Tuesday, April 11, 2006

Singapore office market on the upturn

THE office market has moved beyond the recovery phase and into a strengthening mode, a phase that has every sign of being sustainable for a number of years provided Singapore's strong economic performance continues. Occupancy levels are healthy across most segments of the office market and look set to increase off buoyant tenant demand. Rents are poised to rise at a faster pace, reversing almost 10 years of deflationary office rents and prices, save the short-lived spike of dotcom 2000.
 
This seems a far cry from the doom and gloom that hung over the office market only a couple of years back. So what has happened and what makes us so confident in the outlook for this sector? We observed the first signs of the office market stirring in late 2003 when a selected number of CBRE's investment bank clients indicated that they were gearing up for a modest increase in headcount. This was exciting enough after the sector had just endured three desperately thin years of tenant demand, but when we also started to field inquiries from a number of MNCs considering global offshoring projects, recovery of the office market became a distinct possibility.
While the increased demand was led by the financial sector, in particular the growth in private equity and investment banking, the IT sector followed closely behind. In due course occupier expansion become broadbased.
Back in 2003 the average prime office rent was $4 per sq ft per month (equivalent to 1985 levels). Some even thought this might sink lower. So, more than a few eyebrows were raised when we made a call that office rents would rise 50 per cent in the following three years. With the average prime rent at $5.50 psf per month (+38 per cent) currently, the questions now are just how far rents can climb from here, and, will they return to the peak levels of the mid-1990s? It is my view that rents will increase a fair bit further and quite possibly hit their previous peak.
 
Today's rent level is some 13 per cent below the last 10 years' average prime rent and 40 per cent below the 1997 level. It seems there is ample room for further rental growth. Let's have a look at some of the key reasons.
Most importantly, there is extremely limited new office supply in the pipeline. We estimate that there are only 3.55 million sq ft of known new office construction up to 2010. This is only about 41 per cent of what would typically be expected to be completed over this period. And no less than 76 per cent of the total new office supply is tied up in two major developments: One Raffles Quay (ORQ) and the Business and Finance Centre (BFC). The 1.3 million sq ft ORQ is already approaching a staggering 80 per cent pre-commitment in advance of its phased completion in April and October this year while the BFC's 1.4 million sq ft space will not be ready until 2010.
 
If we assume that office demand continues at an average of 1.5 million sq ft per annum (roughly in line with the past 10 years), then there will be a shortfall of around 3.95 million sq ft through to 2010. This will result in occupancy levels islandwide rising above 92 per cent, which happens to be the occupancy levels in the mid-1990s. Of even more significance is that Grade A buildings could have virtually zero vacancy by 2008/09 pending the arrival of the BFC.
 
Another factor which may help maintain rental growth momentum is that Singapore is relatively cheap for office space. Rents can rise significantly without the city becoming uncompetitive. Singapore had slipped to the 63rd position in terms of occupancy costs in our latest Global Market Rents survey. It ranks well below Sydney (44th), Shanghai (43rd in Pudong and 47th in Puxi), Beijing (60th), not to mention Hong Kong which has moved up to eighth position. A multinational that wishes to lease the best office space in Hong Kong Central or in Tokyo will need to budget for 2.5 times and 3.5 times respectively more than the rent required in Singapore.
Taking account of both internal and external office market data, we have raised our market rent forecasts for Singapore for the second time in six months. Barring any external shock, we can see average prime rents increasing by 50 per cent from today's level through to 2008-09. This would deliver average prime rents above $8 psf per month. Don't be surprised, however, if rents start to test the historic peak of $10 psf per month, particularly for the best quality buildings. This is an outlook for about three years hence. The following are a few trends to look out for:
 
Consolidation of prime CBD: One Raffles Quay and the BFC will be the largest concentration of Grade A space. While we expect the volume of large tenant relocations within the CBD to tail off over the next few years due to the absence of any sizeable new developments, the BFC seems well placed to catch the next wave of major tenant movement by the end of the decade.
Renewed interest in business parks: As larger occupiers' premises options become increasingly constrained, it is possible that some will relook the opportunities available in business parks including build-to-suit. Interest could develop further as Singapore's office rent base increases. The rent delta between prime CBD and the business parks is typically 50 to 60 per cent. In a low rent regime, this translates to a saving of just $1.50 to $2.50 psf per month by going to a business park. There have been few takers for this type of move over the past few years when CBD space was cheap and plentiful. Two to three years out, the rationale for decentralisation could be pretty persuasive.
 
More back office set-ups: Contributions will come from two drivers. Firstly, further global offshoring investment coming into Singapore. We are currently advising many multinationals moving operations to Singapore from higher cost locations. To give a sense of scale, these set-ups could bring in up to 2,000 more high-end jobs.
 
Secondly, existing large occupiers in the CBD may need to split operations as they run out of space for front office departments. We have seen a number of banks moving support functions out of town to free up space to accommodate growth of private equity and corporate banking. The implications for the office market include likely increased demand for fringe and decentralised buildings, early pre-commitments to the decentralised developments in the pipeline and more activity in business parks.
 
Land release: This is perhaps the million sq ft question. The planners will be mindful that developers and landlords have had a fairly torrid run since 1997. It is not, therefore, unreasonable for the property sector players to be allowed a period of improved returns. As noted earlier, the office cost base in Singapore can move upwards without impacting the city's competitiveness. To this extent, we would expect the Urban Redevelopment Authority to be prudent in any land release programme. In the short term, the focus might fall on a few decentralised sites.
 
The writer is executive director, office services, CB Richard Ellis

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// posted by Shajahan @ 11:01 AM


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