COLLIERS QUARTERLY OFFICE | | Q2 2018 | 16 AUGUST 2018

STEADY GAINS ON FIRM FUNDAMENTALS JM Tan | Senior Analyst

Q2 2018 2018F 2018-2022F

Summary/ Full Quarter Full Year Annual Average Recommendations > We believe net absorption will be driven by CBD office rents rose for the financial, professional services, technology fourth consecutive quarter, albeit and flexible workspace firms. 690,000 sq ft 1.5 million sq ft 923,000 sq ft at a moderate clip (+2.6% QOQ) Demand following the rapid recovery since > We expect diminished supply over 2018- Q2 2017. 2020, with annual expansion averaging 2% > Newly completed Frasers of stock. The next major jump in supply (7% 663,000 sq ft 799,000 sq ft 914,000 sq ft Supply Tower drove strong rental of stock) will be in 2021. uplift in Tanjong Pagar as QOQ Change/ YOY Change/ Annual Average Growth/ lease rates scaled well into Quarter-End Year-End End-2022F the double-digits. > CBD Premium & Grade A rents recorded a +2.6% +11.0% +3.7% > Robust transacted deal rise of 7.5% YTD for 2018. We expect full- 1.0pp values signaled bullish year growth to reach 11% and taper down in 2019 (+6%). A slight consolidation is SGD8.82 SGD9.12 SGD9.85 sentiment among landlords Rent and investors. expected in 2020, before rebounding after. > Given tightening vacancy > CBD Premium & Grade A vacancy has fallen -0.3pp -2.9pp -0.1pp (est. sub-5% in 2019-2020F), 2.6ppt since the highest point in Q2 2017, and we advise occupiers to should continue declining until the next supply 5.5% 5.2% 7.7% conduct portfolio planning Vacancy hike in 2021. and lease reviews early.

> For investors, the sector > We anticipate capital values to grow further, in -0.3pp +0.2pp +0.1pp tandem with rents. Yields should remain largely offers attractive income Yields/ flat in the coming quarters, and rise marginally growth and solid demand- Capital after the rental consolidation in 2020. 3.6% 3.6% 3.8% supply fundamentals. Values Source: Colliers International Singapore Research Note: USD1 to SGD1.365 as at 30 June 2018. 1 sq m = 10.764 sq ft. “pp” refers to percentage point. COLLIERS QUARTERLY OFFICE | SINGAPORE | Q2 2018 | 16 AUGUST 2018

LEASING MARKET AND RENTS CBD (Premium, Grade A & Grade B) | Gross Effective Rents $10 Office rents grew at moderate pace as rents consolidate following rapid recovery since mid-2017 $9 8.82

CBD rents increase for the fourth straight quarter, at a relatively $8 pm

moderate pace psf 7.40 Based on Colliers International’s research, CBD Premium and Grade A $7 average gross effective rents saw an increase of +2.6% QOQ to SGD8.82 SGD (USD6.46), marking a slight deceleration as compared to the strong uptick $6 (+4.8% QOQ) in Q1 2018. We view this as a momentary consolidation CBD Premium & Grade A CBD Grade B following the rental market’s rapid recovery totaling +11.0% YOY since Q2 2017. $5 Colliers International forecasts a front-loaded recovery, with rents rising an estimated 10-12% YOY in 2018, and tapering down to 5-7% YOY over 2019. Given that rents have risen some 7.5% YTD, we expect steady rental upticks Source: Colliers International Singapore Research to continue over the remainder of 2018. CBD (Premium & Grade A) | Net Supply, Absorption & Vacancy

Million sq ft Vacancy Falling vacancy rates across CBD Premium and Grade A micro- markets 2.5 12% In Q2 2018, CBD Premium and Grade A vacancy fell 0.3ppt QOQ to 5.5%. All 2.0 10% micro-markets registered slight vacancy declines ranging from 0.4ppt to 8% 1.2ppt. The only exception was the / Tanjong Pagar micro- 1.5 market which saw new Grade A supply being injected during Q2 2018 6% (Frasers Tower), and a corresponding rise in vacancy (+1.7ppt QOQ). 1.0 4% A major by-product of 2017’s large-scale flight to newer CBD developments 0.5 2% (such as Facebook’s move to , Microsoft’s relocation to Frasers Tower), is the steady return of space to the market by vacating occupiers. As 0.0 0% a result, notwithstanding the easing supply pipelines over 2019-2020, we expect vacancy rates to step down gradually as opposed to sharply, as the -0.5 -2% market re-absorbs each round of space being surrendered by vacating Net Supply (LHS) Net Absorption (LHS) Vacancy (RHS) occupiers. Source: Colliers International Singapore Research

