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Prices of office space increased by 0.9% in 2Q2019, compared with the 3% increase in 1Q2019, according to URA data released on July 26. In 2Q2019, URA’s Office Rental Index for the Central Region rose 1.3% quarter-on-quarter (q-o-q), compared to the 0.6% decline in the previous quarter.
The Office Rental Index for the Fringe Area boosted the overall rental index for the Central Region, rising by 4.5% in 2Q2019, the highest quarterly increase in eight years since 1Q2011, notes Christine Li, head of research, Singapore and Southeast Asia, of Cushman & Wakefield (C&W).
The growth in office rents in the Central Region “came on the back of the continued tightening of supply, as island-wide occupancy rate edged up to 88.5% in 2Q2019 from 88.2% three months ago,” notes Tay Huey Ying, head of research and consultancy, JLL Singapore. In Downtown Core, the occupancy rate “rose to its tightest in three years”, standing at 89% as of the end of 2Q2019, she adds.
The completion of Funan, notes Li, led to the office stock rising by about 75,347 sq ft in 2Q2019. Funan attained a “robust” pre-commitment rate of 98%, and the amount of occupied office space rose by about 376,737 sq ft, she says. According to Li, Funan’s south office block is fully leased to the Attorney-General’s Chambers, Singapore Department of Statistics, and the Smart Nation and Digital Government Office; while tenants in the north block include WeWork, Adidas, and Dutch payment platform Adyen. As a result, the islandwide vacancy rate declined to 11.5% in 2Q2019, from 11.8% as at the end of 1Q2019.
Office absorption will continue to rise in subsequent quarters when 9 Penang Road is completed in 4Q2019, as UBS has pre-leased the entire building, says Li. “This bold move will enable the Swiss bank to consolidate its current operations at One Raffles Quay and Suntec City into a single building with a campus-like environment,” she adds.
The office price index in the Central Region rose for the eighth consecutive quarter, reaching 144.4 in 2Q2019. A number of big ticket transactions during 2Q2019 led to the increase in office capital values, notes Li. For instance, AEW acquired Chevron House for $1.0 billion ($2,739 psf), while Frasers Property divested a 50% stake in Frasers Tower at about $2,869 psf. In the suburbs, 7 & 9 Tampines Grande was transacted at $395.0 million ($1,373 psf).
CBD Premium and Grade A gross effective rents gained momentum and grew 3.0% q-o-q to $9.93 psf per month in 2Q2019, according to Colliers Research. The strong net absorption was once again driven by technology and flexible workspace sectors, as vacancy tightened to 2.9% as at end-June 2019, from 3.9% as at end-March 2019.

Outlook

Office prices are projected to continue rising in the next quarter due to a few deals in the pipeline, says C&W’s Li. For example, Arch Capital Management is undertaking due diligence for the purchase of Anson House at around $210 million. In addition, Gaw Capital Partners and Allianz Real Estate are in advanced negotiations to acquire DUO Tower and DUO Galleria for about $1.6 billion.
Li adds that the unrest in Hong Kong could result in investors turning towards the stable Singapore market instead, leading to a decrease in the cap rate. “However, should the recession scenario materialise in 2020, office prices are expected to feel the impact in tandem with rents,” she says.
For office rents, Colliers forecasts that with a higher base for comparison in 2018, CBD prime rents will likely grow at a slower pace – at about 8% — in 2019. While the rental growth in 1H2019 has reached 5.4%, growth should slow going forward as tenants show resistance to further rent hikes.
Grade A and Premium CBD office vacancy is expected to continue to trend below 6% until 2022, adds Colliers. This is in view of the tight CBD Grade A office supply of 2% of stock per annum over 2019-2021, against 5% for the last five years. This should provide support for further rental growth from 2019 to 2021.
For the rest of 2019 and into 2020, JLL’s Tay expects leasing demand from the financial and insurance, business services and technology sectors to remain steady. Co-working operators are also still on the lookout for strategic places to expand their footprint to gear up for the growing demand for flexible space by enterprises, she adds.
While co-working operators like WeWork are still actively expanding, it “remains to be seen if the co-working segment can continue to thrive in the midst of a downturn”, says C&W’s Li.
Tay’s view is that set against a backdrop of tight vacancy and limited pipeline supply, and barring adverse external shocks and an economic recession, there is “potential for office rents to stay on the growth trajectory over the next 12 to 18 months”, but with a “gentler gradient”.
CBRE’s associate director of research, Catherine He, is less optimistic. “In the wake of heightened economic headwinds, the outlook looks increasingly clouded – although the current supply situation is relatively tight, pre-commitments of pipeline projects have slowed considerably. These factors combined could potentially dampen rental growth prospects over the medium term.”
Business confidence was impacted by the escalation of the US-China trade war and growing concerns over an impending US recession due to the inverted yield curve, notes Li. However, there is market optimism that the Federal Reserve will act to sustain economic growth with rate cuts. She adds: “Nevertheless, should the recession scenario materialise in the coming quarters, office rents are expected to experience a decline in 2020.”
News Source: EdgeProperty Malaysia, 26 July 2019
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