– CBD Grade A office rental growth of 15% in 2018 was driven by robust demand for prime office space and tightening vacancies
– Colliers projects average CBD Grade A rent to climb by 8% in 2019 amid diminishing supply of new space
– Shenton Way/Tanjong Pagar and Beach Road micro-markets saw the largest office rental increases in 2018
– Transaction volumes improved in Q4 2018; more investors expected to seek core opportunities in a rising rental market
Tightening vacancies drove up prime office rents in Singapore in 2018. Based on Colliers International’s research, average CBD Grade A office rent rose by 2.4% to SGD9.43 per square foot per month (psf pm) from Q3 to Q4 2018, bringing the full year rental growth to 14.9%. This is the fastest annual growth since 2010, where rents rebounded by 22% following the Global Financial Crisis.
The Shenton Way/Tanjong Pargar and Beach Road markets saw the largest rental increases in 2018, driven by the premium new builds in these localities – such as Guoco Tower and Duo – which were completed in 2016 and brought about a re-rating of rents in their respective micro-markets. In Q4 2018, average CBD Grade A rent in Beach Road jumped by 18.6% year-on-year (YOY) to SGD8.52 psf pm, while that of Shenton Way/Tanjong Pagar micro-market climbed 18.4% YOY to SGD9.53 psf pm.
Ms Tricia Song, Head of Research for Singapore, Colliers International, said, “In view of tight vacancy and a muted supply pipeline, we expect the steady upward rental trend to persist over the next two years, with average rents rising an estimated 8% YOY in 2019, and a further 5% YOY over 2020. The supply shortfall over 2019-2021 should keep CBD Grade A vacancy tight, below the 10-year average of 6.2%, even after accounting for the impact of slowing net absorption in 2020 and 2021 in accordance with consensus forecasts of slowing global economic growth.”
Supply & vacancy
During Q4 2018, the CBD Grade A vacancy tightened by 0.2ppt quarter-on-quarter (QOQ) to 5.4% with no new completions and net absorption outstripping supply. For the full year 2018, Colliers estimates net absorption at 1.28 million sq feet (119,000 sq metres) for CBD Grade A office, compared to 663,000 sq feet (611,600 sq metres) of supply (from Frasers Tower).
Over 2019-2021, the CBD Grade A office supply pipeline is expected to taper significantly from the preceding few years, with new supply averaging 614,000 sq feet (57,000 sq meters), or 2% of stock per annum, in contrast to the large supply injection in 2017 (approximately 10% of stock).
Mr Duncan White, Head of Office Services, Colliers International, said, “With limited Premium stock coming online in 2019 and with a lack of larger contiguous space on offer, we advise occupiers to review portfolios early, and consider alternatives including Flex & Core™ strategies, which combine traditional office leases with short-term lease tenures within flexible workspace offerings. Meanwhile, office landlords could be more proactive in engaging occupiers and be more progressive with varied lease structures to retain and attract tenants.”
Investment market and capital values
Rolling 12-month volumes of office and mixed-use commercial transactions rose 25% QOQ to SGD4.79 billion during Q4 2018. This is mainly attributable to several big-ticket deals transacted during the quarter.
Some major prime office transactions in Q4 2018 included 78 Shenton Way and Robinson 77 – both in the Shenton Way/Tanjong Pagar micro-market which is undergoing rejuvenation – that were sold to seasoned real estate funds. Meanwhile, Allianz Real Estate made its maiden Singapore foray, acquiring a 20% stake in Ocean Financial Centre for SGD537.3 million.
These deals brought total office transactions in 2018 to SGD4.8 billion, down 49% from 2017’s SGD9.3 billion which was boosted by the mega deal for Asia Square Tower 2 (SGD2.1 billion) and other large mixed developments.
In Colliers’ view, the Additional Buyer’s Stamp Duty hike on residential properties should continue to fuel a rise in investor interest towards the commercial sector. Investors are expected to seek core opportunities in Singapore amid a rising rental market.
In Q4 2018, the average imputed capital value of CBD Grade A office properties rose 0.9% QOQ and 7.9% YOY to SGD2,424 psf. CBD Grade A implied yields remained flat, ranging between 3.2% and 3.8% on average.
Mr Jerome Wright, Director of Capital Markets & Investment Services at Colliers International, said, “We expect capital values to trail the projected rent growth and hence yields to remain largely stable over 2019-2021. This is mainly due to the hefty weight of global capital directed towards gateway cities. Moreover, the Singapore office market offers favourable fundamentals, given the impending supply shortfall over 2019-2021.”
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