Savills World Research

Briefi ng Offi ce sector May 2015

Image: Paya Lebar Square, Paya Lebar Road SUMMARY Rental growth has started to taper off in Q1/2015.

Amid economic and business Q1/2015, falling 0.1 of a percentage comes to the fore, may add to greater uncertainties, companies are point (ppt) to 3.6%, while the vacant rental pressures soon, beginning as focusing on cost reduction and the stock stood at 0.96 million sq ft at early as the end of this year. offi ce user market is now dominated the end of March. by fl ight-to-quality or a consolidation to smaller premises rather than In Q1/2015, the average monthly “The return of shadow space by business expansion. rent of CBD Grade A offi ces edged up 0.4% quarter-on-quarter (QoQ) to fi nancial institutions has come In the face of competition S$9.92 per sq ft, while capital values sooner than expected, upsetting from newly-completed and better- of CBD Grade A offi ces stabilised at quality space in both the CBD and S$2,850 per sq ft. the ability of the market to digest decentralised locations, landlords of older CBD buildings are trying to Offi ce tenants in the fi nancial the space in such a short time retain existing tenants to avoid falling sector are acting sooner than expected and therefore compelling us to occupancy. to return surplus space left over from business lines which they have either revise our rental forecast down The overall vacancy rate for exited from or reduced in scope. This the Savills basket of CBD Grade A will increase the shadow space which, year-on-year.” offi ce buildings decreased slightly in if no new market entrant or industry Alan Cheong, Savills Research MCI (P) 042/10/2014 Company Reg No. 198703410D savills.com.sg/research 01 Briefi ng | Singapore offi ce sector May 2015

Market commentary best to retain existing tenants to avoid Vacancy The Ministry of Trade and Industry’s a fall in the occupancy rates of their The overall vacancy rate of Savills advance estimates showed that respective buildings. basket of CBD Grade A offi ce buildings Singapore's economy grew at a steady decreased slightly in Q1/2015, falling pace of 2.1% year-on-year (YoY) in After CapitaGreen at Market Street 0.1of a ppt to 3.6%, while the vacant the fi rst quarter of 2015, unchanged which received its temporary stock stood at 0.96 million sq ft as at from the previous quarter. The growth occupancy permit (TOP) in Q4 last year, end of March. was mainly due to an expansion in the another premier offi ce development, construction sector and the services at Beach Road The increase in vacancy was only seen producing industries, which offset a was completed at the start of 2015. in two sub-markets – Tanjong Pagar contraction in manufacturing. The limited new supply in the CBD pre- and Orchard Road – where it increased 2017 has benefi tted both CapitaGreen by 2.9 ppts and 1.1 ppts respectively, From the Urban Redevelopment and South Beach Tower which saw as the secondary stock vacated in Authority’s Realis records, the offi ce good take-up from tenants seeking some buildings boosted vacancy rates. leasing market remained relatively quality offi ce space with more effi cient In the Tanjong Pagar area for example, stable with a total of 1,160 leases fl oor plates. Besides tenants from Aon moved from Mapletree Anson to signed in the three-month period from the fi nancial, insurance, professional SGX Centre 1 while Shimizu relocated January to March. This represented services and energy sectors, from 78 Tower 1 to a dip of 2.1% YoY from the 1,185 companies from the technology and Aperia at Kallang. recorded in Q1/2014, but a rise of social media sectors also showed 5.0% from the 1,105 a quarter ago. In their strong appetite for such premium Vacancy rates in the other micro- terms of size, most of the deals (1,001 space. For example, Facebook became markets, including Marina Bay, Raffl es or 86.3%) were for premises of 5,000 the anchor tenant at South Beach, Place, Shenton Way and Beach Road, sq ft or less. taking up 70,000 sq ft of space in the recorded marginal declines between 34-storey offi ce tower. At CapitaGreen, 0.3 of a ppt and 1.1 ppts from the Owing to the slow pace of global Twitter has signed up 22,000 sq ft and previous quarter, while City Hall’s economic recovery and transitional Apple has leased 35,000 sq ft with vacancy rate has remained unchanged friction brought on by the domestic options to take up more space. at 1.9% for two consecutive quarters. economic restructuring, business prospects remained modest as in Sales activity, however, was lacklustre By grade, the vacancy rate of the A the previous quarters, with more in Q1/2015. Besides the Chinese New Grade segment inched up 0.4 of a companies focusing on cost reduction. Year period, high capital values with ppt to 3.5% by the end of Q1/2015. In Consequently, the offi ce leasing compressed yields, a recent spike contrast, the vacancy levels of the AAA market continued to be dominated by in interest rates and the lack of new and AA Grade segments dipped by fl ight-to-quality or a consolidation to launches of strata offi ce projects 0.4% and 0.3% respectively. smaller premises rather than business for sale are the reasons behind the expansion. In the face of competition slow market. There were only three Rental and capital from newly-completed and better- big-ticket offi ce transactions in the values quality space in both the CBD and reviewed quarter – AXA Tower (S$1.17 The average monthly rents of CBD decentralised locations, such as billion), the 41st level at Grade A offi ces in Savills basket Jurong East and one-north, landlords Tower One (S$14.5 million) and the continued its upward trend, edging up of older CBD buildings are trying their 8th level at Hub (S$42.6 0.4% from S$9.88 per sq ft in Q4/2014 million). to S$9.92 per sq ft in Q1/2015. Nonetheless, after a strong 14.3% GRAPH 1 growth for the whole of last year, rental Net demand, net supply and vacancy rate of CBD Grade A growth has started to taper off due to offi ces, 2005–Q1/2015 tenants’ resistance to the continued upswing in asking rents, uncertainties Net demand (LHS) Net supply (LHS) Vacancy rate (RHS) about the global economy and infl ux of 4,000 40% substantial amount of secondary and shadow space. 3,500 35%

