Prime office rents: No reprieve in sight for 2017

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OUTLOOK 2017

Prime office rents: No reprieve in sight for 2017

Analysts expect rental rates to drop by up to 10 per cent next year but capital values may still hold up

Friday, December 23, 2016

by Lynette Khoo

[email protected]

@LynetteKhooBT


THE "flight-to-new projects" - a term used by the office leasing sector to describe the trend of tenants swarming into swanky new office projects - is set to continue next year as companies capitalise on softening rents to upgrade their working spaces.

This merry-go-round, however, is causing pain to landlords of older buildings in the Central Business District (CBD). Based on analysts' projections, overall prime CBD office rents may fall by up to 10 per cent next year.

But capital values may still hold up amid keen interest for office assets from private capital and the infrequency in office transactions in the tightly held sector.

Said Cushman & Wakefield research director Christine Li: "If the current global macroeconomic and local micro-market dynamics continue to prevail, average office rentals are expected to soften in the short term due to supply pressures with DUO Tower, 5 Shenton Way (UIC Building) and Marina One completing over the next six months or so."

Overall gross effective rents of CBD Grade-A office are expected to drop by up to 5 per cent next year, after an estimated 8.4 per cent decline to around S$8.50 per square foot (psf) per month this year, Ms Li said.

Savills Singapore is expecting a rental decline of about 10 per cent next year for the CBD Grade-A offices that it tracks, which cover those with multinational tenants and floor plates of at least 10,000 sq ft per floor, after an estimated 5 per cent drop in rents this year to S$8.85 psf per month; CBRE is projecting a 5-10 per cent fall in Grade-A office rents in "CBD Core" in 2017.

Consultancies derive these estimates by tracking a basket of prime CBD offices - each varying from one firm to another. JLL, which tracks investment-grade assets in the CBD, is expecting a smaller 6.6 per cent drop in rents next year as the new supply is gradually absorbed, after a 9.9 per cent fall in 2016.

The office rental index of the Urban Redevelopment Authority (URA) for the Central Region (a wider region that includes fringe areas outside the central area) registered a 6.6 per cent drop over the first three quarters of this year, after a 6.5 per cent drop for the whole of last year. It was 13.2 per cent below the last peak in Q1 2015. Office prices in the same region slipped a smaller 2.2 per cent over the first three quarters this year.

Net take-up of office space in Downtown Core (covers CBD, City Hall, Bugis, and Marina Centre) tracked by the URA during the first three quarters - going by change in occupied space - was nearly 183,000 sq ft, a 69 per cent drop from the year-ago period; the historical average from 2011 to 2015 was around 940,000 sq ft. There is typically a lag from lease commencement to the time tenants move into the new premises.

Savills Singapore research head Alan Cheong believes that annual net take-up of CBD Grade-A office may drop to around 500,000 sq ft in the next five years unless new growth drivers step up fast to fill the gap left by beleaguered industries.

Already, the office leasing market this year has been largely driven by relocations rather than new leases. The former made up 63 per cent of all office leases inked to-date, from 37 per cent last year, based on Cushman & Wakefield's analysis.

JLL head of research for South-east Asia Chua Yang Liang noted that as pre-leasing activity for the new supply such as Marina One, DUO Tower, and UIC Building started around 2015 and 2016, landlords of existing developments are under pressure to keep existing tenants, let alone attract new ones, and this pressure will persist into 2017.

Guoco Tower, which received temporary occupation permit (TOP) in September, hit 85 per cent in occupancy rate for signed leases and those under advanced negotiations. It is said to be bucking the market trend, with asking rents inching above S$10 psf per month in some cases as the landlord GuocoLand fills up the higher floors.

DUO Tower and Marina One, both developed by M+S, are said to have both reached over 30 per cent in pre-lease commitments for office space, according to brokers.

Among the latest relocation leases, BP is said to be moving to Marina One, where it is taking up 70,000 sq ft and letting go of a similar amount of space at Keppel Bay Tower.

Over at 5 Shenton Way, the former UIC Building has secured serviced office provider JustOffice and Japanese shipping group Mitsui OSK Lines, which are taking 40,000 sq ft and 68,000 sq ft respectively.

Based on Savills' estimate, from Q4 2016 to 2018, around 926,000 sq ft of CBD Grade-A "secondary space" will be freed up by relocating tenants. Together with the available secondary space of 305,000 sq ft carried over from the previous periods, there will be a total of some 1.23 million sq ft of secondary space to be absorbed.

Close to 3 million sq ft in CBD office gross floor area (GFA) is slated to come onstream next year, after some 2.3 million sq ft of office GFA was completed this year, according to Knight Frank.

The relocation story is expected to continue unfolding next year as the upcoming Frasers Tower at Cecil Street is ramping up interest ahead of its completion in 2018 while Marina One and DUO Tower are still filling up their remaining space, said its head of office Calvin Yeo.

