Singapore Office Bulletin Q4 2016

Singapore Office Bulletin Q4 2016

Market to remain challenging in 2017, Landlords must work with tenants for mutual success

The office market continued to slip over all four quarter of 2016, extending its decline which, for most market segments and locations, began in the first half of 2015. The already weak global economic growth was coupled with uncertainty caused by the protest vote with Brexit, Trump’s election, and a ‘no’ vote at the Italian referendum, albeit with some bright spots including US’s sustained job growth.

As a result, the market saw overall demand let-up, with businesses rationalising and consolidating, with few new entrants or tenants on expansion mode.

Calvin Yeo, Executive Director and Head, Office Advisory, “Beyond quality and efficient floor plates, building owners can look at offering flexible lease solutions such as a combination of flexible and fixed occupancy arrangements for different business functions, to help occupiers mitigate the increasingly challenging and uncertain business environments compounded by digital disruption.”

Singapore economy to maintain stable slow growth, amid continued uncertainty in the global economy

  • The Singapore economy grew by 1.8% in 2016, according to advance estimates by the Ministry of Trade and Industry (MTI), beating the earlier forecast of 1.0% to 1.5%. Of the goods producing industries, manufacturing grew 2.3% while construction grew 1.3% in the year. Services producing industries saw a relatively slower rate of growth at 0.9%, supported mainly by “other services industries”, transportation & storage, and business services sectors. MTI earlier forecasted economic growth in 2017 at between 1.0% and 3.0%.
  • The US Federal Reserve raised its benchmark interest rate by 0.25% in December, after its economy showed signs of sustained employment growth. The move is likely to raise borrowing costs and dampen investment sentiment. The emphasis of the Trump administration would likely be on economic growth in home markets, which could impact the expansion plans of US businesses overseas.
  • Italy voted “No” in a referendum on constitutional reform, igniting fears of a fresh Eurozone crisis and Italy leaving the European Union. The euro fell to a 20-month low against the dollar on 5 December 2016, amid heightened political and economic uncertainties in the Eurozone.
  • The Chinese economy grew by an annual rate of 6.7% in Q3 2016, matching the pace set in the first two quarters. Although this points towards growth stabilisation in the world’s second-largest economy, uncertainties continue to loom over its slowing credit growth and property market.

Impact of ‘flight to efficiency’ not yet fully felt with physical relocations mostly slated for H1 2017 onwards

  • The flight to Grade A+ buildings in the Raffles Place / Marina Bay district continues to make sense for many businesses, as average rents fell 10.0% over the year. All in all, rents of Grade A+ spaces in the district have fallen 16.4% from the last peak in Q1 2015. Now at sub-$10 psf at $9.40 per square foot per month (psf pm), average rents in Grade A+ offices are now at Grade A office rent levels in H2 2015, presenting a compelling proposition for businesses rationalising their overall business cost and looking to re-balance and re-negotiate their occupancy cost.
  • Similarly, Grade A office space in Raffles Place / Marina Bay declined 10.9% over the year to reach $8.30 psf pm. This reflects the average rent levels of Grade B offices in the first half of 2015, after having fallen 13.3% since the last peak in the first half of 2015. Vacancy rate remains temporarily low at 3.0%, but is expected to see a significant increase by the middle of 2017 as tenants who have pre-leased in other buildings relocate.

Rents of Grade A office space in Shenton Way / Robinson Road / Tanjong Pagar bucked the downward trend; the only segment to see an uptick in the quarter

  • Grade A office space in the cluster grew 1.7% q-o-q, putting a halt to six consecutive quarters of decline in the area. This can be attributed to the strong take-up of office spaces at the recently-completed Guoco Tower.
  • Rents in the area are likely to stay firm with sustained interest in the remaining spaces on the higher floors of Guoco Tower.

Opportune time for prospective returning tenants to the Raffles Place / Marina Bay area

  • The narrowing rental premium of Grade A+/A office in Raffles Place / Marina Bay over other Grade A offices in secondary areas in the city presents a strong value proposition, for tenants who had been crowded out as a result of the rising rents in the area between 2013 and H1 2015, and are considering returning to the CBD.
  • Grade A+/A office rents in Raffles Place / Marina Bay now stand at a premium of only 8.2% or $0.70 psf pm compared to Grade A space in City Hall, compared to a premium of 19.2% or approximately $1.60 psf pm two years ago in the middle of 2014.
  • Compared to Suntec / Marina Centre, rent premium dropped to 9.2% or $0.80 psf pm, as compared to the middle of 2014 where the premium was 14.0% or $1.20 psf pm.
  • Compared to Grade A office space in Orchard, the premium is approximately 9.8% or $0.80 psf pm, as compared to 19.0% or $1.70 psf pm in Q1 2015.

Market Outlook

  • The search for strong and stable locations for business growth and the hunt for capital safe havens will be two key business themes in 2017. With the protest vote seemingly the new world order, uncertainty could retard business activity. Nonetheless, the hunt for profitability in economic centres could benefit cities like Singapore that offer an economically and politically stable location for businesses.
  • Businesses will likely take on a more cautious stance in 2017, as the US Federal Reserve is expected to raise benchmark interest rate three times next year. Companies may, amid uncertainty and falling revenues, pursue further belt-tightening measures to manage business costs.
  • Landlords will need to work closely with tenants in the coming year, understanding their requirements and helping them meet both their business and cost needs, tiding them through the tough economic conditions with win-win lease structures before the climate picks up again.
  • Knight Frank projects that prime office rents will continue to moderate by 6.0% to 9.0% over 2017.
  • The two-tiered performance observed in the prime office market is expected to gather pace, as waves of tenants in older Grade A offices start to relocate to higher quality Grade A+ buildings. It remains to be seen if these hollowed out spaces would be backfilled.
  • Total upcoming office supply is expected to peak in 2017, with approximately 3.7 million sf Gross Floor Area (GFA) or 3.1 million sf of Net Lettable Area (NLA) slated for completion. This includes Marina One, Vision Exchange, GSH Plaza, and V on Shenton.

 

 

 

 

 

About Knight Frank

Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank, together with its US alliance partner, Newmark Grubb Knight Frank, operate from 417 offices, in 58 countries, across six continents and has over 13,000 employees. The Group advises clients ranging from individual owners and buyers to major developers, investors and corporate tenants. For further information about the Company, please visit www.knightfrank.com.

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