DECENTRALISATION was first mooted in Singapore in the 1991 Concept Plan. A hierarchy of commercial centres ranging from fringe, sub-regional and regional centres fanning out from the Central Area was proposed as a means to bring work closer to home and alleviate congestion in the city centre.
Fast forward 25 years and prime decentralised office stock, which has stagnated at two million sq ft since 2007, constituted just 10 per cent of total CBD prime office stock as of the end of 2016.
This can be attributed partly to the lower supply of land released for office development in the decentralised areas compared to that in the CBD in the last ten years.
In fact, the land supply released via public land sale initiatives, such as the Government Land Sales (GLS) programme for office development in the decentralised area since 2007, would hardly be sufficient to replace the older, obsolete stock, much of which has been demolished or downgraded to Grade B and below.
On the other hand, new CBD Grade A office supply that came on stream between 2007 and 2016 arising from public land sale initiatives almost quadrupled that of the decentralised region.
The continual rejuvenation of some older CBD stock, such as Ocean Financial Centre and OUE Bayfront, further boosted Grade A office supply in the CBD.
As a result, CBD Grade A office stock doubled from 2007 to 2016.
The slower rate of growth in decentralised prime office stock compared to that of the CBD resulted in the tightening of rental gap between the two sub-markets.
While the influx of Grade A office supply in the CBD weighed down on prime rents, the limited supply of Grade A decentralised office space kept the vacancy rate low at 1.6 per cent as of end-2016 and helped rents stay resilient against downward pressure.
As the ratio of decentralised stock to CBD stock tightened from 1:5 in 2007 to only 1:10 by 2016, the rental gap between the two sub-markets narrowed from 56 per cent in 2007 to 34 per cent in 2016. This provided little incentive for occupiers to forgo the convenience and prestige of a CBD location for decentralised space.
The abundance of modern and prestigious office developments with high and efficient specifications in the CBD further drew occupiers into the CBD and away from the decentralised locations where good quality space was limited given the tight vacancy rate of 1.6 per cent as of end-2016.
Perhaps there is a lesson to be learnt from the office market in Hong Kong. There, developers have been building more office developments outside the CBD because of the lack of land. The lack of any substantial rejuvenation of existing buildings in the CBD further accentuated the large disparity in the quantum and quality of decentralised versus CBD office stock. The amount of the former has grown by about 38 per cent over the past ten years, on a square foot basis, while the total of the latter has remained largely stagnant.
The lack of new Grade A office stock in Hong Kong's CBD, coupled with the influx of Chinese firms during the 2013-16 period, drove prime CBD rents skywards.
On the other hand, the adequacy of decentralised stock in supporting demand kept the gap between decentralised and CBD prime rents at a wide margin of 67 per cent as of end-2016. The lack of new CBD prime office stock, high CBD rents and the availability of good quality decentralised office space resulted in a substantial number of occupiers moving out of CBD into decentralised office buildings.
Drawing comparisons between Singapore and Hong Kong, the availability of Grade A office stock (or the lack thereof) in decentralised locations in relation to the CBD has affected the behaviour of tenants and the movement in rents.
In Singapore, the limited rental gap of 34 per cent as of end-2016 between prime CBD and decentralised office rents reduces the motivation for tenants to relocate to decentralised buildings. Moreover, the supply of quality office space in decentralised locations is tight, with the vacancy rate at a low of 1.6 per cent as of December 2016. Should this continue, the rental gap between the two sub-markets could tighten further, discouraging relocation and dampening Singapore's decentralisation efforts.
Any increase in the supply of decentralised office space, while at the same time moderating supply in the CBD, could help to widen the rental gap from the current 34 per cent.
In our view, a rental gap of at least 60 per cent would be needed to provide a sufficient cost-saving incentive for businesses to consider decentralised office locations. This, coupled with space efficiency, modern specifications and the green credentials that come with the new stock, particularly if they are located within or in close proximity to transportation nodes, could tip the balance for corporate occupiers in opting for decentralised over CBD locations for part or all of their business functions and where a CBD address is not of great importance.
The adoption of a mixed-use development format (in particular, office and retail) would further elevate the attractiveness of decentralised offices and provide a win-win formula for all stakeholders. Office and retail uses are complementary as the availability of supporting services and amenities in the retail space would provide convenience for office workers who in turn would form a natural shopper catchment for the retail and F&B businesses.
For developers, mixed-use projects reduce the development and investment risks, while from the planning point of view, the availability of mixed-use developments lowers the propensity to develop a large number of supporting amenities in the nearby vicinity, thereby allowing efficient allocation of land resources.
In conclusion, for decentralisation to reach its full potential, it is necessary for Singapore to increase the supply of such space so that a compelling rental gap can be attained to motivate businesses to relocate. The adoption of the mixed-use development format (e.g. office/retail) and ensuring that they are located within or in close proximity to transportation nodes would further ensure a winning formula.
At the end of the day, the availability of a diverse range of office space and locations at varying price points would be a magnet drawing more businesses to set up in Singapore.
Source: Business Times, 24 Mat 2017