Historically, the Singapore office market has not been a very volatile one when compared to other major markets such as Hong Kong.
However, in recent years the market here has become much more volatile than usual, as can be seen during the last cycle. Rents grew very rapidly from around $5 per square foot per month (psf pm) in 2003 and 2004 to a peak of $18.40 psf pm in Q3 ’08. Rents then fell very sharply during the global financial crisis, dipping 58 per cent to $7.75 psf pm by Q1 ’10.
While all markets are cyclical, Singapore’s commercial property market saw rental fluctuations that were more typical of more volatile markets than ours. This is because many new developments were cancelled or delayed during the Asian financial crisis and Sars period from 2000 to 2004.
The construction period of about four years for a Grade A office building meant that there was a lag in the supply pipeline, which was, therefore, adversely affected from 2004 to 2008.
Also, the period from 2006 to 2008 saw a very substantial increase in demand for office space from the financial services sector, partly as a result of the global growth of this sector and partly as a result of Singapore’s successful repositioning as a global banking hub.
The lack of supply caused the vacancy rate to drop to a record low of below 2 per cent and rentals to escalate to record levels. Jones Lang LaSalle’s Q3 ’08 numbers showed an average Grade A Raffles Place rent of $18.40 psf pm. This was an average number and there were some buildings registering rates of $21 to $22 psf pm at this time.
Subsequently, the global financial crisis saw rents drop off dramatically from 2008 to last year, as a lack of confidence in the world economy resulted in a sharp decline in demand for space.
Sentiment was exacerbated by the impending supply boom in the Central Business District (CBD), with close to 8 million sq ft of major projects becoming available between this year and 2015. By Q1 ’10, rents had plunged 58 per cent to $7.75 psf pm.
The first signs of a market pick-up came early this year, when an increased level of activity was seen in the one million sq ft of buildings that came online in the CBD last year.
Much of the activity was due to tenants taking the opportunity to consolidate operations, something that they had previously not been able to do because they could not find contiguous space when occupancy rates were very high – over 98 per cent – during the market peak in 2007 and 2008.
These tenants were often coming out of leases with passing rents in the mid teens and given that much of the fringe CBD 2009 supply was transacting at the $6 to $7 psf pm mark, they could upgrade to a new building, pay for their fit out and still show a cost saving, thereby giving them the opportunity to relocate. This “flight to quality” phenomenon was prevalent in late last year and early this year.
The activity in 2010 has also been characterised by larger occupiers pre-committing to new developments in order to consolidate their operations and because many are sensing that the office market has bottomed out, with a run-up in rents expected over the next two to three years. Indeed, rentals in the Singapore office market are experiencing an upturn and have seen strong growth during Q3 ’10.
The 2.6 per cent increase in Q2 ’10 was the first after 15 months of rental decline. Jones Lang LaSalle’s preliminary estimate of the average CBD Prime Grade A gross effective rent shows an increase of 9.4 per cent quarter-on-quarter to $8.70 psf pm in Q3 ’10 from $7.95 psf pm in Q2 ’10.
The office market witnessed strong leasing activity during Q3 ’10. Many of the landlords in the market have enjoyed increases in achievable rents, with the better quality space experiencing double-digit growth in Q3 ’10.
Jones Lang LaSalle’s preliminary data also suggest that the vacancy rate in the Raffles Place Grade A market has been steadily decreasing. Vacancy in this segment of the market stood at 5.5 per cent in Q1 ’10 before dropping to 4.2 per cent in Q2 ’10. Preliminary data show a further drop to 2.8 per cent in Q3 ’10.
Unlike in the previous period where the higher-tier segment of the market dominated the overall leasing scene, improvements in occupancy levels during Q3 ’10 were seen across the board in both investment grade and lower grade buildings.
The overall increase in activity was spurred most significantly by large leasing deals, such as AXA signing up as the new anchor tenant at 8 Shenton Way in taking about 70,000 sq ft of space in the building. The outlook for new buildings has also improved in terms of pre-commitment.
These predominantly involve buildings that are scheduled to come on-stream next year. 50 Collyer Quay, Asia Square Tower 1 and Ocean Financial Centre have very strong levels of pre-commitment – at over 60 per cent, 40 per cent and 70 per cent of space, respectively, either pre-committed or with terms agreed.
Next year will see an estimated 2.8 million sq ft of new development come onstream, which will increase market vacancy levels. However, this will be mitigated by supply being removed from the market to be redeveloped for residential and commercial uses.
Still, the increase in vacancy rates will keep rental growth in check as tenants will have a number of options in either the new buildings or space coming back to the market.
That said, assuming a strong economy, we do expect to see rental growth over the next couple of years.
By Chris Archibald, International Director and Head of Markets at Jones Lang LaSalle.