Calm Replaces Frenzy, But Office Sector Will Still Be Buoyant

Source : The Business Times, December 21, 2007

Supply remains tight in short-term, prices may rise slower in 2008

The tight supply of office space seen this year will spill over into 2008, keeping rents buoyant and rising in the region of 20 per cent for Grade A space.

However, the massive supply expected from 2010 onwards, coupled with a growing resistance to rental hikes and the possibility of a slowdown in the US economy, will likely bring a sense of calm with the new year, replacing the manic price increases that dominated much of 2007, when rents in areas like Raffles Place increased by 100 per cent.

Colliers International director for research and consultancy Tay Huey Ying says that based on the average annual office absorption rate in the last three years of about 2.3 million sq ft, islandwide occupancy could reach 95 per cent by 2010, but added that this was 'unlikely in view of the looming US recession'.

Colliers estimates that potential supply is estimated to be 5.2 million sq ft, or about 1.7 million sq ft a year for the next three years.

'In the likely event of a moderation in annual office demand by some 25-30 per cent to an annual average of some 1.6 million sq ft in the next three years, islandwide occupancy rate would still remain at a healthy level of above 92 per cent by 2010,' added Ms Tay.

Cushman & Wakefield's (C&W) estimates for the shorter term reveal a more dire supply situation.

C&W managing director Donald Han says that only 2.7 million sq ft of new office space will be completed for 2008 and 2009, or an average of 1.35 million sq ft per annum. Projected take-up however, has historically been around 2 million sq ft.

But while rents will continue to rise, tenants may simply up their tolerance thresholds and resist expansion by 'hot-desking, working from home, or reconfiguring workstations', at least until rents stabilise, reckons Mr Han.

Landlords' rental expectations will remain high but Mr Han believes that tenants are beginning to resist high rents and expects 'more corporates who are large users of space to continue adopting cost segregation strategy in 2008'.

'Assuming half of a front end office in the CBD pays $15 psf while the other half of backroom operations pays a $4 psf industrial rate, the blended rate achieved is $9.50 psf, which makes businesses more agile and competitive in a high cost environment,' Mr Han said.

He also noted that the Grade B office sector is enjoying high occupancy rates of 95-98 per cent with some fringe areas like the Tanjong Pagar, Beach Road and Chinatown micro markets seeing record rental transactions.

Mr Han added: 'There has been a growing trend of companies buying premises for own use in lieu of renting. These have similarly led to the rise of rental and capital values for conservation shophouses and strata-titled offices.'

Capital values rose rapidly in 2007. According to Savills Singapore, average Grade A capital values rose 33 per cent in Q2'07 and 23 per cent in Q3'07, quarter-on-quarter.

For 2008, however, Savills is projecting a 20 per cent increase for the whole year.

The sector will also continue to be bolstered by institutional buyers. Savills director of marketing and business development Ku Swee Yong said: 'They invest in Singapore for interest rate arbitrage, tax gains, forex gains or diversification, and portfolio diversification. The office investment market will continue to be filled with investor interest and we will see a constant supply of funds chasing after very few assets.'

The lower price fetched for Marina View Parcel B recently does not alter his view either. 'Marina View Parcel B had restrictions due to the common services tunnel construction access. The price is not reflective of the market because you have to discount for the inconvenience. I don't believe one can draw any conclusions from the price,' he added.

With good returns on capital values, Knight Frank director, research and consultancy Nicholas Mak believes that 2008 will see investors continue to look for short term gains. 'A few have already been flipping commercial properties because the profit is too good to pass up,' he added.

Better yields may persuade these investors to hold for longer term rental returns but Mr Mak only expects yields to rise in 2009 or 2010.

For 2008, the tight supply will be mitigated by limited office space completion and new transitional office sites being developed.

Interest in the transitional sites has been encouraging.

CB Richard Ellis executive director (office services) Moray Armstrong said: 'The successful award of the first transitional office parcel at Scotts Road and the swift pre-commitment of the entire block by insurance giant Prudential provides a good gauge of strength of the leasing market in 2007.'

CBRE estimates that Grade A rents will average $18.50 by end-2008 but Mr Armstrong expects the market to be, 'more friendly beyond 2010'.

'This is likely to be factored into property decisions by the corporates,' he added.

By CBRE's analysis, more than 68 per cent (or about 6.2 million sq ft) of the on-coming supply from 2008-2012 is likely to be categorised as Grade A - almost doubling the current Grade A stock.