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POISED for a GRADUAL RECOVERY Senior Associate Director | Research | Singapore +65 6531 8567 [email protected]

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POISED for a GRADUAL RECOVERY Senior Associate Director | Research | Singapore +65 6531 8567 Shirley.Wong@Colliers.Com COLLIERS QUARTERLY OFFICE | SINGAPORE | RESEARCH | Q4 2020 | 14 JANUARY 2021 Shirley Wong POISED FOR A GRADUAL RECOVERY Senior Associate Director | Research | Singapore +65 6531 8567 [email protected] Tricia Song 2021–25 Director and Head | Research | Insights & Q4 2020 Full Year 2021 Annual Average Singapore > CBD Grade A office showed resilience with +65 6531 8536 Recommendations [email protected] 336,900 sq ft net absorption in 2020 despite CBD Grade A rents declined 2.1% GDP contraction of 5.8%, driven by previous QOQ in Q4 2020 and 5.4%* for Demand flexible workspace commitments. In 2021, -59,600 sq ft 787,900 sq ft 894,000 sq ft the full year to SGD9.57 (USD7.24) we expect technology to drive demand. per sq foot, on weak global > We expect relatively muted CBD Grade A economic conditions. We forecast supply in 2021-2022, with annual expansion rents to grow 5.5% by the end of averaging 2.6% of stock versus 4.7% for the 0 sq ft 783,900 sq ft 883,000 sq ft 2021, on an eventual economic Supply last five years. 2023 should see higher supply rebound and benign supply. at 4.5% of stock. We forecast new demand in 2021 Annual Average to be driven by the technology QOQ / YOY / Growth 2021–25 / End Q4 End 2021 End 2025 sector. Meanwhile, Q4 2020 CBD > CBD Grade A rents declined 2.1% in Q4 2020 Grade A vacancy of 5.2% (+1.8pp 1.0pp-2.1%* +3.7% and 5.4%* for the full year to SGD9.57 5.5% YOY) could tighten over the next (USD7.24) per sq foot. We expect rents to two years on muted supply and Rent rebound 5.5% by end-2021, in line with the SGD9.57 SGD10.09 SGD11.45 demand recovery. (psf pm) GDP growth, as supply stays at benign levels. Capital values declined 3.4%* in > CBD Grade A vacancy rose to 5.2% from 3.4% +0.3pp -0.2pp -0.2pp 2020 to SGD2,436 (USD1,843) per in 2019, partly due to new completions and sq foot as transaction volumes fell partly due to contraction in net demand. We 61% YOY excluding mergers. expect limited supply to keep vacancy rates 5.2% Vacancy 5.0% 4.3% We recommend occupiers to low until 2023’s supply hike. leverage on current market > Capital values declined 1.3% QOQ in Q4 2020 -1.3%* 3.0% +3.0% weakness to lock in leases. and 3.4%* for the full year to SGD2,436 Landlords should redevelop older Capital (USD1,843) per square foot. We expect long Values/ properties into mixed-use term capital value growth to be intact on low SGD2,436 psf SGD2,509 psf SGD2,822 psf Yields interest rates and capital allocation. developments to unlock value. Source: Colliers International. Note: USD1 to SGD1.3221 as of 31 Dec 2020. 1 sq m = 10.76 sq ft. “pp” refers to percentage point. *Adjusted for any change in basket of properties. COLLIERS QUARTERLY OFFICE | SINGAPORE | RESEARCH | Q4 2020 | 14 JANUARY 2021 LEASING MARKET AND RENTS Office rents and vacancy, Q4 2020 Average Gross QOQ YOY Expect rents to rise 5.5% in 2021 Effective Rents Change Change Vacancy CBD Grade A rents declined 5.4%* in 2020 (SGD psf pm) (%) (%) (%) CBD grade A rents fell 2.1% in Q4 2020 and 5.4%* for the full year to SGD9.57 Grade A (Premium Tier) (USD7.24) per sq ft, in line with our forecast. 2020 was a favourable year for Raffles Place / New Downtown 11.28 -3.0% -8.0% 3.2% occupiers, providing them with opportunities to renew leases at lower rents, while landlords are more willing to negotiate and offer higher incentives. Grade A Albeit weak now, market dynamics are conducive for a recovery towards the Raffles Place / New Downtown 9.70 -2.9% -6.7%* 7.6% end of 2021. 1) Oxford Economics forecast a positive GDP growth of 5.6% for Shenton Way / Tanjong Pagar 10.05 -1.1% -4.7%* 8.3% 2021; 2) New office demand driven by the technology sector and an overall business recovery. The recent award of the digital banks licenses could also City Hall 9.93 -1.5% -3.9% 3.7% support demand for office space, while near term decentralization drive is Beach Road / Bugis 8.75 -2.6% -6.7% 2.8% mitigated with the cancellation of the High-Speed Rail project in Jurong; 3) benign supply levels in 2021-2022 (average annual expansion at 2.6% of stock Orchard Road 8.74 -2.4% -4.4% 4.7% versus 4.7% for the last five years); 4) positive net absorption to tighten CBD Grade A Average 9.57 -2.1% -5.4%* 5.2% vacancy before the next supply hike in 2023; 5) CBD stock will likely be further reduced through