Pegging office space investment to high vacancy periods

THE Singapore real estate market has been volatile. Amid the cyclical nature of the market, we looked at data from 2000 to find the best years to buy an office building in Singapore and hold for five years. We found that these periods have generally coincided with periods of high vacancy rates.

In 2001 to 2004 prime office rents fell 42 per cent, before rising 270 per cent in 2005 to 2007, then correcting downwards by 52 per cent in 2008 to 2009. In the last two years, prime office rents fell 18 per cent and JLL expects rents to fall another 10 per cent before recovering in 2017.

Due to the market’s cyclical nature, investment in Singapore office assets at the right time can provide rich returns. In 2002 to 2005, an investor who bought an office building and sold it after five years would have made an average annual return of 18 per cent. In 2009 to 1H2010, an investor doing the same would make an average annual return of 11 per cent.

Based on the current supply pipeline, JLL expects the CBD office vacancy rate to rise to 12.5 per cent in 2017 and stay at around 12.1 per cent in 2018, potentially presenting an opportune time to invest in office assets. Another way to time the market is based on market yield spreads. Counter-intuitively, it has historically been better to buy assets when market yield spreads are narrower, as these coincide with periods of high vacancies and rental declines.

In 2002 to 2004, when vacancy rates were high and rents fell, the spread between prime office yields and 10-year bond yield ranged from 100 bps (basis point) to 140 bps. When the rents recovered, this spread widened to 250bps in 2005-2008. In 2009-1H2010, when the spread narrowed again to 185 bps, it was again a good time to invest in office assets.

In the last two years, the yield spread has narrowed again to 150bps. This may seem tight, but is likely due to the 18 per cent decline in office rents over the period. When occupancy and rents recover over the next five years, it is likely that capital values would follow the same trend.

Structurally, we are also positive about Singapore’s office market outlook. Singapore is situated in the fast-growing South-east Asia region. South-east Asian economies are forecast to grow at 5 per cent annually till 2020, exceeding global growth of 3.5 per cent.

The strongest growth countries are potentially: Vietnam, Philippines and Indonesia. Their growth will support Singapore’s exportable services and enhance the city’s value proposition as a gateway of South-east Asia.

Between 2010 and 2014, Singapore’s services exports recorded robust growth of 8.6 per cent CAGR (compound annual growth rate). Despite the global slowdown in trade in 2015, export growth in Singapore’s financial services, telecommunications, computer and information services sectors stayed resilient. In 2016 to 2020, we expect these exportable services to continue to grow given the rise of the middle class and increased urbanisation in South-east Asia.

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