Singapore office rents fall 0.6% in 1Q2019

By Bong Xin Ying

/ EdgeProp Singapore |

April 27, 2019 4:16 PM SGT

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While island-wide occupancy and sales continued to improve, the rental index (Central Region) saw its first decline in seven consecutive quarters, according to figures released from the Urban Redevelopment Authority (URA) on April 26. Rentals of office space decreased by 0.6% in 1Q2019, compared with a 0.5% increase in 4Q2018. URA’s Office Rental Index for the Central Region in 1Q2019 is 8.6% below the most recent peak in 1Q2015.

Meanwhile, rent growth accelerated in 1Q2019 across almost all submarkets tracked, says Tay Huey Ying, head of research and consultancy at JLL Singapore. JLL’s research showed the average monthly gross effective signing rents for a fixed basket of Grade-A office assets in the CBD rose 3.7% q-o-q in 1Q2019 to $10.63 per sq ft from $10.25 per sq ft in 4Q2018. This is faster than the 3.3% q-o-q recorded in 4Q2018 and 2.3% q-o-q recorded in 3Q2018. The relentless rise in the rents of the basket of office assets tracked by JLL was underpinned by diminishing availability of good quality office space in the CBD for lease amid firm demand and limited new supply.

According to JLL’s Tay, the correction reflected in URA’s 1Q2019 office rental index could be due to the “occurrence of more leases taking place in Category 2 offices as the availability of Category 1 offices for lease diminishes amid firm demand”. She adds that a more active Category 2 office leasing market could have dragged down the overall rental index for the quarter.

‘Category 1’ refers to office space in buildings located in core business areas in Downtown Core and Orchard Planning Area which are relatively modern or recently refurbished, command relatively high rentals and have large floor plate size and gross floor area (GFA), while ‘Category 2’ refers to the remaining office space in Singapore which are not included in Category 1.

Prices and rentals

Prices of office space increased by 3% q-o-q in 1Q2019, compared with a 2.4% increase q-o-q in the previous quarter. In the Central Region, office prices are now 8.9% above the recent low in 2Q2017.

Based on Colliers’ research, CBD Premium and Grade-A gross effective rents grew 2.3% q-o-q to $9.64 psf in 1Q2019. Increasing landlord confidence underpinned lower incentives and rental uplift.

Colliers says the net absorption in 1Q2019 was driven by technology and flexible workspace sectors, as vacancy tightened to 3.9% as of end-March 2019 from 5.4% as of end-December 2018.

Colliers forecasts that with a higher base for comparison in 2018, CBD prime office rents will likely grow at a slower pace – at about 8% – in 2019. Meanwhile, Grade-A and Premium CBD office vacancy is expected to continue to trend below 6% until 2022.

Office sales prices grew at an “accelerated pace, on the back of more en bloc transactions during the quarter”, says Tricia Song, head of research for Singapore at Colliers International. The transactions include the sale of Manulife Centre which was jointly acquired by ARA Asset Management and British property group Chelsfield for $555.5 million; six levels at Suntec City which were reportedly sold to Alpha Investment Partners for $160 million, and another floor at the same property that was sold to an unnamed party for $8 million, adds Song.

Vacancy and stock

The amount of net occupied office space increased by 19,000 sq m (204514 sq ft) in 1Q2019, compared with the increase of 39,000 sq m (nett) in the previous quarter. Meanwhile, the stock of office space decreased by a net 6,000 sq m in 1Q2019, compared with a net increase of 59,000 sq m in the previous quarter. Together, the island-wide vacancy rate of office space declined to 11.8% at the end of 1Q2019, from 12.1% as at the end of the previous quarter.

As at the end of 1Q2019, there was a total supply of about 733,000 sq m GFA of office space in the pipeline, compared with the 732,000 sq m GFA of office space in the pipeline in the previous quarter.

According to JLL’s Tay, JLL “remains upbeat” about the prospects for Singapore’s office leasing market. This is due to the steady demand for office space shown by the healthy pre-commitments for schemes scheduled for completion in 2019, namely 9 Penang Road and Funan. “This is amid tight vacancy of 6% for Grade-A office space in the CBD as of end-1Q19 which we expect to tighten further to below the frictional rate of 5% by the end of 2019,” Tay adds.

The supply squeeze will also continue to give landlords the upper hand in lease negotiations. “Barring adverse external shocks, there is potential for 2019 to outperform 2018 in terms of rent growth for Grade A office space in the CBD,” says Tay.

Referencing the CBD Incentive Scheme and the Strategic Development Incentive (SDI) Scheme, which were proposed in the URA Draft Master Plan 2019, Colliers’ Song is optimistic that these schemes will “reduce the availability of office space in the CBD and drive up rents”.

“Affected occupiers should explore options to move to newer space within the CBD, or move to city fringe offices or even to business parks, if applicable...investors could also look to add value with redevelopment premiums to older buildings,” adds Song. “Broadly, we expect reduced new CBD Grade-A office supply over 2019–2021, with annual expansion averaging 2% of stock, and the continued tightening of vacancy should support rental growth.”

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