Tightening vacancies have driven up Singapore prime office rents in 2018. This saw average CBD (central business district) Grade A office rent rising by 2.4 per cent to S$9.43 per square foot per month (psf pm) from Q3 to Q4 2018, bringing the full year rental growth to 14.9 per cent, Colliers International’s data showed.
This is the fastest annual growth since 2010, where rents rebounded by 22 per cent following the Global Financial Crisis, said the property consulting group.
Shenton Way, Tanjong Pagar and Beach Road markets saw the largest rental increases in 2018, driven by the premium new builds such as Guoco Tower and Duo. These buildings – which were completed in 2016 – brought about a rerating of rents in their respective micro-markets.
Meanwhile in fourth-quarter 2018, average CBD Grade A rent in Beach Road jumped by 18.6 per cent year on year (y-o-y) to S$8.52 psf pm, and the Shenton Way/Tanjong Pagar micro-market climbed 18.4 per cent y-o-y to S$9.53 psf pm.
Tricia Song, Colliers’ head of research for Singapore, expects a steady upward rental trend to persist over the next two years, with average rents increasing an estimated 8 per cent y-o-y in 2019, and a further 5 per cent y-o-y over 2020. This is in view of tight vacancy and a muted supply pipeline.
She added that the supply shortfall over 2019 to 2021 should keep CBD Grade A vacancy tight and below the 10-year average of 6.2 per cent, this is even after accounting for the impact of slowing net absorption in 2020 and 2021, done in accordance with consensus forecasts of slowing global economic growth.
On supply and vacancy in the fourth quarter of 2018, CBD Grade A vacancy tightened by 0.2 percentage point quarter-on-quarter (q-o-q) to 5.4 per cent, with no new completions and net absorption outstripping supply. As for the full year 2018, Colliers is estimating a net absorption at 1.28 million square feet (119,000 square metres) for CBD Grade A office, this compared to 663,000 sq ft (611,600 sq m) of supply from Frasers Tower.
Over the 2019 to 2021 period, the CBD Grade A supply pipeline is expected to “taper significantly” from the previous few years, with new supply averaging 614,000 sq ft (57,000 sq m), or 2 per cent of stock per annum, in contrast to the large supply injection in 2017 (about 10 per cent of stock).
Collier’s head of office services, Duncan White, said that with limited premium stock coming online in 2019 and with a lack of larger contiguous space on offer, occupiers are advised to review portfolios early, and consider alternatives which combine traditional office leases with short-term lease tenures within flexible workspace offerings.
“Meanwhile, office landlords could be more proactive in engaging occupiers and be more progressive with varied lease structures to retain and attract tenants,” he added.
The office investment market saw rolling 12-month volumes of office and mixed-use commercial transactions rise 25 per cent q-o-q to S$4.79 billion during the fourth quarter. This was mainly due to several big-ticket deals transacted during the period.
This includes 78 Shenton Way and Robinson 77 that were sold to seasoned real estate funds. Both properties are located in the Shenton Way/Tanjong Pagar micro-market which is undergoing rejuvenation. Meanwhile, Allianz Real Estate acquired a 20 per cent stake in Ocean Financial Centre for S$537.3 million.
These deals brought total office transactions in 2018 to S$4.8 billion, down 49 per cent from 2017’s S$9.3 billion, boosted by the mega deal for Asia Square Tower 2 at S$2.1 billion, and other large mixed developments.
Colliers is also expecting the additional buyer’s stamp duty hike on residential properties to continue fuelling a rise in investor interest towards the commercial sector. Thus, investors are expected to seek core opportunities in Singapore amid a rising rental market.
In the fourth quarter, the average imputed capital value of CBD Grade A office properties rose 0.9 per cent from the previous quarter, and 7.9 per cent from the previous year to S$2,424 psf. CBD Grade A implied yields remained flat, ranging between 3.2 per cent and 3.8 per cent on average.
Jerome Wright, director of capital markets and investment services, said: “We expect capital values to trail the projected rent growth and hence yields to remain largely stable over 2019 to 2021.This is mainly due to the hefty weight of global capital directed towards gateway cities. Moreover, the Singapore office market offers favourable fundamentals, given the impending supply shortfall over 2019 to 2021.”