Yahoo Finance COMMENT: Singapore’s office market is done with WFH
By Andy Mukherjee
(Bloomberg Opinion) — Singapore offices aren’t exactly humming with activity yet, but they have at least stopped hollowing out. Occupancy rates in Suntec City rose to 97.2% in December, the highest in six quarters. Rents are nearly 8% steeper than two years ago when there was no pandemic and no to-let signs in the five-tower, 2.3 million-square-foot complex in the heart of the Asian financial centre.
Yet the stock market continues to be cautious, almost pessimistic. Shares in Suntec Real Estate Investment Trust, the landlord, are still trading 30% below their book value. Some of the bearishness arises from short-term uncertainty: not knowing how high global interest rates will go or if the worst of Covid-19 is indeed over. Another part comes from a decline in the perceived long-term utility of office buildings as valuable assets.
That’s the WFH effect. The financial sector, historically the most important tenant in Singapore’s office market, has also been at the forefront of adopting work-from-home arrangements. DBS Group Holdings Ltd., the city’s largest bank, trimmed its office space requirement, following Citigroup Inc. and Mizuho Financial Group Inc.
Those pressures are now being offset by normalising economic activity and pragmatic policies. After allowing quarantine-free travel from a couple of dozen countries under so-called vaccinated travel lanes, Singapore is committed to reopening its borders more fully this year. That gives it a leg-up over rival Hong Kong, whose zero-infections strategy is isolating it from the world, making it tough for businesses to use the Chinese special administrative region as an Asian hub. Bank of America Corp. is looking at moving an unspecified number of employees from Hong Kong to Singapore, the Financial Times reported Thursday.
Even with flexible work arrangements, more bankers in the city-state should translate to demand for more office space.
Besides, the source of demand is shifting. Finance might soon cease to be biggest driver of Singapore’s office market. According to property broker Jones Lang LaSalle Inc., the technology industry accounted for 22% of the uptake between 2015 and 2020, up from 8% in the previous 10 years. The share of financial services and insurance came down to 30% from 54%.
That trend seems to be picking up: ByteDance Ltd., the Chinese owner of video app TikTok, has moved into One Raffles Quay, a plush address in the central business district, even as UBS Group AG moved out. About 31% of the space leased out last year to new tenants at the Suntec City office complex went to technology, media and telecom firms, according to the full-year results released on Jan. 26 by Suntec REIT, more than the 20% taken up by banking and insurance clients.
Office landlords’ fortunes are on the mend. Suntec REIT posted an 18.2% jump in distributable income from operations last year, after an 11.6% slump in 2020. Still, the prospect of higher interest rates may be making investors worry about capital losses.
Those concerns may be overdone. When the U.S. Federal Funds Rate went up between December 2015 and July 2019, Singapore REITs delivered 33% gains. “A rising rate environment as such is not necessarily bad for the sector’s outlook if it is accompanied by economic growth — this is as earnings growth generally tends to outpace rate hikes,” writes Shekhar Jaiswal, an RHB Bank Bhd. analyst. They’re likely to underperform “when central banks are forced to raise interest rates to tame surges in inflation while economic growth stagnates.”
Growth may indeed slow from last year’s 7.2%, but it’s unlikely to stagnate. The official 2022 forecast is for a “creditable pace” of 3%-to-5% expansion in gross domestic product. As long as monetary tightening — both at home and overseas — doesn’t derail those projections, economic activity should be brisk enough to earn higher rents for Singapore landlords, shielding them from the impact of higher rates.
Limited supply should also help. Assuming there’s no crunch of construction workers, three projects may finish in 2022. In Hong Kong, where more than 10% of Grade-A space is vacant, nine new office properties may add to the glut this year, possibly extending “the decline in major landlords’ potential rental revenue for several years,” according to Bloomberg Intelligence analysts Patrick Wong and Michael Tam.
Before the Covid-19 outbreak, Singapore came up with the idea of remaking its central business district by dismantling the rigid boundaries between spaces where people work, live, shop and dine. As older properties get torn down to make way for integrated, mixed-use developments, displaced commercial establishments will need to find new addresses. That’s one more reason why even with hybrid work becoming permanent, the city’s post-pandemic office market may not be a haunted house.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.
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