collier said. Its head of office services, Duncan White, said: “The market is acutely aware of the tight office vacancy rate and muted future supply, and this likely prompted a series of consolidation and relocation activity by multinational corporations in Q3 2018. We expect keen competition for prime upcoming supply and would advise occupiers to review portfolios early, as CBD premium and Grade A vacancy could stay firmly below 6 per cent over the next three years. ”

Meanwhile, the office investment market saw lower overall volumes in Q3 2018 due to smaller deal sizes transacted during the quarter. The rolling 12 month volumes of office and mixed-use commercial transactions fell 28 per cent q-o-q to S$3.83 billion, according to Colliers research. Some notable office transactions in Q3 included 55 Market Street, the office component of OUE Downtown and seven strata units at Prudential Tower. In particular, 55 Market Street was transacted at what is believed to be a record low capitalization rate of 1.7 per cent for a 999-year leasehold asset, underscoring the weight of Institutional capital chasing core opportunities at elevated valuations.

In Q3 2018, the average imputed capital value of CBD Grade A office properties rose 2.2 per cent q-o-q to S$2,401 psf. CBD Grade A implied yields remained flat, ranging between 3.2 per cent and 3.8 per cent on average.

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