Savills World Research

Briefing Office sector February 2014

Image: Marina Bay SUMMARY 2013 was a year of recovery for the office leasing market, which recorded improving rents and higher occupancy rates.

 Real economy sectors, such  In Q4/2013, the average rent of  Savills expects the recovery phase as resources, oil and gas, and Savills basket of CBD Grade A office to continue over the coming quarters, professional services companies, buildings stood at S$8.64 per sq with moderate rental growth in CBD continued to account for the largest ft per month, up 1.9% quarter-on- Grade A offices. share of office take-up. quarter (QoQ) and 3.9% year-on-year (YoY). Rents are rising on the back of  The overall vacancy rate of CBD smaller-sized lettings, while rents for “With limited supply, 2014 Grade A offices tracked by Savills large floorplate spaces are still under declined for the fourth consecutive pressure. could well be the year of quarter, from 7.8% at the end of 2012 to 3.4% by the end of Q4/2013. galloping rents.” Alan Cheong,  After a relatively subdued Q3, the Savills Research  Although take-up slowed in Q4 volume of investment activity in the compared with previous quarters in office market soared to S$1.3 billion 2013, the whole year recorded net in the last quarter. Capital values of absorption of 974,000 sq ft, close to Grade A offices edged up 1.1% to the historical average of 1 million sq ft. S$2,780 per sq ft in Q4/2013.

MCI (P) 026/10/2013 Company Reg No. 198703410D savills.com.sg/research 01 Briefing |Singapore office sector February 2014

Market commentary TABLE 1 Although the pace of growth slowed Micro-market Grade A office rents and vacancy rates, slightly coming into the fourth quarter, Singapore’s economy registered a Q4/2013 3.7% YoY increase in 2013, near Location Rent (S$ per sq ft Vacancy rate (%) the top end of the official forecast of per month) between 3.5% and 4.0%. /Marina Bay 9.09 3.5 2013 was a year of recovery for the City Hall 8.73 1.2 Singapore office leasing market, with a broad-based improvement 8.08 4.6 in demand across all sectors. Real economy sectors, such as resources, Tanjong Pagar 7.85 7.7 oil and gas, and professional services Orchard Road 9.30 1.3 companies, continued to account for the largest share of office take-up. Beach Road/Middle Road 6.94 4.0 Encouragingly, we have also seen increased demand from banks and Source: Savills Research & Consultancy financial institutions, although they to focus on the CBD, although some Way area contributed about 32.5% have not yet fully nursed themselves tenants opted for suburban locations, of the total absorption, mainly in Asia back to health post-global financial such as one-north, attracted by lower Square Tower 1. Central locations and crisis. Within this context, demand rents. prestigious addresses have resulted in for smaller spaces (less than 10,000 prime office buildings in Raffles Place sq ft) from real economy companies Taking advantage of limited new supply and Marina Bay being highly sought- continued to dominate the market. By and increasing demand for smaller after by tenants in spite of increasing location, leasing activity has continued spaces, landlords, particularly those of rents. prime-quality office space, have held GRAPH 1 out for higher rents. However, given On the supply side, only one office Net demand, net supply and vacancy the continuing lacklustre performance building was completed in 2013, of the financial sector, landlords have namely Tower 2, which rate of CBD Grade A offices, 2002–2013 encountered resistance from these contributed about 780,000 sq ft of Net Demand (LHS) Net Supply (LHS) Vacancy Rate (RHS) traditional large space occupiers. space to the CBD Grade A market. 4,000 40% Therefore, rents are rising on the back With limited new supply and growing

3,500 35% of smaller-sized lettings, while rents of demand, occupancy levels were driven large floorplate spaces are still under up. The overall vacancy rate of CBD 3,000 30% pressure. Grade A offices tracked by Savills has 2,500 25% declined for the fourth consecutive

2,000 20% After a relatively subdued Q3, the quarter, from 7.8% at the end of 2012 volume of investment activity in the to 3.4% by the end of Q4/2013. In 1,500 15%

'000 sq ft office market soared to S$1.3 billion in the last quarter of 2013, improving 1,000 10% the last quarter. This brought the total occupancy was seen in two micro-

