Singapore office property market demonstrates resilience amid turmoil

  • CBD grade A rents declined 1.2% QOQ in Q2 2020 to S$10.00 per sq foot (psf), reflecting the impact of the coronavirus outbreak (COVID-19)
  • CBD grade A vacancy increased 1.5pp to 4.6%, partly attributed to newly completed buildings with lower occupancies
  • New demand in Q2 was mainly driven by flexible workspace operators who committed earlier
  • Total office or mixed developments investment volumes grew by 76.7% QOQ to S$1.3 billion in Q2 2020
  • Optimistic outlook on long-term capital value growth expected to be intact, at 2% p.a., versus the long-term rental growth of 3.3%.

 

SINGAPORE, 7 July 2020 – Colliers International (NASDAQ and TSX: CIGI), a global leader in commercial real estate services, has published its latest research report which examines the performance of the Singapore office property market in Q2 2020 and its prospects ahead.

 

Rents

Evaluating the data, Colliers Research notes that Q2 2020 saw the onset of rental declines as Singapore entered the “circuit breaker” from April 7 to June 1. Average CBD Grade A rents moderated 1.2% QOQ to S$10.00 (U$7.18) psf, while Grade B rents slid 1.8% QOQ on a like for like basis.

Tricia Song (宋明蔚), Head of Research for Singapore at Colliers International, said, “We expect to see further rental declines over the next two quarters, as leasing demand continues to weaken as the global economy slows down. Further, landlords are starting to offer longer rent-free periods, and we are likely to see higher incentives reflected in the next quarter.”

Rick Thomas, Executive Director and Head of Occupier Services in Singapore at Colliers International, said, “Landlords are focusing on tenant retention. As a result, we saw a 1.7% QOQ decrease in Premium and Grade A rents in Raffles Place and New Downtown.”

“There is even room for more negotiation in the Grade B office market where we have seen renewals and new leases pushing down rents by 6-10%. This presents opportunities for resilient occupiers in a more tenant-favorable environment.”

Office rents and vacancy, Q1 2020

 

Average Gross Effective Rents
(SGD psf pm)

QOQ Change (%)

YOY Change (%)

Vacancy (%)

Grade A (Premium Tier)

 

 

 

 

Raffles Place / New Downtown

11.98

-2.3%

0.2%

2.8%

Grade A

Raffles Place / New Downtown

10.29

-1.2%*

-0.3%*

6.9%

Shenton Way / Tanjong Pagar

10.43

-1.1%*

1.3%*

8.1%

City Hall

10.21

-1.4%

0.6%

3.0%

Beach Road / Bugis

9.27

-1.2%

0.9%

1.2%

Orchard Road

9.10

-0.5%

-1.3%

3.4%

CBD Grade A Average

10.00

-1.2%*

0.3%*

4.6%

City Fringe 7.70 -1.5% -2.5% 4.9%
 Suburban 5.18 0.0% 0.0% 8.8%
Grade B
       
Raffles Place
8.74 -0.8% -1.5% 5.7%
Shenton Way / Tanjong Pagar 8.15  -1.3% -2.1% 6.0%
Beach Road / Bugis 7.92 -1.2% -0.6%* 8.8%
Orchard Road 8.35 -3.9% -3.5% 17.3%
CBD Grade B Average 8.29 -1.8% 0.8% 8.2%
City Fringe 6.74 -2.8% -4.6% 6.5%
Suburban 4.54 0.0% 0.0% 16.5%

Source: Colliers International
Note: Average gross effective rents are benchmarked to a full-floor space in mid-zone level; conservative figure tending towards lower-end of rental range for a property. Effective rent refers to average rate payable over the lease term after accounting for incentives.
* On a like-for-like basis

 

Colliers Research expects relatively muted CBD Grade A supply through 2021, with annual expansion averaging 3% of stock versus 5% for the last five years. The next major supply wave (about 7% of stock) is scheduled for 2022.

 

Vacancy and take-up

CBD Grade A vacancy rose to 4.6% in Q2, from 3.1% in Q1, on new completions, and could rise further as the year progresses and new supply enters the market. Colliers Research forecasts vacancy could rise to 7.5% by end of 2020.

Demand driver in Q2 2020 was mainly the Flexible Workspace sector, which committed to expansions earlier. New space take-up includes JustCo’s 45,000 sq feet new branch opening at OCBC Centre East and Arcc Spaces’ 19,000 sq ft flagship centre at One Marina Boulevard.

Mr. Thomas added: “Going forward, Flexible Workspace and Technology sectors will continue to be the key drivers of office demand. As occupiers rationalise their space requirements and consider a flex-and-core or split-office strategy, we will see more flexible workspace centres opening next quarter such as JustCo at Centrepoint, The Work Project at Capitagreen, and WeWork at 30 Raffles Place.”

 

Investment Sales

Despite the circuit breaker, total office or mixed office investment volumes grew 76.7% QOQ to S$1.3 billion in Q2 2020, bringing the rolling 12-month volume to S$6.2 billion.

Sales during the quarter was driven mainly by two major transactions both sold by Perennial - 50% stake in AXA Tower to Alibaba; and the remaining 30% stake in TripleOne Somerset to Shun Tak Holdings

Notable Office Transactions

Property

Price (SGD million)

Price PSF NLA (SGD)

Micro-Market

Remaining Tenure

TripleOne Somerset (30% stake)

342

2,250

Orchard

45 years

AXA Tower (50% stake)

840

2,493

Shenton Way /
Tanjong Pagar

61 years

30 Raffles Place (office units)

122.3

2,067

Raffles Place /
New Downtown

68 years

 Suntec City Tower One  13.9 2,890 City Hall 68 years

Source: Colliers International
Note: Price of TripleOne Somerset at S$342 million is based on reported total asset value of S$1.14 billion

 

Jerome Wright, Senior Director, Capital Markets in Singapore at Colliers International, said, “These transactions reflect the long-term attractiveness of Singapore to foreign investors. In particular, coming at a time like this, when future rents and capital values could be uncertain, these transactions should boost confidence in the Singapore office market and reaffirm investor appetite for prime CBD assets. Over the next few years, we can expect an increase in capital market volumes as interest rate outlook and capital allocation to Asia’s key gateway cities both look favorable.”

The average imputed capital value of CBD Grade A office properties declined 0.6% QOQ to S$2,504 psf, in line with the rental declines in the quarter. Colliers’ Valuation team, meanwhile, maintained cap rates unchanged at a range between 3.15% and 3.50% in Q2 2020.

Colliers Research remains optimistic and expects long-term capital value growth to be intact, at 2% p.a., versus the long-term rental growth of 3.3%.

Download our quarterly office report for Q2 2020 here.

 

 

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Media Contact:

Annabelle Taylor