Office segment the star performer but what'll happen when the party ends?


URA's Central Region office price index up 1.6% in Q3, office rental index up 2.6%


THE office segment has emerged as the star of Singapore's property market in terms of prices and rents, going by third-quarter data released by the Urban Redevelopment Authority (view infographic).

The ongoing office rent recovery story, fuelled by tightness of available supply in the short term, has been supporting a steady rise in prices of office space, noted market watchers.

Barring a shock such as recession, the office party should continue next year, given that not much new office completion is expected.

The big question is how the party will end in the second half of 2016 or 2017, when a slew of major office completions are expected.

As Savills Singapore research head Alan Cheong put it: "Are we in the early stages of witnessing a slow-motion train wreck or are things not so negative?"

URA's office price index for the Central Region rose 1.6 per cent quarter-on-quarter in Q3 after staying unchanged in Q2. The office rental index in Central Region rose 2.6 per cent, following a 2.8 per cent increase in Q2.

In contrast, URA's overall private home price index continued its downtrend, easing 0.7 per cent in Q3. Its rental index for private homes also dipped 0.8 per cent.

As for retail space, prices in the Central Region eased 0.2 per cent after slipping 0.3 per cent in Q2, though rents managed to inch up 0.1 per cent in Q3.

Desmond Sim, head, CBRE Research, SE Asia, highlighted that office rent hikes are being fuelled not by firms expanding but more likely from the tightness of available space.

"This limited availability will likely carry through into 2015 but any rental growth will be checked in the face of a large injection of office space at the end of 2016," he said.

JLL national director Ong Teck Hui noted that URA's data showed that the islandwide stock of completed office space contracted by 505,903 square feet in Q3, due to stock withdrawal.

Year to date, the stock has shrunk 355,209 sq ft cumulatively, against a net increase in demand of 839,584 sq ft. As a result, vacancy has dipped to 8.4 per cent at end-Q3 from a high of 10 per cent at end-Q1.

CBRE's Mr Sim said that full-year 2014 net absorption is likely to be around one million sq ft. Last year, the figure was 1.29 million sq ft and in 2012, 1.87 million sq ft.

CBRE executive director (office leasing) Michael Tay acknowledged the substantial 7.4 million sq ft of offices completing in 2014-2017. This will come from big projects such as Guoco Tower, Duo, Marina One and 5 Shenton Way.

"On an average annual basis, though, the supply works out to 1.85 million sq ft, which does not seem scary as historically the market has consistently been able to absorb 1-1.5 million sq ft a year.

"After the completion of South Beach Tower and CapitaGreen in the next few months, there is no major completion until mid-2016."

Mr Tay expects CBRE's gross effective monthly rental for Grade A office space to end the year at an average of S$11.25 per square foot, up 15 per cent for this year, and predicts a further 15.5 per cent increase next year to S$13 psf. However by Q4 2016, the figure will pull back to S$12.75 psf.

"During this period, there will be redevelopment or repositioning of existing office buildings that may lead to tenant relocations.

And the fact that there is not much new supply in 2015 and H1 2016 may lead occupiers to hold back expansion, which may create a bit of pent-up demand going into H2 2016 and 2017. So it is still too still early to call it an oversupply situation."

Also sounding a positive note, Savills' Mr Cheong said: "Singapore's office market is extremely resilient because of the Republic's openness to human and financial capital and the strong adherence to the rule of law."

At JLL, head of investments Karamjit Singh said: "Right now, there are two components to office capital market values: block buyers who pick up an entire building or floors, and the strata office market being pursued by smaller investors and owner occupiers. As long as interest rates remain affordable, this will help owner occupiers choosing to buy rather than to rent their office space."

However, another market watcher sounded a cautionary note: "While rents will still increase, the economy is quite weak, especially the financial sector - the mainstay of CBD office occupiers. Yes, there is some demand coming from Internet and technology companies, but how many Alibabas are there?

"I would be more careful about investing in offices as prices have increased more than rentals; so net yields have become very low. This could be a danger sign, especially when interest rates rise."

Source: Business Times, 25-26 Oct 2014