Category Archives: Rental

Prime office rents: No reprieve in sight for 2017

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.

Singapore’s prime office rents to bottom in 2018: Knight Frank

A FLIGHT-TO-QUALITY among office occupiers is weighing down on rents and occupancies at older Grade A office buildings, where more space will be freed up as these tenants move into new prime offices.

This is giving rise to a “two-tiered performance” in the prime office market, with Grade A offices seeing steeper declines in rents than the so-called “Grade A-plus” offices in the coming quarters. Average office rents will continue to fall before bottoming out in 2018, property consultancy Knight Frank projects.

These Grade A-plus offices refer to newer buildings with better specifications in the prime office market.

With the downside risk in office rents already well-documented ahead of looming completions of massive projects, market observers have started speculating when the bottom will be reached.

But some analysts are expecting the bottom to arrive sooner. DBS Group Research and Religare are tipping a bottom in the second half of 2017; Maybank Kim Eng has projected a bottoming-out of office rents over the next five to six quarters, which suggests Q4 2017 to be the earliest for that to happen.

Knight Frank head of office Calvin Yeo said: “Competition for tenants will be rife, particularly among buildings vying to backfill vacancies from tenants relocating to quality (spaces) over the upcoming quarters.

“Buildings with significant net lettable area (NLA) due for lease renewal from now till 2018 will continue to be under threat of losing tenants to quality buildings,” he added.

During the third quarter, Grade-A office space in the Raffles Place/Marina Bay district saw the largest quarterly decline of 2.9 per cent in monthly gross effective rents (which exclude fit-out period but include rent holidays and service charges) to S$8.20-8.70 per square foot (psf). This is followed by a 2.7 per cent fall for Grade A office spaces in the Marina Centre and Suntec City areas to S$8.10-8.60 psf.

The pursuit of tenants by upcoming office projects in recent quarters has been at the expense of older Grade A buildngs, which will see some tenants moving out soon when those swanky new buildings are completed.

The Business Times had earlier reported a slew of pre-lease commitments inked in new projects. ING, which now occupies 70,000 sq ft at Republic Plaza, is close to securing a similar amount of space at Guoco Tower in Tanjong Pagar Centre. Itochu Singapore, also currently at Republic Plaza, is also taking up 28,000 sq ft at Guoco Tower.

Communications agency Dentsu Aegis Network, which now operates from 77 Robinson Road and has member firms in several other locations, is said to be finalising a lease for about 90,000 sq ft at Guoco Tower.

Cybersecurity company Palo Alto Networks is moving out of its 20,000 sq ft of space at Millennia Towers to take up some 36,000 sq ft at Guoco Tower.

Amadeus, a global IT solutions provider for the travel industry, now occupies over 20,000 sq ft at Parkview Square in North Bridge Road and is said to be taking up a lease for 36,000 sq ft at Guoco Tower.

Swiss private bank Julius Baer, which has inked a lease at close to double-digit rent for a “high density floor” spanning 100,000 sq ft at Marina One, is slated to give up its 72,000 sq ft of space spread over two floors at Asia Square Tower 1.

“Upcoming vacancies in Grade A buildings will increase in the next two years as these tenants relocate, and put pressure on rents as a result,” Mr Yeo said.

A skyscraper index released by Knight Frank this month, which tracks rental performance of commercial buildings over 30 storeys high, showed that prime office rents on the upper floors of Singapore skyscrapers are the eighth most expensive globally.

Asia-Pacific cities saw the highest rental growth, with towers in Shanghai recording the strongest growth in the world of 7.6 per cent in the first half, followed by Sydney, Hong Kong and Taipei. Singapore bucked that trend with a 7 per cent drop.

Subletting of excess space emerging as viable option for firms

Subletting of excess space seems to be emerging as a viable option for tenants to ease their rental burden, as they look to navigate a slowing economy.

With the latest spate of corporate downsizing by financial institutions, some companies may be giving up office space before their leases have expired. For these firms, they may – with the landlord’s approval – look to sublet the space to another firm.

This practice of subletting is typically known as “shadow space”. And in a market already facing pressure from brand new supply coming on stream later this year, such as Guoco Tower, Marina One and Duo, analysts said that such subletting agreements are expected to drive rents down even more.

Mr Desmond Sim, head of research for Singapore and Southeast Asia at CBRE, explained: “Shadow space or secondary stock would put more pressure on rents, because there is the base rent which is already being signed in, so often there will some discount given to attract a sub-tenant to come in and take up this space. So there will be more pressure on the rent.

“On the landlord side, while they are still taking in this base rent, the pressure for them is when this lease of this shadow space expires; it becomes a primary vacancy, so that is also putting some pressure on landlords which want their space to be occupied or leased for the long term.”

Given the depressed sentiments in the office market, potential tenants are in a stronger position to bargain as they will have the pick of where they would like to set up an office.

