Office rents and vacancy rates improving: C&W

20130627-bt-office-space-outlook [SINGAPORE] Led by Marina Bay, the office market is starting to see rents and vacancy rates improve, supported by more broad-based leasing demand.

According to Cushman & Wakefield (C&W), Marina Bay saw Grade A vacancies decline 2.0 percentage points to 3.6 per cent from the first quarter, even as rents rose 10.9 per cent on a quarterly basis.

This led to an increase in average Grade A rents by 4.2 per cent to $9.03 per square foot (psf) per month quarter-on-quarter.

The Shenton Way submarket saw rents rise by 9.5 per cent to $7.64 psf per month, while rents in Raffles Place inched up 0.6 per cent, to $8.82 psf per month. Elsewhere, Orchard Road rents moved up 4.6 per cent to $8.49 while suburban rents rose 1.3 per cent to $5.64 psf per month.

Indeed, positive tenant sentiment and a sound economic outlook have led to space demand outpacing supply, as some occupiers take back space they had previously given up, or space is absorbed by new occupiers.

"(Previously) the market was speculating about amount of shadow space we could potentially have. But in Q2 2013, the volume of shadow space declined to 272,000 sq ft," said Sigrid Zialcita, managing director for C&W's research team in the Asia-Pacific.

Year-to-date, some 451,000 sq ft of space has been absorbed within the core markets, defined as Marina Bay and Raffles Place/Shenton Way.

While this is below the average absorption rate of between 1 million and 1.5 million sq ft seen between 2008 and 2011, it is "very positive" when compared with Hong Kong's absorption rate of 10,000 sq ft year-to-date, said Ms Zialcita.

While the financial sector is still an important driver of activity, the sector is also seeing a larger base of demand drivers such as companies operating in industries including information and communications, finance and insurance and legal services.

"Measured against other comparable markets like Hong Kong, Chennai, or Beijing, this is the reason why absorption has been quicker to pick up in Singapore - because we have other drivers of demand," said Ms Zialcita.

On the other side of the equation is the fact that no new developments have been delivered in the CBD area.

Asia Square Tower 2 is expected to receive its temporary occupation permit (TOP) only in September.

With pre-commitment estimated at 25 per cent, Asia Square Tower 2 will likely raise the market- wide vacancy rate. However, it is unlikely to be permanent given that demand is expected to be stronger in the second half of the year, even as it grows more rapidly next year.

As such, while vacancy rates in the Marina Bay submarket may rise to 11.1 per cent by the end of this year - from 8.5 per cent in 2012 - this is expected to fall to 5.1 per cent in 2014.

Rents on the other hand are projected to hit $11.68 psf per month as at end- 2013, from 2012's rate of $10.50 psf per month.

"The most recent transactions in Marina Bay have achieved rents over $12 psf," said Toby Dodd, country manager, Cushman & Wakefield Singapore. "We expect this trend of rental growth to continue as the Marina Bay offers a new standard of office space. This trend will be further supported by the development of the iconic landmark, Marina One, which is slated for completion in 2016."

The Raffles Place / Shenton Way submarket could see rents increase to $8.67 psf per month as at end-2013, from $8.23 psf per month, as vacancy rate falls from 6.6 per cent in 2012, to 4.7 per cent.

Within the suburban market, vacancy rates are expected to rise from 2.7 per cent in 2012 to 6.0 per cent in 2013, due to notable projects including Jem and Metropolis.

Added Ms Zialcita: "2013 and 2014's vacancy rates, on average, are less than 10 per cent. That is the equilibrium vacancy rate. If you have vacancy at that level, you can sustain high rents."

Separately, investment volume reached $409.68 million this quarter, representing a year-on-year increase of 21 per cent.

As rent recovery occurs, the Grade A office market is likely to outperform other segments, as investors and occupiers see better value at current pricing levels, said C&W.

Among other notable transactions, 25 per cent of Jem's equity interest changed hands for around $27 million from Lend Lease to a new fund called Lend Lease Jem Partners fund. The rest of Jem's equity stake is held by Lend Lease Asia Retail Investment Fund, in which Lend Lease has co-invested.

Source: Business Times, 27 Jun 2013