• Premium and Grade A rents in city-centre rose by 4.8% quarter-on-quarter in Q1 2018
• Landlords embarked on drastic cuts in leasing incentives amid office bull market
• Financial, professional services, technology and flexible workspace firms to drive office space take-up
• Singapore office market seen as the strongest income-growth opportunity within Asia for investors
Singapore, 25 April 2018 – Singapore office market could offer the strongest income-growth opportunity within Asia for investors, with the potential to achieve up to 20% rental growth over 2018 and 2019, according to Colliers International’s latest quarterly report on the office property sector.
Firm economic momentum has strengthened market confidence and synchronised growth across office-using sectors should elevate prime office rents by 10-12% in 2018, and by 5-7% over 2019. In Q1 2018, the Singapore office market posted a strong uplift in rental performance, particularly the Premium and Grade A space in the central business district (CBD) where rents climbed by 4.8% quarter-on-quarter (QOQ) to SGD8.60 per square foot per month. This was a sharper acceleration from the 2.7% QOQ pickup in Q4 2017 and 0.6% QOQ rise in Q3 2017.
Since the rental trough in H1 2017, CBD Premium buildings’ average rents have posted a cumulative increase of 14.3%, nearly double the 8.2% growth in the overall CBD prime office market over the same period.
Mr. Duncan White, Head of Office Services at Colliers International, says, “Renewed strength amongst businesses, especially the services sectors, coupled with a limited stock of upcoming new CBD supply over 2018-2020, likely drove the brisk rental recovery. As the market recovers and vacancy tightens, we recommend occupiers to bring forward impending lease reviews. In a landlords’ market, tenants will find it increasingly challenging to secure attractive rents. In addition, we have observed that many landlords have scaled back on lease incentives in the past months.”
The shift towards a climate favouring landlords was evident from drastic cuts in lease incentives (aside from standard fit-out periods). Colliers noted that the average lease incentive level for CBD Premium and Grade A transactions fell from 6.8% of face rents (equivalent to 2.4 months of rent-free assuming a 36-month lease term) in H1 2017 to 4.6% of face rents (or about 1.7 months of rent-free assuming a 36-month lease term) in Q1 2018.
The vacancy rate also declined swiftly, further strengthening landlord’s hand. CBD Premium and Grade A vacancy was down by 2.3 percentage points QOQ to 5.8% in Q1 2018. The reduction in vacancy rates was noticeable across all CBD prime office districts ranging from the traditional core CBD area to Beach Road and Orchard Road. Meanwhile, CBD Grade B vacancy recorded a marginal increase of 0.2 percentage point to 6.8%.
Mr. White adds, “This suggests that the flight-to-efficiency trend – characterised by relocations to newer buildings for efficiency gains – is slowing down, and becoming more evenly matched against the rate of backfill space absorbed in older buildings. The rapid decline in vacancy rates in higher-tier office properties and resilient take-up in older buildings indicates that strong occupier demand fundamentals are supporting the current office market upturn.”
Muted short-term supply of new office space – averaging 0.58 million sq ft of CBD Premium and Grade A stock per year over 2018-2020 – and growing office demand by the service sector are expected to keep rents firm. Colliers anticipates the supply drought to be more pronounced in 2019, as new office space is slated to be heavily concentrated outside the core CBD.
The next major jump in CBD Premium and Grade A office space supply will likely occur in 2021 from CapitaSpring and the Central Boulevard greenfield site, injecting a combined 1.9 million sq ft of space within the Raffles Place/New Downtown area. In anticipation of the large supply in 2021, Colliers projects that rents could see some consolidation, falling by 4% in 2020, before potentially rebounding again over 2021-2022.
Colliers expects office space take-up in 2018 to be driven by the legal, financial and business services firms, in tandem with the sustained growth of technology companies and flexible workspace operators. Office developments that will come on-stream this year include: Frasers Tower which already achieved a pre-commitment rate of 83% as of March 31, 2018; Paya Lebar Quarter with more than half of its office space potentially pre-leased and under advanced stages of negotiation; and 18 Robinson which was about 30% pre-leased as at the end of Q1 2018.
Meanwhile, the office investment market continued to pick up in Q1 2018, driven by future income growth expectations, with average imputed capital values for the CBD Premium and Grade A market rising by 1.6% QOQ to SGD2,281 psf.
CBD Premium and Grade A office yields remained largely stable in Q1 2018. Colliers anticipates capital values to grow in tandem with rents, albeit at a slower clip. Yields should stay largely flat or rise marginally over the medium-term from 2018 through 2022.