The office market has seen significant changes this year, but there is good value in office investments.
The effects of COVID-19 have raised fundamental questions for the office sector, such as new approaches to space utilisation, the reassessment of premises strategy and the nature and scale of office demand, combined with the implications for rents and capital values.
Significant changes are already taking place, and a key question is whether these will be in place for the short-term or whether we are seeing structural shifts that will persist going forward.
Is it the right time to invest in office? How much value would office investments bring now? We sat down with Senior Director of Capital Markets and Investment Services Jerome Wright for his opinions on where he sees the Singapore Office Market going.
Q: What has been the economic impact on sales volume and asset pricing?
Despite investment transactions in the office sector stumbling in the first half (H1) of 2020, net absorption in Singapore increased in Q2 from the Q1 levels, reflecting fundamental strengths in the market. We are expecting to see transactions of office towers gradually resuming and price levels should remain relatively stable for premium buildings.
"We are expecting to see transactions of office towers gradually resuming and price levels should remain relatively stable for premium buildings."
While the investment market is unlikely to reach new benchmarks until the occupier market has stabilised, there has been limited distressed offerings in Singapore as a result of loose monetary conditions.
Q: What are the implications for office investment?
Investment sentiment is improving along with the resumption of business activity.
In the short term, there will likely be a divided approach in investor strategy involving either core, low-risk assets, or opportunistic purchases of discounted distressed properties.
We expect the office to retain a key role in corporate real estate strategy; home working will complement office work, not replace it. Offices in the central business district (CBD) with excellent location, accessibility and connectivity will continue to enjoy stable occupancy, making them attractive.
Related content: Asia Pacific Office Market H1 2020 Review and Five-Year Outlook
"We can still find good value in commercial assets, with new developments attracting greatest interest from investors. It is the new developments with high specifications that will meet the occupation needs of the occupiers."
Looking ahead, investors will likely assign a premium to buildings with very high standards of hygiene, sanitation and wellness certification.
Singapore Grade A office assets are still expected to achieve a five-year average annual rent growth of 3.3%. Office assets in decentralised areas and business parks may also be attractive, as these districts are likely to benefit from demand for partial relocation to cheaper areas and satellite offices.
Occupiers looking for cost savings will likely consider leasing space outside the CBD or making use of flexible workspace. One other consideration is the appetite for flexibility in lease commitments. As occupiers gravitate to shorter-term lease commitments, a shorter income stream with implications for valuations and hold periods is created.
Over the coming quarters, we expect tenants to have a greater chance of negotiating shorter leases than before the downturn. Investors will need to take into consideration the willingness of landlords to accommodate occupiers’ desire for shorter leases and their ability to do so.
Q: Should investors still consider the office market?
Yes, while taking new approaches into consideration.
Overall, we can still find good value in commercial assets, with new developments attracting greatest interest from investors. It is the new developments with high specifications that will meet the occupation needs of the occupiers.
"Investors should also consider looking past traditional CBDs to decentralised districts and business parks, given the changing definition of ‘core’. They should consider tactical partnerships with flexible operators to attract and retain tenants."
The new models and possibilities that are emerging will also require investors to look beyond standard valuations. Investors should also consider looking past traditional CBDs to decentralised districts and business parks, given the changing definition of ‘core’. They should consider tactical partnerships with flexible operators to attract and retain tenants by extending services and offerings.
Whilst there is short term pressure on flexible workspace operators – with the current reduced occupancy loads, and work from home policies – investors should be open to properties occupied or managed by flexible workspace operators, or even enter partnerships with these operators.
This arrangement provides flexibility for landlords and allows a more versatile approach, such as considering new management and leasing structures as opposed to the traditional way of corporate anchor tenants.
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