S'pore Still Hot Despite Office Space Crunch

Source : The Business Times, October 9, 2007

Its overall value proposition is what counts ultimately, not just rental costs

ASIA today is different from what it was 10 years ago - all the countries have undergone changes politically, economically and socially. Likewise, Singapore has emerged stronger fundamentally and is now one of Asia's most conducive environments for business and investment, earning accolades for its many endeavours to transform the island state into a bustling metropolis not just for business but also for entertainment, the arts, and other lifestyle attractions.

More efficiency: Rising rentals have forced firms to implement flexible workplace strategies to maximise the use of space

In 2008, Singapore will host the Formula One race, while in 2009 and 2010, world-class integrated resort developments like the Marina Bay Sands and Resorts World Sentosa will open their doors. By 2012, the historic City Hall and the former Supreme Court buildings will become the National Art Gallery.

The Asian office property sector enjoyed strong growth underpinned by the robust economic performance in the region. A high correlation between the economic and office market cycles is evident. Singapore's economy grew by 7.9 per cent in 2006 and is forecast to grow between 5 per cent and 7 per cent in 2007, with the FIRE (Financial, Insurance, Real Estate) sectors being the major growth contributors.

According to Russell Reynolds Associates, 50 per cent and 40 per cent respectively of Europe-based and US-based technology companies locate their Asia-Pacific headquarters here - more so than in any other Asian country.

Due to strong leasing demand, office occupancy continued to soar and in H107, the Singapore office rental index increased by 22.5 per cent, while the office price index grew by 13.5 per cent.

The financial services sector was a key driver for this demand growth, as evidenced by the increased space taken up in the last 18 months by Barclays, Credit Suisse, Merrill Lynch, Scotiabank, Societe Generale, Standard Chartered Bank, and The Royal Bank of Scotland.

In addition to a wave of M&A activity, the increase in demand for finance and business services was also driven by the emerging markets of countries in the region such as China, India and Vietnam, where progressive deregulation of these banking markets opened up new opportunities. As a result, mortgage lending, consumer credit and wealth management activities flourished.

Singapore's office take-up escalated and the market attained a high occupancy of 97 per cent in the Central Business District (CBD). The unrelenting race for space continued to drive rents up in all micro-markets to historic highs. The financial hub of Raffles Place led the rental hikes with a 54 per cent increase in H107 to average $13.10 per square foot per month from $8.50 at end-2006, surpassing the previous peak of $11.25 psf recorded in 1990. For the same period, average monthly rents in Marina Centre increased 48 per cent to $11.80 psf from $8 psf.

Many tenants found their renewal rents had increased by at least two to as much as three times their previous rents. Some professional services groups opted for less costly fringe city locations while those companies that do not require a presence in the city decided it was timely to decentralise. Many industrial and technology-based companies that used to occupy office buildings were also compelled to take the logical step of substituting business park/high-tech industrial options for office space as the rental gap widened.

We also saw an increasing trend of financial institutions separating and locating their backroom operations away from their city offices, a rational strategy given the cost efficiencies and for 'business continuity' reasons.

A number of the banks we spoke to were rather sanguine about the rental hikes as comparatively, prime rents in other Asian financial centres like Tokyo and Hong Kong are still more expensive; for example, Hong Kong's average Grade A rents are about a third higher than Singapore's.

With just 2.18 million square feet of new supply scheduled to be completed between now and 2009, ie less than one million sq ft a year, the tight office situation is expected to persist till 2009. In 2010, 1.8 million sq ft of new supply, mostly Grade A space emanating from the Marina Bay Financial Centre, will enter the market followed by large-scale completions from new Government Land Sales (GLS) of development sites in Marina Bay, as well as the redevelopment of obsolete buildings in the CBD like Ocean Building, from 2011 onwards.

In the interim, the government has introduced some strategies to mitigate the tight supply situation. Several disused state properties were immediately made available for lease via public tender and the first 'transitional office' development site with a 15-year lease at Scotts Road was successfully tendered to provide near-term relief.

In addition, new office redevelopment sites in the CBD and suburban centres like Tampines have been sold or are being fast-tracked for sale under the GLS programme. All the above will provide a supply pipeline of over 12 million sq ft of office space in the medium term.

In addition, there will be potential new supply of business park space at Changi Business Park, Alexandra Business Park and One-North, which will provide alternative space options for businesses that qualify under the zoning criteria.

On the part of corporate occupiers, many have also implemented workplace strategies to maximise their space utilisation in line with today's lifestyle and trends. For example, flexible concepts like 'hot-desking', 'hotelling', or 'work anywhere, anytime' allow staff to opt to work from home or to work part-time, and have contributed to more efficient use of office space.

Notwithstanding the rental trends above, cost of office space is only one aspect of a company's overall costs and should be set against other more important considerations, like market access, business environment and availability of talent, among others. In a nutshell, the real issue for many businesses is a city's or a country's overall 'value proposition'.

There are some pro-business initiatives that the government could adopt to alleviate the current space crunch. Reviewing the business park and industrial use guidelines for greater flexibility or allowing the conversion of well-located, under-utilised industrial premises into offices for back-of-house operations and for SMEs are possibilities. In addition, the development of other non-CBD offices, for example, in the Paya Lebar sub-regional centre, could be expedited in tandem with those in the CBD.

The writer is executive director of business space (office/industrial) at DTZ Debenham Tie Leung (SEA)