Knight Frank is guiding for a 6-9 per cent rental fall for Grade A and Grade A-plus offices in Raffles Place and Marina Bay office precinct next year, following a 10.5 per cent drop in gross effective rents to S$8.87 psf per month this year.

Most analysts believe that any rebound in office rents will come only in 2018. How soon office rents will turn the corner will depend on when net office demand picks up, said DBS vice-president for group equity research Derek Tan. He is projecting a 5-10 per cent drop in office rents in 2017 as net demand stays flat or marginally positive as companies move from older offices to newer ones.

Maybank Kim Eng analyst Derrick Heng said he sees a 5.6 per cent drop in Grade-A office rents next year on the back of rising vacancies before a slight rebound of 2.4 per cent in 2018. But ample liquidity in the market and keen interest in office buildings should keep capitalisation rates or the rate of return on the property tight.

Capital value estimates for CBD Grade-A office still fall within the S$2,300-2,700 psf range for next year. Judging from the recent enthusiastic bidding of the Central Boulevard "white" site in the government land sale programme and the sale of prime buildings such as Asia Square Tower 1 and 77 Robinson Road, institutional investors are confident of the long term fundamentals in the Singapore office market, Dr Chua said, projecting a 4.3 per cent slide in capital values next year.

According to Mr Tan of DBS, the average 3-3.2 per cent capitalisation rates in office transactions - versus the 3.75-4 per cent used by valuers in deriving capital values for most office landlords - suggests that capital values should remain stable.

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'New' office leases make up only 10% of the total this year: Cushman

Tech firms' share of all Singapore office leases signed this year dives to 14% from 33%; finance's share dips to 24%

Friday, December 23, 2016

by Lynette Khoo

[email protected]

@LynetteKhooBT


AS YET another sign of tough times facing businesses, new office leases this year - by companies that previously did not have a presence here or were not in the building where the new lease is inked - made up only 10 per cent of all office leases inked this year, down from 20 per cent in 2015.

Relocation leases accounted for a significant 63 per cent of the leases, while the balance 27 per cent are renewal leases, based on Cushman & Wakefield's lease profile analysis.

Its research director Christine Li noted that the stark drop in new leases this year coincided with a cautious business mood as the economy battles headwinds in the banking, oil, and commodities sectors.

Savills Singapore research head Alan Cheong flagged that the technology sector, while still growing rapidly, is unable to make up for the shrinking of office space by troubled sectors. "With a glacial pace of growth anticipated for 2016-2017, net new demand in the near term will be weak," he said.

Going by the lease profile this year, signs of growth tapering off in the technology sector have emerged.

Technology companies' share of the office leases inked this year dived to 14 per cent from 33 per cent last year as fewer large-scale tech companies were expanding; the share of finance companies slipped to 24 per cent this year from 36 per cent, while the share of professional/business services firms surged to 17 per cent from 5 per cent as many of these firms are relocating to new office buildings.

Another area of concern is that more than half of the new leases this year were supported by serviced office and co-working players, particularly in the new office developments, Ms Li noted.

These included Regus' taking up of 12,940 square feet of space in DUO Tower, 20,000 sq ft in Guoco Tower, and 25,000 sq ft at 410 North Bridge Road (Cosmic Insurance Building). JustGroup is occupying some 40,000 sq ft at the former UIC Building for serviced offices and 34,000 sq ft at Marina One for co-working space. The Working Capitol said this month that it is taking up about 55,000 sq ft across 11 floors at 140 Robinson Road - this deal is not included in the Cushman & Wakefield study.

CBRE executive director for office services Michael Tay noted that the full potential of co-working space remains unclear but "with everyone jumping into it, there is always be a concern that there will be a consolidation at some point".

Noting that the qualities of co-working operators are varied, ranging from some providing a holistic startup community and support services to those that only sell membership for the use of space, Mr Tay said he expects to see mid to long-term consolidation in this sector. The TMT (technology, media and telecommunications) sector may also be primed for some short-term consolidation.

But with quality office space commanding a smaller rental premium this year than before, many office occupiers were prompted to capitalise on a soft rental market to move to better buildings in a "flight-to-quality".

Some 77 per cent of the relocating tenants signed leases with higher rents on a per square foot (psf) basis, while some 21 per cent of these tenants signed leases with lower rents. About 2 per cent of the tenants signed leases at the same rents as before.

Cushman & Wakefield estimates that a majority of relocating tenants had in 2015 inked leases with rents that were up to S$5.50 psf per month higher than what they were paying before; for the leases signed this year, most relocating tenants have to pay only up to S$2 psf per month more at the new premises.

Ms Li noted that such rental premium would have ranged from S$3-4 psf per month - usually for the movement from Grade-B or C buildings to Grade A-plus buildings - in a landlord's market.