2 COLLIERS QUARTERLY OFFICE | SINGAPORE | Q2 2018 | 16 AUGUST 2018

Frasers Tower completion catalyzes major market re- Singapore | Prime Office Rents | Q2 2018 rating for Tanjong Pagar Average Gross QOQ YOY The 663,000 sq ft (61,600 sq m) Frasers Tower came on-stream in the Effective Rents* Change Change Shenton Way / Tanjong Pagar Grade A micro-market during Q2 2018, (SGD psf pm) (%) (%) achieving a pre-commitment rate of 80% as of its completion. Within the Premium same district, UIC Building also recently secured full occupancy (as of 13 August 2018), within a year since its completion. /New Downtown 10.66 1.6% 16.1% Grade A Based on Colliers’ research, Frasers Tower consistently transacted in excess of SGD10.00 (USD7.33) on effective rents. This significantly boosted average Raffles Place/New Downtown 9.18 3.1% 11.4% rents (+5.8% QOQ) in the Shenton Way / Tanjong Pagar micro-market. Shenton Way/Tanjong Pagar 8.92 5.8% 15.4% Frasers Tower’s robust pre-leasing activity – anchored by MNCs such as Microsoft, Total Oil, Arup, Sumitomo Corporation – and following on from City Hall 8.93 0.4% 6.6% ’s strong performance since its completion in 2016, has fueled the rejuvenation of the Tanjong Pagar district. Beach Road 7.78 2.4% 11.1% Orchard Road 8.64 2.5% 8.5% Furthermore, several office properties in the vicinity recently completed major refurbishment works, such as OUE Downtown, and AXA CBD Premium and Grade A 8.82 2.6% 11.0% Tower. These positive drivers have catalyzed a major market re-rating City Fringe 7.28 3.9% 9.1% (+15.4% YOY) for the micro-market. Suburban 4.77 1.7% 7.2%

Singapore | Prime Office Vacancy | Q2 2018 Grade B

Occupied Area Vacant Area 2018-2020F Supply Current Vacancy Raffles Place/New Downtown 7.97 2.6% 7.4% 30 (LHS) (LHS) (LHS) (RHS) 9% Shenton Way/Tanjong Pagar 7.40 2.2% 9.5%

Beach Road 6.36 4.3% 9.8% 20 5.9% 6% 5.5% 4.9% Orchard Road 7.87 2.3% 9.6%

10 3.1% 3.0% 3% CBD Grade B 7.40 2.8% 9.0% Vacancy 1.8%

City Fringe 6.64 2.8% 6.1% NLA million million NLA sqft 0 0% Suburban 3.88 1.3% 6.3% CBD CBD City Fringe City Fringe Suburban Suburban (Premium & (Grade B) (Grade A) (Grade B) (Grade A) (Grade B) *Assuming a full-floor lease on a mid-zone level. Effective rent refers to average rate payable Grade A) over the lease term after including incentives (e.g. rent-free period).

Source: Colliers International Singapore Research Source: Colliers International Singapore Research

3 COLLIERS QUARTERLY OFFICE | SINGAPORE | Q2 2018 | 16 AUGUST 2018 Selected Leasing Transactions | Q2 2018

Stream of anchor tenants filling up PLQ bodes well for cost- Estimated TOP: Q3 2018 effective City Fringe districts Spaces (IWG) Pre-commitments by various MNCs have 52,000sf (New Site) continued building up at the 880,000 sq ft Paya Lebar Quarter Tower 1 (81,800 sq m) Paya Lebar Quarter in Q2 2018, Great Eastern 125,000sf (Relocation) bringing its pre-leased rate to 50% ahead of its McAfee Paya Lebar Quarter Tower 3 9,000sf (Relocation) opening. Major pre-leasing deals include a Novena Square NTUC Income 55,000sf (Relocation) 125,000 sq ft (11,600 sq m) take-up by insurer Paya Lebar Quarter Tower 2 Great Eastern at Tower 3 to house its sales Novena agency function, and a 55,000 sq ft (5,100 sq m) lease by insurance industry peer NTUC Income at Paya Lebar

Tower 2, in a relocation from Harbourfront CBD Estimated TOP: 2019 Centre. IWG-subsidiary Spaces, a flexible Adyen workspace operator rapidly expanding this year, 10,000sf (Relocation) also leased some 52,000 sq ft (4,800 sq m) at Funan

Tower 1. SS&C Fund Services Enterprise Singapore 19,000sf (Relocation) Paya Lebar Quarter Towers 1 to 3 are scheduled North Tower 50,000sf (Relocation) Bugis Junction Towers to be completed by the end of September 2018. Meanwhile, the retail component, PLQ Mall, is Haitong International Securities slated to be completed in Q1 2019. 15,000sf (Relocation) The steady stream of anchor tenants filling up Indeed Recruitment Paya Lebar Quarter signals robust interest in this 11,000sf (Relocation) Ocean Financial Centre up-and-coming City Fringe district by both public and private sector occupiers.

