Take-up were mainly Grade A office space below 20,000 sq ft

2012-10-03

International property consultant, Colliers International’s latest quarterly research report revealed that a more diverse occupier demand – that extends beyond the financial services sector to include broad-based services firms such as those in the professional and legal services industries, insurance and commodity segments – has provided support in the moderation of Grade A office rental decline in Singapore in 3Q 2012.  

This is despite the Singapore’s office property market continuing to writhe in 3Q 2012 on the back of a slowing global economy.   Key concerns on the persistent Eurozone debt crisis, the faltering economic recovery of the United States and the slowing growth momentum of Asia continued to weigh on business confidence in the quarter. 

These concerns, in turn, resulted in suppressed leasing activities among large space occupiers, including major banks and financial institutions, as they remained cautious of the uncertain economic conditions. 

Mr Calvin Yeo (杨光伟), Executive Director of Office Services, Colliers International, says, “On a positive note, however, the challenging business environment also presented opportunities for tenants – both new and current – to take advantage of the softening rental situation.” 

It is observed in 3Q 2012 that tenants who want to maintain their presence in Singapore took the chance to take flight to quality, while an increasing number of foreign companies expresses interest in setting up entities in Singapore to partake in Asia’s growth momentum and to diversify from the Eurozone’s shrinking economy.

Mr Yeo adds, “These companies range from the professional and legal services industries to the insurance, commodity, energy and private equity sectors.  Noticeably, the majority of take-up in 3Q 2012 were of Grade A office space below 20,000 sq ft.”

Occupancy Rate
The average occupancy rate of Grade A office space in the Central Business District (CBD) strengthened from 92 per cent in 2Q 2012 to 93.1 per cent in 3Q 2012, the highest in five quarters. 

Occupancy rates of micro markets surrounding the Marina Bay area, namely, the City Hall/Marina and Raffles Place/New Downtown micro-markets, recorded the highest jump of 2.6 and 1.7 per cent, respectively, during the quarter.

For instance, sustained demand for quality office space in the Raffles Place/New Downtown micro-market can be observed from the absorption of space at the six-month-old Marina Bay Financial Centre (MBFC) Tower 3. 

Overall commitment rate for MBFC Tower 3 increased from about 68 per cent in 2Q 2012 to some 76 per cent in 3Q 2012, with new tenants – including the shipping company, Berge Bulk; the investment firm, Clifford Capital; the law firm, Clyde & Co; and the pediatric nutrition company, Mead Johnson; among others.  

Take-up in other new office buildings in Raffles Place/New Downtown micro-market during the quarter was also encouraging. 

The UK law firm, Freshfields, leased an office space at Ocean Financial Centre, while the online foreign exchange trading service provider, Oanda Asia Pacific, expanded its operations in Singapore, moving from China Square Central to OUE Bayfront. 

Over at Centennial Tower in the City Hall/Marina micro-market, nearly 90 per cent of the 129,000 sq ft of space that was vacated by Citi last year has been taken up by both new and existing tenants, including Sumitomo Mitsui Banking Corporation and a leading management consulting firm.

Rents
The strengthening in the overall occupancy rate of Grade A office space in Singapore in 3Q 2012 helped moderate the office rental decline for the second consecutive quarter, amid a testing global economic climate.

Average monthly gross rents for CBD Grade A office space eased 1 per cent quarter-on-quarter (QoQ) to reach S$8.37 per sq ft as of September 2012, slightly lower than the 1.1-per-cent slide recorded in 2Q 2012.

Notably, in the Raffles Place/New Downtown micro-market, the average monthly gross rents for Grade A office space fell 2.2 per cent QoQ in 3Q 2012 to S$9.26 per sq ft.  This is lesser than the three per cent QoQ drop recorded in 2Q 2012.

Mr Yeo comments, “Although Grade A office rents in the Raffles Place/New Downtown micro-market has declined by 14 per cent in the current downturn since 4Q 2011, it is much milder compared to the previous downturn in 2008/2009, when office rents tumbled 61 per cent in the first 12 months.

The gentler rental downtrend this time is largely attributed to businesses continuing to maintain a presence in Singapore, given her compelling regional business hub status, which provided support for rents.”

Capital Values
Transactional activities in the strata office market has generally toned down in 3Q 2012. 

After brisk sales activities in 1H 2012 seen in developments, including PS100 in Tanjong Pagar, Oxley Tower along Robinson Road and EON SHenton at Shenton Way, there was a dearth of new project launches in the CBD in the third quarter. 

However, given the low interest rate environment and continued limited supply of prime strata office space, fundamentals in the strata office market remains healthy.  Recent anti-speculation measures implemented in the residential and industrial sectors have also diverted some investors’ interest to the office market. 

Therefore, supported by investors’ confidence in this market segment, the average capital value of Grade A office space in the Raffles Place/New Downtown micro-market held firm at S$2,447 per sq ft in 3Q 2012, after easing by 0.5 per cent in the previous quarter.

Outlook
Looking forward, although the overall office rental drop has decelerated for two consecutive quarters, it is still early to conclude if rents and prices will bottom out soon due to the global economic instability. Banks are still cutting jobs worldwide to reduce structural over-capacity, and this trend could spill over to Singapore if the global economic conditions do not improve. 

Ms Chia Siew Chuin (谢岫君), Director of Research & Advisory of Colliers International, says, “In addition, as the government seeks to keep business occupation cost competitive, there are a slew of potential new office buildings – both within and outside of the CBD – that await pre-commitment from occupiers. 

There is also a substantial stock of shadow space that is available for sub-let or re-assignment by existing tenants, as well as a potentially-large supply of secondary space that could enter the market when tenants move to newer buildings. 

Particularly, if the stock of secondary office space is not taken up in time before they are returned to the market upon lease expiration, this could potentially take a toll on the current strong occupancy rates.”

Nonetheless, frameworks built by regulators and central banks in light of the global financial crisis could possibly fend off any possible steep meltdown in the economy.

Ms Chia concludes, “Barring any unfavourable economic development in the Eurozone and the global economy, the fall in rents in the Raffles Place/New Downtown micro-market for the whole of 2012 could be between 10 per cent and 15 per cent.

The corresponding rental decline for office space in the CBD could range from 5 per cent to 10 per cent.

Meanwhile, overall capital values in the Raffles Place/New Downtown micro-market and in the CBD could hold stable with marginal downsides for the year.”