Yahoo Finance Singapore CBD Grade A office rents to see slowest growth in 2020
Singapore CBD Grade A office rents to see slowest growth in four years in 2020
Singapore CBD Grade A office rents rose by 7% YOY in 2019, following a quiet Q4 2019
Colliers Research expects Singapore CBD Grade A office rents to grow by 1% YOY in 2020, slowing down after rising 26% cumulatively over the past three years
Singapore CBD Grade A micro- market in Beach Road/Bugis posted the strongest rental increase in 2019
Flexible workspace and technology sectors to drive Singapore CBD Grade A office demand in 2020, with the arrival of digital banking in Singapore an interesting development to watch
Colliers International today released its latest Quarterly Office Market report which projects that Grade A office rents in Singapore’s central business district (CBD) will likely rise in 2020 – which will make it the fourth straight year of rental increase. However, the pace of rental growth will slow substantially as the weak economic outlook and more cautious market sentiment crimp landlords’ ability to continue to hike rents.
Data analysed by Colliers Research showed that CBD Grade A office rents climbed by 7% year-on-year (YOY) for the whole of 2019 – this follows the 15% increase posted in 2018 and 2.3% growth in 2017. Rental growth is expected to continue in 2020, with Colliers Research forecasting rents to inch up by 1% YOY. However, the anticipation of higher supply of new office space in 2022 could snap the growth streak next year, as rents are projected to decline by 4% YOY in 2021. Singapore is still an attractive occupier market in Colliers’ view; over a five-year period from 2020-2024, average rent is expected to grow 3.3% per annum.
Tricia Song, Head of Research for Singapore at Colliers International, said, “2019 was a year of two halves: H1 2019 saw a steady 5.4% (YOY) rental growth on the back of strong net absorption led by flexible workspace and technology sectors; while H2 2019 witnessed lower net demand from a weaker economic growth, rising vacancy and slowing rental momentum as tenants showed increasing resistance to further rent rise. Some of the concerns around market uncertainties in 2019 will carry into the new year and we expect tenants will remain prudent in their real estate decisions.”
Q4 2019 office market performance
While CBD Grade A office rental growth was flat in Q4 2019 at SGD10.09 per square foot per month (psf pm), Colliers Research noted that rents of Grade B office space had started to decline, slipping by 0.7% quarter-on-quarter (QOQ) to SGD8.47 psf pm – the first quarterly decline in CBD Grade B office rents since Q3 2017.
Broadly, the muted rental movements in Q4 reflected reservation on both ends of the market: the occupiers being more conservative about their space needs due to the subdued economic growth; and landlords being more realistic on asking rents as occupiers face increased cost pressure.
Of the six office micro-markets tracked by Colliers Research, Beach Road/Bugis posted the strongest rental growth (+10.2% YOY) in 2019, as landlords priced in the upcoming rejuvenation in the precinct, as well as the planned completion of Guoco Midtown in 2022 and the Shaw Tower redevelopment in 2023. Raffles Place/New Downtown (Premium) (+8.3% YOY) and Shenton Way/Tanjong Pagar (+8.2% YOY) micro-markets also did well driven by newer buildings.
CBD Grade A vacancy tightened to 3.4% in 2019 from 5.4% in 2018, well below the 10-year average of 6.2%, and Colliers Research expects the limited supply of office space to keep vacancy rates down until the 2022 supply hike.
Q4 2019 investment market
In Q4 2019, office investment sales in Singapore came in at SGD1.1 billion, down sharply by 63% QOQ partly due to the high base effect from a strong Q3 2019. Despite the slower market activity in Q4 2019, transaction volumes jumped by 62% YOY to SGD7.6 billion in 2019 on heightened investors’ interests. Looking ahead, Colliers Research remains optimistic on strong capital market transactions owing to the favorable interest rate outlook and demand-supply dynamics.
Notable office transactions during the quarter included the sale of Bugis Junction Towers for SGD547.5 million, Robinson Centre for SGD340 million, and KH Kea Building for SGD79.3 million.
With optimistic valuations achieved in major transactions in 2019, the average imputed capital value of CBD Grade A office properties rose 3.9% YOY for the full year to SGD2,518 psf. Colliers’ valuation team is of the view that cap rates remained unchanged in Q4 2019. Overall, 2019 saw a cap rate compression of 10-15 bps to range between 3.15% and 3.50% on average.
Outlook
Demand and rental growth momentum have slowed down considerably in the second half of 2019 on weak economic growth and external uncertainties. There was also increased resistance to further rent hikes at the current decade-high rental levels.
Nonetheless, the expected modest pick up in economic activity in 2020 could provide some lift to business sentiment and boost rents by 1%. Meanwhile, new CBD Grade A supply is expected to remain limited, averaging 820,000 sq feet (76,000 sq metres) per annum in 2020-2021 which will keep vacancy tight, well below the 10-year average of 6.2%.
Ms. Song added, “In 2020, we expect the demand for office space to continue to be led by the technology and flexible workspace sectors, albeit at a slower rate. To this end, an interesting development that could support tech sector growth would be the arrival of virtual banking, with the Monetary Authority of Singapore (MAS) set to announce the results of the applications for up to five digital banking licences by mid-2020.”
Rick Thomas, Head of Occupier Services for Singapore at Colliers International, noted, “We believe there are opportunities for occupiers to plan ahead and make their moves this year – be it renewals or relocation – as the office rental growth is likely to ease relative to the stronger increases seen in the past two years. Meanwhile, the next wave of office supply coming in 2022 could trigger ‘flight to efficiency’ as some occupiers may look to relocate from their existing premises to new builds, to enjoy more efficient floor plate, more amenities, and better building specifications. These movements in the market will further create real estate opportunities for occupiers.”
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