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CBD office rents set to rise

After two years of weak demand, office rental growth is poised for recovery, boosted by four factors.

AS business confidence strengthens, a turnaround in office leasing activity in the Central Business District (CBD) is on the horizon.

Prospects for Grade A office rents are looking slightly brighter after two years of weak demand. Gross effective Grade A rents grew by 1.7 per cent in the second quarter of 2017 as multinational companies took over swathes of space in premium buildings in Raffles Place and Marina Bay.

The long-term potential for rents is positive, supported by demand from growth sectors such as co-working and technology, and dwindling business park supply. The widening rental gap with Hong Kong also makes Singapore a much more attractive location for businesses to set up their regional and global hubs.

We are confident of a sustained recovery of office demand and rental growth over the next three years. Below are four reasons why we think office rents are on the rise over the short to medium term.

  • Established multinationals are keeping supply-demand dynamics stable

Major commercial landlords have reported an uptick in demand driven by multinational corporations. Guoco Tower, which was reportedly 18 per cent pre-leased last April, has achieved an astounding 93 per cent occupancy year-to-date. The landlord of the mixed-use integrated development has since revised the asking rent up to the double-digits for the remaining high floors in the building.

Major deals in Marina One include Facebook inking a lease for 320,000 square feet (sq ft), Grab taking up 80,000 sq ft, and Ocean Network Express's lease for 50,000 sq ft. In addition, Macquarie was also reported to be in advanced negotiations for 40,000 sq ft.

Frasers Tower will soon have a new tenant - Microsoft which signed a lease for 125,000 sq ft.

Overall, the net office absorption in the Downtown Core submarket - where the bulk of Singapore's CBD offices are located - amounted to 409,000 sq ft in the first half of 2017 alone, significantly more than the annual average of 341,000 sq ft between 2014 and 2016.

And despite a supply influx totalling 1.2 million sq ft during the second quarter of 2017, the total Grade A CBD vacancy rate rose by less than one percentage point in that period.

All these are clear indications that the underlying demand for office space in Singapore is intact. Over the last three decades, weak office absorption happened only when there was a crisis. The office absorption remained quite stable despite periods of substantial supply completion. The city-state has always had the capacity to absorb supply over time, so long as the overall economy is healthy and improves in a sustainable manner.

  • Co-working and e-commerce innovators are laying the groundwork for growth

There has been significant growth in office demand from the rapidly expanding co-working sector. Based on Cushman & Wakefield research, co-working and serviced office players have taken up close to 400,000 sq ft of office space since the beginning of 2016. This trend is set to grow in the near to medium term, as more international and regional players up their game. Examples of this include the recent acquisition of Spacemob by WeWork and the merger of JustCo and China's naked hub.

According to our estimates, the demand from co-working and serviced office players could take up 10 to 15 per cent of the total office space in terms of square footage in the next two to three years as competition for market share intensifies.

Meanwhile, the battle between technology giants for South-east Asia's consumer market also spells good news for landlords. In June, Chinese e-commerce giant Alibaba raised its stake in Lazada to 83 per cent with an additional US$1 billion investment. A month later, Amazon made its first foray into South-east Asia by launching its Prime Now service in Singapore, taking on local delivery services such as Fairprice Online and Redmart. In the same month, Uber rival Grab also raised US$2 billion from Didi and SoftBank in its bid to defeat Uber in South-east Asia. In fact, SoftBank's pledge to invest US$100 billion in the technology sector means a wave of money is set to pour into tech startups here.

Technology companies already occupy 44 per cent of total office space in Singapore in terms of square footage, and we expect demand to trend upwards in the near to medium term.

  • Business park office supply is maxing out

Given the uncertain macroeconomic environment over the past two years, many corporates have been choosing to take up quality business park space to reduce costs. With the influx of business park space averaging two million sq ft annually, rents were much more affordable and large technology tenants took advantage of the savings. For instance, Google and Apple leased 280,000 sq ft and 215,000 sq ft respectively in Mapletree Business City II and Innovis in Fusionopolis.

During those years, office absorption took a dive while business parks enjoyed healthy takeup from corporate tenants (Chart 1).

That's set to change as there is an acute shortage of business park supply averaging only 0.7 million sq ft annually over the next three years. To put things in perspective, that's only half of the 10-year historical average of 1.4 million sq ft. With such tight supply, we expect more demand from corporates being channelled back to the office sector.

  • Widening rental gap with Hong Kong makes Singapore an attractive hub for MNCs and Chinese businesses

The rental gap between Hong Kong and Singapore has been expanding over the past three years. After adjusting for inflation, Hong Kong's office rental premium over Singapore in US dollar terms reached 191 per cent in the second quarter of this year. The rental gap is in stark contrast to the narrow gap of just 47 per cent in 2003 during the Sars outbreak (Chart 2).

The current rental differential gives Singapore a significant advantage over Hong Kong as a competitive business hub and makes it an increasingly attractive location for multinational corporations to site their regional headquarters.

Hong Kong's office market has in recent years been buoyed by the weight of demand from banks and financial firms from mainland China. It is also seen as a natural base for international banks and financial firms focusing on the Chinese market.

Singapore is fast catching up in this regard. In June, Singapore's Deputy Prime Minister Tharman Shanmugaratnam announced that Singapore and China are working more closely to step up collaboration in five key areas in the financial sector. One key area highlighted by Mr Tharman is expanded project financing for Belt and Road Initiative (BRI)-related infrastructure projects through Singapore. The BRI is an ambitious plan worth approximately US$900 billion on the part of the Chinese government to boost trade and to stimulate growth across Asia and beyond by building massive rails and ports along the "modern Silk Road" trading route. Should the collaboration come to fruition, we will see Singapore benefitting from the growing presence of Chinese banks, further underpinning office space demand.


Office leasing activity is expected to pick up as business sentiment continues to strengthen, with Grade A CBD rents projected to increase by up to 10 per cent in 2018.

A two-tiered office market has emerged with new projects enjoying higher occupancy and rental recovery, while the older and less efficient office buildings are likely to come under pressure in the years ahead as they struggle to backfill the space vacated by tenants relocating to newer developments.

Nevertheless, as there will be a significant reduction in pipeline supply post-2017, the market is expected to experience stronger rental growth in subsequent years on the back of better economic prospects.

Sectors with strong growth potential such as technology, insurance, serviced office and co-working will be key to driving the recovery of the leasing market.

  • June Chua is head of leasing and Christine Li is head of research at Cushman & Wakefield Singapore.

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