More office transactions are taking place and buyers are also willing to raise their offers to match promising performance of the office sector
About two years ago, following the collapse of Lehman Brothers and the deepening global financial crisis, property analysts were pessimistic about the Singapore office market amid concerns over weak demand and a supply overhang.
Companies began slashing jobs while corporate real estate decisions were put on hold, resulting in an immense slowdown in leasing activity. Since then, prime rents across all sub-locations within the Central Business District have corrected more than 50 per cent from the peak. Last year alone, prime rents tumbled by a staggering 44 per cent.
Nevertheless, rents of office space saw a sturdy turnaround in Q2 this year, supported by consecutive quarters of positive demand since Q4 last year. The improvement in demand was largely driven by the economic recovery in Singapore and the Asian economies since end last year, with companies actively looking for space to cater for expansions.
Prime rents grew 4.5 per cent in Q2 this year from the previous quarter, putting a halt to the downward trajectory after seven quarters of declines.
Looking ahead, the office sector is likely to outshine the other property sectors as business confidence continues to improve and companies re-initiate their expansion plans.
CONTINUED IMPROVEMENT IN OFFICE DEMAND EXPECTED
The Singapore economy is tipped to expand at a blistering rate of between 13 and 15 per cent this year.
Owing to the vigorous economic expansion, net absorption for office space rose from a negative take-up of about 237,000 sq ft last year to a positive 635,000 sq ft over the first six months of this year.
As of June this year, overall island-wide demand for office space has returned to pre-financial crisis levels.
With the resumption of strong hiring within the financial, insurance, real estate and professional services sectors and the influx of new occupiers into the market, we foresee total net office demand to hit 2 million sq ft this year.
MANAGING OFFICE SUPPLY
Having achieved a turnaround in office rents, the next stage for office rental recovery is sustainability. To ensure sustainable growth in office rents, demand and supply imbalances have to be kept in check.
Over the past year, about 2.15 million sq ft of office space was taken out of the pipeline, greatly alleviating the supply overhang. In addition, with a potential conversion of 0.84 million sq ft of existing office space to residential and hotel uses, the 7 million sq ft of new office stock, to be completed between this year and 2012, looks increasingly manageable.
On top of that, 41 per cent of the stock in major new office buildings has been pre-committed and another 15 to 20 per cent are under earnest negotiations to let.
We are confident that these projects will continue to be well received and absorbed in the coming quarters while older prime grade buildings will remain attractive to replacement and existing tenants at competitive rates.
RENEWED INTEREST IN GOVERNMENT LAND SALES SITES
In fact, the limited supply pipeline in 2013 and beyond has raised concerns of a potential supply gap. Coupled with the growing confidence within the office market, interest in the Government sales of sites has been renewed since early this year.
The transitional office site in Mohamed Sultan Road drew three aggressive bids, with the top bid coming from Link (THM) Holdings at $17.19 million, which far exceeded the sole bid of $4.65 million received in 2008. The bid price was 84 per cent higher than the trigger price of the site.
Subsequently, the Government land sale of the white site in Jurong Gateway Road attracted six bidders. With a winning bid of $748.89 million or $649.60 per sq ft per plot ratio, Lend Lease plans to develop a commercial mixed development with about 30 per cent of the gross floor area (108,000 square metres) allocated to office use.
In order to cater to the future growth of the business community, the Government has also set aside three land parcels with office components under the 2H2010 GLS Programme in Tanjong Pagar, the Jurong Lake District and Paya Lebar Central.
The keen interest to develop office projects also shows that the participants of Singapore’s office market are maturing in their development decisions.
Traditionally, office projects are embarked upon only when there is a supply crunch, such as during the economic upswing in 2007.
But due to the cyclical nature of the economy and office rents, these faced the possibility of meeting with an economic downturn upon completion.
Likewise, there were hardly any developers that adopted a contrarian strategy by starting office projects during the Sars-stricken watershed year 2003, even as prices were attractive. This led to a supply crunch in 2007 when the economy finally picked up.
The developers’ interest this year, which is the early stage of a confirmed economy recovery, shows that they are striving to minimise potential mismatch in demand and supply.
They are keen in developing office space before an economic boom, with an eye to completion at an opportune time to meet future demand.
PROMISING PERFORMANCE OF THE OFFICE CAPITAL MARKET
Since the onset of the global crisis in 2008, we have not seen many transactions involving distressed owners offloading their assets.
Instead, sellers are holding on to their improved financial positions as buyers seek in vain for investment grade properties at rock-bottom prices.
However, we observe that more transactions are taking place now and buyers are more willing to raise their offers to match the anticipated future performance of the office sector.
In recent months, several major office buildings like StarHub Centre, Chow House and DBS Towers 1 and 2 have changed hands. Total investment sales ($5 million and above) amounted to $2.7 billion in the first eight months of the year, which is three-fold the investment volume concluded last year.
Despite the euro zone sovereign debt crisis and fears that the American economy may slip into a double-dip recession, the robust economic performance in Singapore bodes well for the office market.
We believe that the office market is staging a vigorous comeback with rental growth of about 10 per cent for the second half of this year and 15 to 20 per cent next year as landlords push asking rents upwards on the back of positive sentiment and healthy pre-commitment levels gained in new buildings.
The increase in leasing interest will be underpinned by companies undergoing corporate expansion beyond reinstating the business functions that were trimmed during the recession.
The expansion is also likely to be broad based – from corporate giants to small and medium sized businesses. The increase in rentals will also stir investment sales, uncovering opportunities for investors.
By Lee Peiying, research analyst for the Asia-Pacific region at Cushman and Wakefield.