3,000 30% On a quarterly basis, rents in Marina Bay gained 0.7% to S$13.75 per sq 2,500 25% ft, followed by Raffl es Place which

2,000 20% registered a slight growth of 0.5% to S$10.34 per sq ft, while rents in other 1,500 15% sub-markets remained unchanged sq ft ('000) from last quarter. 1,000 10%

500 5% Capital values of CBD Grade A offi ces in the reviewed quarter stabilised 0 0% at S$2,850 per sq ft. The most -500 -5% notable offi ce investment deal was BlackRock’s sale of AXA Tower, a -1,000 -10% 50-storey offi ce tower with a balance 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Q1/2015 lease term of about 66.5 years. A Source: Savills Research & Consultancy consortium led by Perennial Real

savills.com.sg/research 02 Briefi ng | Singapore offi ce sector May 2015

Estate Holdings Limited paid S$1.17 TABLE 1 billion – S$1,735 per sq ft of net Micro-market Grade A offi ce rents and vacancy rates, Q1/2015 lettable area. On the strata offi ce front, the 41st level at Suntec City Tower One was transacted at S$14.5 million Location Rent Vacancy rate (%) (S$3,009 per sq ft), while the 8th level (S$ per sq ft per month) at was sold for S$42.6 Marina Bay 13.75 5.4 million (S$3,250 per sq ft). Raffl es Place 10.34 2.5 Outlook Shenton Way 8.26 2.0 Events that have transpired at the start of this year have a strong bearing Tanjong Pagar 8.30 9.8 on our outlook for the CBD Grade A City Hall 9.75 1.9 offi ce market. The decisions of quite a number of fi nancial institutions to Orchard Road 10.08 3.0 scale back or exit risk-taking business Beach Road/Middle Road 7.73 3.2 lines came much earlier than expected. More unexpected was the extent of the Source: Savills Research & Consultancy reduction in their spatial requirements. Some have begun the process of GRAPH 2 returning the space to the market and these will, over the course of the Price and rental indices of CBD Grade A offi ces, Q1/2005–Q1/2015 next 24 months, add to the increasing amount of shadow space coming onto Price index Rental index the market from existing Grade AAA 250 offi ces. Taking the new supply entering the market, together with other residual stock from existing Grade A offi ces as 200 well as secondary space vacated by tenant relocations, the CBD Grade A offi ce market may be looking at around 150 5.37 million sq ft in total from Q2/2015 until the end of 2017. The confl uence of 100

decisions by these fi nancial institutions Q1/2003 = 100 has made it much more challenging for the offi ce market to continue its 50 upward momentum. Consequently, we are compelled to revisit our earlier forecast of offi ce rents and make a 0 call that despite rents having risen marginally in Q1/2015, effective offi ce rents are now likely to soften by 3% YoY in the second half of 2015.  Source: Savills Research & Consultancy

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