Guoco Midtown's flexible leases may help draw tenants

Developer GuocoLand is going all out to woo tenants for the $2.4 billion mixed-use Guoco Midtown project in Beach Road, which will be completed in 2022.

The attractions include a 40m swimming pool and a circuit track, but its tweak to the traditional leasing concept is what may just tip the office market battle in its favour.

Tenants are usually locked into a certain square footage of office space over a period of five years, for example.

But at Midtown, 15 per cent of the office net lettable area has been set aside for adaptable spaces.

Businesses can choose to expand or contract their teams without moving or renovating their main offices during the lease.

"In one aspect, it's a bold move, but it's also an offensive move," said GuocoLand Singapore group managing director Cheng Hsing Yao.

He told The Straits Times on Monday: "We are not just competing among landlords but with operators that offer flexibility."

Mr Cheng was referring to co-working companies, which have seen tremendous growth recently.

A Colliers International study last month found that the flexible workspace sector made up 45 per cent of prime-grade office net absorption last year.

Much of the growth is a reaction to the rigidity of leasing terms as landlords aim to secure rental stability, added Mr Cheng.

This will not be developers' first attempt to meet the challenge posed by co-working spaces.

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Mapletree, Keppel Land and Lendlease have their own co-working brands. A CapitaLand joint venture has acquired a stake in a co-working business, while City Developments runs a flexible workspace with a co-working operator.

Real estate professor Sing Tien Foo from the National University of Singapore thinks more flexible space in the market is a big plus, as it allows tenants to better plan resources in line with market cycles.

He also expects GuocoLand's move to create competition for co-working space providers.

Co-working giants WeWork and JustCo, which each have at least 10 locations here, declined to comment.

Prof Sing believes more developers will follow suit to offer more flexibility in their leasing terms, which is good news for tenants.

"In the past, firms expanding their businesses may have to take up new office space in some other buildings to accommodate new operations and staff.

"This will increase the fixed costs for the firms, having multiple sets of overheads in different locations."

He said landlords may have more to lose in such a case, as the landlord-tenant relationship becomes "a more collaborative and risk-sharing partnership arrangement".

Ms Jenny Ling, director of office services at Colliers International, warned of "white elephant" space: "One potential drawback could be that the landlord runs the risk of having vacant space within its development if there is no actual demand for the flexible space."

Mr Cheng said GuocoLand is guarding against rental volatility by ensuring tenants are from different sectors. He added that 15 per cent of net lettable area for flexible contracts is still manageable.

CBRE Singapore managing director Moray Armstrong said there will likely be similar lease models in the market in future, where core space will be offered at a lower cost, while a premium will be charged for flexibility, similar to how airline customers pay higher prices for a ticket that can be changed.

The office rental market's outlook is positive. Mr Armstrong said grade-A space has seen "strong occupier interest in quality buildings".

"From now through 2022, Singapore's office supply pipeline appears commensurate with the expected level of demand."

Source: Straits Times, 25 May 2019