redevelopment. So far, AXA Tower, Fuji Xerox Towers and City Fringe 7.39 -1.8% -6.4% 4.5% Tower Fifteen have announced redevelopment plans, and we expect more to Suburban 4.95 -0.4% -3.9%* 7.7% jump onto the bandwagon over the next few years. Grade B In 2021, we forecast CBD Grade A rents to rise 5.5% to SGD10.09 (USD7.63) per sq ft. Among the Grade A micro-markets, Shenton Way/Tanjong Pagar has Raffles Place 8.22 -3.1% -7.0% 5.1% the highest potential for rising rents as it is best positioned to benefit from the CBD incentive schemes and undergo rejuvenation. The longer term Greater Shenton Way / Tanjong Pagar 7.77 -2.4% -5.9% 7.4% Southern Waterfront development nearby could further uplift the precinct. Beach Road / Bugis 7.55 -2.6% -5.8% 8.5% CBD Grades A & B gross effective rents Orchard Road 7.91 -3.1% -9.0% 18.0% SGD psf pm CBD Premium & Grade A CBD Grade B $12 CBD Grade B Average 7.86 -2.8% -7.0% 8.4% $11 $10 9.57 City Fringe 6.63 -0.1% -6.2% 7.7% $9 $8 Suburban 4.54 0.0% 0.0% 16.9% $7 7.86 $6 Source: Colliers International. Note: Average gross effective rents are benchmarked to a full-floor space in mid-zone level; conservative figure 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 tending towards lower-end of rental range for a property. Effective rent refers to average rate payable over 2021F 2022F 2023F 2024F 2025F the lease term after accounting for incentives. Source: Colliers International. *Adjusted for any change in basket of properties. 2 COLLIERS QUARTERLY OFFICE | SINGAPORE | RESEARCH | Q4 2020 | 14 JANUARY 2021 We recommend occupiers lock in their leases before rents increase. Larger CBD Grade A net absorption, supply and vacancy occupiers should rationalise their space requirements and alternatively adopt a flex-and-core or split-office strategy. We urge landlords to leverage Million sq ft Net Supply Net Absorption Vacancy Vacancy 2.5 the Urban Redevelopment Authority’s (URA) incentive schemes and redevelop older properties into mixed developments, or actively 10% amalgamate neighboring buildings to unlock the value of their older 1.5 properties. For investors, we recommend older buildings with 5% redevelopment potential and opportunities to increase the Gross Plot Ratio. 0.5 INVESTMENT MARKET -0.5 0% Source: Colliers International A record year for deals driven by mergers Notable office transactions, Q4 2020 Excluding mergers, transaction volume fell 61% YOY in 2020 Price (SGD Price PSF Remaining Property million) NLA (SGD) Micro-market Tenure Total office or mixed office investment volumes grew more than 10 times Capital Tower 1,412 1,922 Shenton Way/ Tanjong Pagar 74 years QOQ to SGD10.3 billion (USD7.8 billion) in Q4 2020, driven by the merger of Asia Square Tower 2 (office) 2,214 2,848 Raffles Place/New Downtown 86 years CapitaLand Commercial Trust and CapitaLand Mall Trust. This brings the full Raffles City Tower (60% stake) 538 2,352 City Hall n.a. year transaction sales volume to SGD13.2 billion (USD10.0 billion, +73% YOY). Excluding all REIT mergers in the year, transaction volume would have Six Battery Road 1,457 2,949 Raffles Place/New Downtown 804 years amounted to only SGD3.0 billion (USD2.3 billion, -60.6% YOY) in 2020. One George Street (50% stake) 579 2,600 Raffles Place/New Downtown 81 years CapitaSpring (45% stake) 687 2,358 Raffles Place/New Downtown 60 years Nonetheless, there were many significant investments made by foreign 21 Collyer Quay 472 2,355 Raffles Place/New Downtown 829 years investors in 2020, some at record prices despite the pandemic (e.g. 50% stake in AXA Tower to Alibaba, 30% stake in TripleOne Somerset sold to CapitaGreen 1,667 2,378 Raffles Place/New Downtown 52 years Shun Tak Holdings, Robinson Point transacted at SGD3,736 (USD2,826) per Keppel Bay Tower 657 1,700 City Fringe n.a. sq ft). These transactions highlight the long-term attractiveness of Singapore Source: Colliers International to foreign investors and appetite for rare freehold buildings. Over the next CBD Grade A capital values & island-wide transaction volumes few years, we remain optimistic for capital market volumes on a favorable SGD psf interest rate outlook and capital allocation to Asia’s key gateway cities. Office / Mixed Devt Sales Transaction Volumes TTM (RHS) SGD million 3,000 CBD Grade A - Average Capital Values (LHS) 14,000 Grade A capital values declined 3.4%* in 2020 12,000 10,000 The average imputed capital value of CBD Grade A office properties declined 2,000 8,000 1.3% QOQ in Q4 2020 and 3.4%* for the full year to SGD2,436 (USD1,843) 6,000 per sq foot along with the rental declines.
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