The strong office rental upturn over 2018-2019 Braemar Shipping Services 12,000sf (Relocation) should accentuate the attractiveness of 80 Robinson decentralized micro-markets, and prompt Aetna occupiers to consider City Fringe Grade A 8,000sf (Relocation) 80 Robinson developments that can bridge the gap between cost and value. Allianz 50,000sf (New Lease) Legend: ASB Tower Company Name Estimated TOP: 2020 Net Lettable Area of Lease (Relocation / Expansion / Renewal) Address or Building Name Source: Colliers International Singapore Research 4 Estimated TOP (for buildings under construction) COLLIERS QUARTERLY OFFICE | SINGAPORE | Q2 2018 | 16 AUGUST 2018

INVESTMENT MARKET AND Notable Office Transactions | Q2 2018 Transacted Price Price PSF NLA Property Micro-market CAPITAL VALUES (SGD million) (SGD) Shenton Way / Twenty Anson 516.0 2,503 CBD capital values see strong growth on bullish Tanjong Pagar Shenton Way / transactions MYP Plaza 247.0 3,000 Tanjong Pagar Higher volumes across en-bloc and strata office sales Springleaf Tower Shenton Way / 54.2 2,602 Based on Colliers International’s research, total office sales transactions (on (strata) Tanjong Pagar a rolling 12 months basis) were up +8.7% QOQ to SGD3.79 billion (USD2.78 Raffles Place / 46.6 3,550 billion) in Q2 2018. This is the second sequential uptick in transaction (strata, whole floor) New Downtown volumes after four quarters of decline, marking heightened investor interest in the office sector. Recent punitive measures on the residential sector, such Source: Colliers International Singapore Research the Additional Buyer’s Stamp Duty hike, may continue to fuel a rise in investor interest towards the commercial sector. CBD Capital Values & Total Investment Sales Volumes En-bloc deals in Tanjong Pagar were the highlight of the quarter, with MYP Plaza being transacted at SGD247 million (USD181 million), and Twenty SGD psf SGD million Singapore Office - Sales Transaction Volumes TTM (RHS) Anson changing hands shortly after for SGD516 million (USD378 million). 3,000 12,000 CBD Premium & Grade A Office - Average Capital Values (LHS) Urban Redevelopment Authority REALIS data as of 27 July 2018 indicated a total of 108 strata deals were closed during Q2 2018, marking another 10,000 triple-digit sales quarter following the 126 deals transacted in Q4 2017. This re-affirmed rising interest in the strata office market. 2,000 8,000

6,000 CBD capital values registered 3.0% QOQ jump in Q2 2018 In Q2 2018, the average imputed capital values of CBD Premium and Grade 1,000 4,000 A office properties rose by a sizable margin (+3.0% QOQ) to SGD2,350 (USD1,722) psf. This was driven by a strong leasing market, and 2,000 benchmarked to transactions during Q2 done at robust pricing levels, which

signaled bullish sentiment among landlords and investors. 0 0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 CBD Premium and Grade A office yields remained largely stable in Q2 2018, 2007 ranging between 3.3% and 3.9% on average. Yields should remain largely *Valuation-based methodology is used to derive capital values. Investment sales only include transactions over flat over 2018-19, as Singapore remains attractively defensive in an SGD5 million. “TTM” refers to trailing 12 months. increasingly volatile global landscape. We may see marginal yield expansion Source: Colliers International Singapore Research from 2021 onwards after the rental consolidation in 2020. 5 Primary Author: For further information, please contact:

JM Tan Tricia Song Senior Analyst | Research | Singapore Director and Head | Research | Singapore +65 6531 8533 +65 6531 8536 [email protected] [email protected]

Duncan White Executive Director and Head | Office Services | Singapore +65 6531 8684 [email protected]

Govinda Singh Executive Director | Consulting, Valuation & Advisory Services | Singapore +65 6531 8566 [email protected]

Tang Wei Leng Managing Director | Singapore +65 6531 8688 [email protected]

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