Office rents up for 5th consecutive quarter: URA

By Bong Xin Ying

/ EdgeProp Singapore |

October 27, 2018 5:53 AM SGT

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Demand for office space has continued to outpace supply for the fourth consecutive quarter in 3Q2018, and this has driven a fifth straight quarter of rent growth, according to URA data. The URA office rental index for the Central Region climbed 12.2% from the bottom in 2Q2017, but is still some 8.5% below the recent peak in 1Q2015, notes Tay Huey Ying, JLL head of research for Singapore.

The URA office rental index rose 2.5% q-o-q in 3Q2018, led by the Central Area, which rose 3% q-o-q, the strongest rental growth since 2Q2014, says Christine Li, Cushman & Wakefield (C&W) senior director of research.

For the first nine months of 2018, the office rental index was up 7.9% on the back of stronger GDP growth, recovering business sentiment and a dearth of quality Grade-A office supply. “Landlord in Singapore are now in a strong position to resist demands for lower rents because of the limited amount of new space available over the next two years,” says Li.

Landlord in Singapore are now in a strong position to resist demands for lower rents because of the limited amount of new space available over the next two years (Photo Credit: Samuel Isaac Chua/EdgeProp Singapore)

Net demand for 3Q2018 was 45,000 sqm (484,380 sq ft), led by strong take-up by office occupiers in the Downtown Core which accounted for 38,000 sqm of the space absorbed in 3Q2018. This brings total islandwide demand to 133,000 sqm for the first nine months of the year, adds Li. This compares with a total net demand of only 5,000 sqm for the same period in 2017.

There was a resurgence of demand by tenants in the financial sector drove leasing activity during 3Q2018, adds Li. HSBC Bank signed a one-year lease extension for its existing premises of 200,000 sq ft in HSBC Building while concluding a deal to relocate and take up 140,000 sq ft at MBFC Tower 2 in 2020. In addition, Allianz inked a lease for 50,000 sq ft in ASB Tower (the new tower on the site of the former CPF Building on Robinson Road).

The co-working segment continues to make huge strides with Hong Kong-based Campfire in negotiations to take up 85,000 sq ft at 139 Cecil Street. Meanwhile, JustCo is taking up the second floor of China Square Central by 4Q2019, adding to its portfolio of 13 centres.

“With newly completed projects enjoying high occupancy levels due to increased leasing demand, the office market is now firmly tilted in the landlords’ favour,” says Li. During 3Q2018, the Grade-A CBD office rent tracked by C&W rose by 2.7% to $10 psf per month amidst the lack of supply.

Given expectations of healthy economic growth underpinning demand, and tapering office pipeline supply, the rental index for office space in the Central Region is poised for further growth going into 2019, reckons JLL’s Tay. Only 49,000 sqm gross floor area (GFA) of office space is expected to be completed in 2019, according to URA data. This is half the 86,000 sqm expected to come on stream in 4Q2018 on top of the net new supply of 99,000 sqm stock added in the first three quarters of 2018.

Rents are projected to continue escalating as the tight supply will persist for three more years until the supply influx of 1.8 million sq ft in 2022, according to C&W’s Li. Grade-A CBD rents are projected to rise by 11% in 2018 and a further 9% in 2019, as the tight supply situation will persist until 2022.

Grade-A CBD rents are projected to rise by 11% in 2018 and a further 9% in 2019, as the tight supply situation will persist until 2022 (Photo Credit: Samuel Isaac Chua/EdgeProp Singapore)

JLL’s research however showed that their average monthly gross rents have climbed by more than 18% from the bottom of $8.41 psf in 1Q2017 to $9.93 psf by the end of 3Q2018. Rent growth has slowed for three consecutive quarters, says Tay, suggesting the setting in of occupier resistance.

The Fringe Area registered a 0.2% q-o-q growth in 3Q2018, the slowest pace of increase this year, and pales in comparison with the 2.5% and 1.7% increase in 1Q2018 and 2Q2018 respectively, says C&W’s Li. With the tight CBD supply over the next three years, demand for city fringe offices is expected to increase, notes she says. This will bode well for Paya Lebar Quarter, which has a total net lettable area of 900,000 sq ft, and is expected to enjoy high occupancy rates when it is completed in 2019, she adds.

“Office sales prices grew at a much more subdued pace,” notes Duncan White, head of office services, Colliers International. URA Office Price Index for the Central Area rose at a slower clip of 0.1% q-o-q compared to 1.9% q-o-q in the preceding period. The slowdown in price levels came after strong upticks in the previous three quarters, he adds.

With the tight CBD supply over the next three years, demand for city fringe offices is expected to increase, notes she says. This will bode well for Paya Lebar Quarter (Photo Credit: Samuel Isaac Chua/EdgeProp Singapore)

“The punitive ABSD measures on the residential sector since July should continue to fuel a shift in investor interest towards the commercial sector,’ says White.

C&W’s Li adds: “Because there’s still growing interest in office properties by institutional players, opportunistic private equity investors, wealthy individuals and family offices, that will continue to provide support for prices.” Examples include BlackRock’s purchase of seven strata units in Prudential Tower for $130.1 million in 3Q2018; AEW’s acquisition of the freehold 55 Market Street for $216.8 million at a cap rate of 1.7%; and ARA is in talks to acquire Manulife Centre for $550 million.

Meanwhile CLSA has put 77 Robinson on the market for $725.0 million and Khazanah Nasional Berhad may potentially divest its 60% stake in Marina One and DUO Tower to aid in reducing Malaysia’s national debt of RM1 trillion.

Cognizant of tightening vacancy, multinational corporations have embarked on a series of consolidation and relocation activity, according to Colliers International research. There’s been broad based expansionary activity among financial, professional services, technology and flexible workspace firms.

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