DBS vice-president for group equity research Derek Tan felt that some tenants may be upgrading to a better location as their renovation costs and fit-outs in existing premises are fully depreciated. They may also be motivated to do so in a bid to attract talent as the millennial workers seem to prefer prestigious office addresses and funky office spaces.

Possibly due to softening rents and an anticipation of rents bottoming out in the future, most office tenants are taking up more space as they signed relocation leases.

Among such leases, some 79 per cent showed an expansion of space requirements, while 13 per cent involved space contraction; the remaining 8 per cent opted for the same amount of space in the new location they are moving into.

Consequently, there was a net increase of 205,000 sq ft of space requirement among tenants that occupy at least 5,000 sq ft, according to Cushman & Wakefield. On average, such tenants took up 8,200 sq ft more space when they signed relocation leases this year, compared to those that took up 6,300 sq ft more space on average last year.

Explaining why a majority of relocating tenants are expanding their spaces, Knight Frank head of office Calvin Yeo said many relocate because they need more space in anticipation of future business activities but are unable to find that additional space in their existing buildings.

Still, with many of them moving into buildings with larger floor plates and higher efficiency, the increase in space requirements would be lower than if they had remained in their existing buildings, he added.

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Government trims marginally industrial land supply for first half of 2017

It is releasing six sites on Confirmed List and five on Reserve List under IGLS programme

Saturday, December 24, 2016

by Lynette Khoo

[email protected]

@LynetteKhooBT


IN what is seen as a mild trimming of industrial land supply in a weak market, the government is releasing six sites on the Confirmed List and five sites on the Reserve List under the Industrial Government Land Sales (IGLS) programme for the first half of 2017 spanning 11.25 hectares.

The six sites on the Confirmed List can potentially yield 656,167 square feet in gross floor area (GFA) based on their plot ratios, after the government offered seven Confirmed List sites that can yield 705,466 square feet in H2 2016 IGLS.

But in ensuring continued land supply for industrialists, all six sites are zoned Business-2 for heavier and more pollutive industrial use, each with a tenure of 20 years.

This is the third time in a row in the IGLS that all sites on the Confirmed List have tenures of 20 years, market watchers observed. It is generally deemed unfeasible to turn a site smaller than one hectare and with tenure of less than 30 years into a strata development and sell individual units, they say.

Three bigger sites with 30-year leasehold that can be turned into multiple-user developments are still available but these are under the Reserve List - a list where sites are triggered for tender only when an interested party submits an application with a minimum price that is acceptable to the government.

Said Knight Frank executive director and head of industrial Tan Boon Leong: "The government has taken into consideration the weak market for industrial by not releasing more sites on the Confirmed List and having more sites for end-users than for developers to strata-title and sell."

Market watchers note that while the government is cautious not to aggravate the already weak industrial property market, it is still trying to keep costs low for end-users. Cushman & Wakefield research director Christine Li noted that despite the slowdown in manufacturing activity, the industrial GFA under the Confirmed List for the next six months is trimmed by only 7 per cent. This ensures adequate supply for industrialists, who may need their own industrial space to get ready for an upturn once the global economy is on a stronger footing, she said.

Under the Confirmed List, four are located at Tuas South Link, have a gross plot ratio (GPR) of 1.4 and an average plot size of 0.47 ha. A 0.58-ha plot is located in Tampines North Drive 3 and the other 0.8-ha site is at Jalan Lam Huat - both with a GPR of 2.5.

Mr Tan noted that this is the first time that the government is offering an industrial site at Jalan Lam Huat under the IGLS programme. The last time an industrial site was sold in this area was under a private deal in 2012 when City Developments and a Hong Leong Group company sold their nearly 500,000-sq-ft freehold industrial land for S$240 million to buyers linked to BS Capital.

Under the Reserve List, three sites with 30-year tenures were carried over from the H2 2016 IGLS. Only one site is zoned Business-1 for non-pollutive light industrial use, which is a 1.6-ha site in Woodlands Height with a GPR of 2.5.

Consultants note that the likelihood of interested parties triggering reserve sites for sale is pretty low.

With many companies restructuring or consolidating, the marginal decrease in industrial land supply and not putting any B1 sites on the Confirmed List will give the market more time to absorb the existing supply of industrial space, said SLP International executive director Nicholas Mak.

"Similar to the H2 2016 IGLS programme, the government did not offer any (Confirmed List) site larger than one hectare that are meant for multiple-user industrial development. This indicates that the government could be wary of the large upcoming supply of new industrial space amounting to 27.6 million sq ft, that would be completed in the next three years," Mr Mak added. "Half of this upcoming supply would be available next year. This could push the vacancy rate to as high as 12 per cent if the economy does not recover next year."