Experts said landlords will have to be innovative when looking for ways to convince tenants to sign leases.

Said Ms Christine Li, director of Singapore research at Cushman & Wakefield: “Landlords have to be very realistic when they negotiate a renewal, especially with the anchor tenants, because if you look at some of the banks, they can easily take up to one-third of the whole building. So in the event that the tenants decide to relocate, it will be difficult for the landlord to fill up that one-third.

“And landlords will have to settle probably for a smaller tenant or they will have to consider sub-dividing the floor space to accommodate multiple tenants.”

Property consultancy CBRE estimates that between now and 2017, rents are expected to decline by between 18 and 20 per cent. However, it added that the sector could see a recovery in 2018, when new supply drops.

Source : Channel NewsAsia – 3 Mar 2016

Empty offices and falling rents spell further gloom for landlords

Office buildings in the city fringes may be increasingly left vacant as tenants seek the opportunity to move into Grade A premises in the Central Business District (CBD) with rents weakening amid an onslaught of incoming supply.

Pundits, such as Bloomberg columnist Andy Mukherjee, have blamed the weak office market here on a “fundamental miscalculation” on the part of some Singapore developers that had “misplaced optimism” that China would sustain its rapid pace of its growth and pull the rest of Asia along.

With another 7 million square feet of new office space under construction at a time when businesses are holding back expansion plans, rents in Singapore will continue to tumble, analysts warned. Mr Nicholas Mak, executive director at SLP International Property Consultants, has forecast a 10 to 15 per cent fall in rents this year, accelerating from the 6.5 per cent decline last year.

“In the past six months, we have already seen a noticeable slowdown in demand (for offices). The financial services industry has been the main demand driver but that has been the biggest weakness in the last few years,” said Mr Desmond Sim, head of CBRE Research in Singapore and Southeast Asia.

As of the end of last year, Grade A office rents in the CBD cost between S$8.00 and S$12.80 psf, according to a report by property firm Knight Frank Singapore. Those outside the CBD but still within Singapore’s central areas fetched S$7.50 to S$11.90 psf, while rents for offices in the city fringes and suburbs ranged from S$4.40-S$8.10 psf.

Competition for tenants is intensifying, with landlords offering attractive renewal terms to retain existing tenants, said Ms Louise Toovey, director of office agency at Knight Frank.

They are also more willing to extend competitive rental rates to new tenants and offer additional incentives such as a rent-free period within the lease, she added.

The landlords’ willingness to lower rents have already resulted in several flight-to-quality cases. Online travel company Expedia vacated its Hong Kong Street premises for space in the recently-completed South Beach Tower. Immigration services provider Fragomen also moved into South Beach Tower from Haw Par Glass Tower, real estate consultancies Colliers International and Knight Frank reported. But with fewer companies expanding and fewer new companies being set up, this phenomenon comes at the expense of older, less attractive buildings.

“Flight-to-quality will definitely leave voids in other markets. The non-beneficiaries are buildings that are functionally-challenged – smaller floor plates, pencil-thin buildings or very, very aged buildings. This might encourage some sort of regeneration to keep these buildings up-to-scratch. Regeneration could even come in a change of use,” Mr Sim said.

This also means that islandwide office vacancy rates will likely soar past the current 9.5 per cent, as almost 4 million sq ft of the estimated 7 million sq ft of supply is due for completion in the second half of this year.

Signs of rising vacancy are clear, analysts said, citing Tanjong Pagar Centre as an example of slower demand for offices. At 290 metres, the prestigious mixed-use development will be Singapore’s tallest building when completed later this year, but it has secured barely 10 per cent of lease commitments for its 890,000 sq ft of office space. Other major developments set to enter the market include Marina One and DUO Tower, which will add more than 2 million sq ft of office space.

In response to TODAY’s query on the take-up rates of Marina One and DUO, developer M+S would only say that it is seeing “healthy interest” and “various tenants have pre-committed” to both projects.

Property analysts said that the days of quick supply absorption are well over and the current weak market could take as long as five years to recover even as land supply for commercial development has been scaled back.

“It is bad enough. Supply is at record high this year at a time when companies are downsizing and merging,” said Mr Ku Swee Yong, chief executive of property firm Century 21.

“Good or bad market, there should have been a controlled but steady supply of land. Controlled, meaning the developers shouldn’t have been so excessive. The Government may have been excessive in releasing land through GLS (Government Land Sales programme), but its premise is that with more land, there can be better control of prices,” he added.

CIMB Private Banking economist Song Seng Wun said that regardless of macroeconomic conditions, the Government has taken a deliberate approach to have supply exceed potential take-up.

“Today’s demand may be softer than earlier projected, but this is part and parcel of any cyclical market. It’s always difficult to predict,” he said.

Source : Channel NewsAsia – 1 Feb 2016