500 5% to S$3.6 billion for the whole of 2013, markets, Raffles Place/Marina Bay down 32.8% from 2012’s S$5.4 billion. and Shenton Way, which increased by 0 0% Compared with a year ago, the number 72 and 76 basis points respectively -500 -5% of office strata-titled sales remained from a quarter ago. Although vacancy healthy, while investment interest rates in other micro-markets inched -1,000 -10% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 in older buildings on the city fringe, up marginally in Q4, most still remain especially those with redevelopment below those of a year ago. Source: Savills Research & Consultancy potential, is growing, as offerings in the GRAPH 2 CBD become limited. Rents and capital values In Q4/2013, the average rent of Savills Price and rental indices of CBD Grade Vacancy rates basket of CBD Grade A office buildings A offices, Q1/2002–Q4/2013 Although take-up slowed in Q4 stood at S$8.64 per sq ft per month, compared with previous quarters in representing a 1.9% increase QoQ. Price Index Rental Index 2013, the whole year recorded net Rental growth has accelerated rapidly 250 absorption of 974,000 sq ft, close to during the quarter, driven by the higher the historical average of 1 million sq rents achieved for smaller spaces, 200 ft. About 58.8% of the space taken- especially in the Grade AAA office up in 2013 was in the Raffles Place/ buildings located in the Marina Bay

150 Marina Bay area, while the Shenton area. Rents in most micro-markets,

TABLE 2 100 Q1/2003 = 100 CBD Grade A office rents and capital values, 2014F

50 % change YoY

0 Rent 5–10

Capital value 0–5 Q1/2002 Q3/2002 Q1/2003 Q3/2003 Q1/2004 Q3/2004 Q1/2005 Q3/2005 Q1/2006 Q3/2006 Q1/2007 Q3/2007 Q1/2008 Q3/2008 Q1/2009 Q3/2009 Q1/2010 Q3/2010 Q1/2011 Q3/2011 Q1/2012 Q3/2012 Q1/2013 Q3/2013

Source: Savills Research & Consultancy Source: Savills Research & Consultancy

savills.com.sg/research 02 Briefing |Singapore office sector February 2014

including Raffles Place/Marina Bay, per sq ft respectively, representing 41st level of Tower Three Shenton Way, Tanjong Pagar and more moderate annual increases of was sold for S$3,000 per sq ft. Later in Beach Road/Middle Road, rose faster 3.1% and 2.7%. November, three levels (25th to 27th) of in Q4 compared with the previous Springleaf Tower were transacted for quarter. This bears out our observation The S$970 million sale of TripleOne S$2,400 per sq ft. that Grade A office rents are in an Somerset in late December was the upswing phase. biggest office investment deal in Capital values of Grade A offices 2013. Located opposite Somerset edged up 1.1% from S$2,750 per sq 2013 saw a turnaround in overall CBD MRT Station, the 17-storey property ft in Q3/2013 to S$2,780 per sq ft in Grade A office rents, with a 3.9% with a balance lease term of about Q4/2013. On a yearly basis, capital growth after a contraction of 4.7% 61 years was sold to a consortium values were up by 9.0% from S$2,550 in 2012. Monthly rents at Grade AAA led by Perennial Real Estate Holdings per sq ft in Q4/2012. Hefty price office buildings surged 8.3% YoY, for S$1,714 per sq ft based on its net tags have outpaced the moderately closing at S$10.83 per sq ft in Q4. For lettable area of around 566,000 sq ft. improving rents, causing yields to Grades AA and A office space, rents The strata sales market saw record compress further in the last few rose to S$9.14 per sq ft and S$8.05 prices set once again. In October, the quarters.

OUTLOOK The prospects for the market

Moving into 2014, Singapore's has encouraged landlords to hold up more seasoned investors who still economic outlook remains positive rents. On the demand side, the hiring prefer this sector, and by and large do and will benefit from the improving outlook remains uncertain over the next not seem to be affected by the total external economic conditions in half-year and companies will continue debt servicing ratio framework. In view the US, Europe and China. The to be conservative in their expansion of the more positive outlook for the future supply pipeline of CBD Grade plans according to the latest surveys. office rental market, we may also see A office space remains relatively Therefore, we expect the office leasing a few more office investment deals. limited in 2014, with only about 1.2 market to be dominated by small However, the pricing gap between million sq ft from CapitaGreen on lettings, with tenants holding the buyers and sellers has widened and Market Street and South Beach negotiating power, as there are plenty yields have compressed, and as such, Tower on Beach Road being of options from pockets of space in transaction activity in 2014 will be scheduled for completion by year’s various buildings. Savills expects the most likely be limited due to the tightly end. Therefore, there are very few recovery phase to continue over the held stocks and the lack of available landlords holding new supply of coming quarters, with moderate rental investment opportunities. The growth in CBD Grade A office space, while growth in the CBD market. capital values is therefore expected to older stock in Raffles Place, Shenton be modest. Way, Tanjong Pagar and City Hall The strata office market will remain are enjoying low vacancy rates. This healthy as there are end users and

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