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Uncertainties and opportunities
Amid economic uncertainties that continue to plague Singapore’s office market, tenants are being presented with opportunities.By Nikki De Guzman The sluggish economic conditions in Singapore and overseas, volatility in commodity and oil prices, and the increasingly cautious outlook among market players are just some of the reasons to which experts are attributing the continuous drop in office rents here.
As more businesses move to consolidate offices in efforts to combat high occupancy costs, the market has seen vacancy rates surge with other developments struggling to secure tenants.
Given the falling rental prices, opportunities to secure prime spaces at relatively lower costs have multiplied, benefitting not only new entrants but also those looking to move to newer office buildings. However, analysts say this is not necessarily a good thing for the sector.
In this issue, we look at the struggling office sector, the uncertainties affecting the market, and the opportunities it presents despite turbulent times. A turbulent year Singapore’s office sector started the year with a continued decline from the previous year as demand for new workspaces slowed, with more businesses consolidating their premises to cut costs.
In the first quarter of the year, prime Grade A office rents fell from the previous quarter, marking the sector’s fourth straight quarter of decline.
“With increasing vacancies, City Hall Grade A offices experienced the steepest drop, falling by 4.1 percent in Q1 2016. This was followed closely by Marina Centre / Suntec Grade A offices, where rents weakened by 4.0 percent over the same period,” Knight Frank said in a report. At the same time, rents of Grade A office space in Shenton Way / Robinson Road / Tanjong Pagar slid by 3.6 percent, while similar properties in Orchard Road posted a dip of 1.7 percent.
In a separate report covering the office sector in the Asia Pacific region, the property consultancy revealed that Singapore recorded the largest drop of 4.4 percent in prime office rents across the region, which it attributed to the “double whammy of significant supply and weak demand”.
Knight Frank also forecasted the decline during Q1 to continue to the following six to 12 months.
And this was true according to the figures recorded for the second three-month period.
Average rents for Raffles Place / Marina Bay Grade A+ office spaces slipped 3.6 percent quarter-on-quarter in Q2 (refer to Figure 1). While the rest of the CBD saw similar declines in rentals, Orchard Grade A office spaces remained the most resilient among all precincts, recording the smallest quarter-on-quarter rental decline of 2.4 percent in Q2 2016.
According to Knight Frank, despite relative resilience in the Orchard area, the Q2 decline still marked the largest decline since Q3 2014, signalling the island-wide weakening in the office leasing market. Opportunity deals However, this downward trend of rents in the second quarter has resulted in an increase in the number of tenants starting to take advantage of the “good deals”.
In a recent report, Knight Frank noted that the increase in leasing activity has been bolstered by flight-to-quality movement, with tenants taking up spaces in new buildings in the CBD as their leases approach expiry.
“The sustained decline in prime office rents offer a value proposition for tenants to take up spaces in Grade A+ buildings with higher quality specifications, floor plate efficiencies and better locations,” said Calvin Yeo, Knight Frank Executive Director and Head for Offices.
“As a result, average vacancy rate for Raffles Place / Marina Bay Grade A+ office buildings fell from 6.3 percent in Q4 2015 to 5.5 percent in Q1 2016, while the traditional Raffles Place / Marina Bay Grade A buildings saw its overall vacancy rate increase from 2.0 percent in Q4 2015 to 2.9 percent in Q1 2016.”
Cushman & Wakefield’s recent office report also highlighted the uptick in office leasing activity, particularly during the second quarter, with some deals already sealed for projects that are yet to be completed over the next few months. These leasing deals include M+S’s Marina One. Earlier in June, the 60:40 joint venture between Malaysia’s Khazanah Nasional and Singapore’s Temasek Holdings announced that the current take-up rate at Marina One Offices is now over 550,000 sq ft, both signed and under documentation. The integrated development is set for completion in 2017.
Meanwhile, Guoco Tower has also seen an increase in the take-up rate in recent months. According to Cushman & Wakefield, technology company SAS is relocating from Twenty Anson to GuocoLand’s upcoming Grade A office block, taking up a 20,000 sq ft floor space there.
Other leasing movements that are said to be in motion, according to market chatter, are Japanese firm Mitsui’s plans to lease about 80,000 sq ft at Asia Square Tower 2, which is said to already be in the advanced stages of negotiations. PwC is also said to be in advanced discussions to move from its namesake building at 8 Cross Street to Marina One’s East Tower.
Despite the increase in leasing activities, CBRE said it should be noted that most of the tenants involved in the improvement of recent leasing transactions are “to relocate from older generation buildings resulting in some secondary vacancies”.
CBRE expects vacancy levels, which in Q2 stood steady at 5.9 percent, to rise over the next few months once these new developments are completed—which collectively offer a significant amount of space available for lease.
“Given these imminent completions, developers have been very proactive in structuring new pre-lease deals as competition to secure tenants has intensified,” it said, adding that existing buildings will likely face further adjustments.”
Outlook As the overall sentiment in the office market here continues to be plagued by the downside factors that have persisted since last year, experts forecast challenging market conditions for the sector.
“The market could find its bottom by the end of 2017 or early 2018,” said Cushman & Wakefield Research director Christine Li, who is just one of many analysts forecasting declines for the office sector here.
Earlier this year, brokerage firm Daiwa Securities said Singapore office rents may decline as much as 25 percent until the end of 2018 from its peak in the first quarter of 2015 amid a cloudy global economic growth forecast and a large supply of prime space entering the market. Daiwa also downgraded office-related real estate investment trusts (REITs) from neutral to negative and lowered all individual stock ratings from hold to underperform.
In a report by Bloomberg, Daiwa analyst David Lum said the brokerage is “concerned that the year-to-date performances (of these REITs) are now at odds with the deteriorating fundamentals of the office sector”.
For the rest of 2016, Li said that rents in the office market could fall a further five percent, after falling about 4.4 percent during the first half of the year.
Type: Office development Developer: M+S Pte Ltd Tenure: 99-year leasehold Nearby Amenities: Telok Ayer Market, Marina Bay Sands, Marina Bay Link Mall Nearest Transport: Downtown, Marina Bay MRT stations Scheduled Completion: 2017 Marina One Offices Maxwell Road Marina One Offices comprises two towers – Marina One East Tower and Marina One West Tower. This is a prime Grade A office development located within the Marina Bay financial district.
Scheduled for completion in 2017, the development will contain approximately 1.88 million sq ft of net lettable area with typical floor plates ranging from 34,000 sq ft to 40,000 sq ft. There will also be two high-density floors of approximately 100,000 sq ft each – the largest prime Grade A office floor plates in Asia. Theses spaces will be located on the 28th and 29th floors of Marina One offices.
Facilities in Marina One’s office component include a 300-pax capacity auditorium with a pre-function area, two 122-person meeting rooms that can be joined together to maximise the capacity, bicycle parking lots and shower facilities.
Located along Maxwell Road, Marina One is easily accessible via the MCE and the CTE. Nearby MRT stations include the Downtown station on the Downtown Line and Marina Bay station on the North-South Line.
Marina One Offices forms part of an integrated development by M+S Pte Ltd, a 60:40 joint venture between Malaysia’s Khazanah Nasional and Singapore’s Temasek Holdings.
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