Savills World Research

Briefi ng Offi ce sector November 2017

Image: Collyer Quay SUMMARY Notwithstanding elevated vacancy levels, CBD Grade A offi ce rents are rising in Q3/2017.

Backed by their strong holding ft and no new supply, the vacancy rate transaction values of S$2.48 billion. power and healthy commitment from of Grade A offi ce space in the CBD Capital values of CBD Grade A tenants, landlords of prime new offi ce fell 0.7 of a percentage point (ppt) to offi ces stayed fi rm at S$2,723 per buildings are now confi dent enough 5.8%. sq ft. to increase asking rents, with those owning older buildings, attempting to Average rents of CBD Grade A follow the trend. offi ces increased slightly in Q3/2017 “As the offi ce market becomes after recording no change in the The “fl ight-to-new-projects” theme previous quarter. Rents of such more complex, understanding which dominated the leasing market buildings tracked by Savills edged since the 2H/2015, has gradually how the market structure up 1.0% quarter-on-quarter (QoQ) to morphed from observation to concrete evolves now is more important rental increases. However, tenants will S$8.78 per sq ft in Q3/2017. consider relocating to newer buildings than traditional demand supply only if there are strong push factors. The offi ce investment sales market also showed encouraging analysis.” As at the end of September 2017, results in Q3/2017 with seven Alan Cheong, Savills Research with net take-up at around 197,000 sq deals completed, resulting in total

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Market commentary Q1/2017. Based on the statistics the biggest offi ce investment sales Based on the advance estimates from the Urban Redevelopment deal in Singapore so far this year. from the Ministry of Trade and Authority (URA), there were a total of The transaction total of S$2.094 Industry (MTI), Singapore’s 1,1901 leases that commenced in the billion translates to S$2,689 per sq ft economy expanded 4.6% year- third quarter, a 2.1% increase from a based on 778,719 sq ft net lettable on-year (YoY) in Q3/2017, the quarter ago. space. Separately, CCT divested strongest growth in more than the commercial component at its three years. The robust economy However, the “fl ight-to-new projects” Wilkie Edge to a joint venture of Lian performance was supported mainly theme which dominated the leasing Beng Group and Apricot Capital for by the manufacturing sector which market, since the second half of S$280.0 million. In addition, there 2015, has gradually morphed from were fi ve strata-sale transactions, continued to power ahead with a observation to concrete rental each worth at least S$10 million, in 15.5% YoY growth. Service sector increases. Tenants will now consider Q3/2017, involving strata units at growth also accelerated, growing relocating to newer buildings only if Springleaf Tower, Suntec Towers and by 2.6% YoY in Q3/2017. The there are strong push factors, such Prudential Tower in the CBD. job market also showed further as unreasonably high renewal rents signs of recovery with the overall by existing landlords, big changes to Demand, supply and unemployment rate down slightly their real estate requirements arising vacancy from 2.2% in June to 2.1% in from mergers & acquisition activity Based on Savills estimates, with September. and aging premises at their current tenants moving in newly-completed address. With rents beginning to projects and gradual take-up of In tandem with the broad-based trend up, coupled with limited supply secondary stock, the third quarter economic recovery, the offi ce leasing in the medium term, the forward- saw a net take-up of around 197,000 market begun to come alive in thinking tenants have jettisoned their sq ft Grade A CBD offi ce space. With the past few quarters. Sentiments previous bearish outlook and begun no new supply entering the market, amongst landlords and offi ce early rental renewal negotiations, the occupancy level of CBD Grade marketing professionals have swung even if there is still one or two years A offi ce space improved with the from pessimism to optimism as fears left to run in their lease. vacancy rate dropping 0.7 of a ppt of oversupply began to evaporate. QoQ to 5.8%. Backed by the strong holding power The offi ce investment sales market of landlords and accompanied by also registered good results Rental and capital healthy commitment by tenants, in Q3/2017 with seven deals values landlords of prime new offi ce contributing a total transaction value After the second quarter, where rents buildings have turned bold and of S$2.48 billion. This number was did not change on a QoQ basis, began to raise asking rents. For more than double the S$1.18 billion average rents of overall CBD Grade A landlords of older buildings, they too in a quarter ago. Among these, the offi ces increased in Q3/2017. Rents have tried to follow suit. As a result most notable deal was CapitaLand of such buildings tracked by Savills of these factors, offi ce rents turned Commercial Trust’s (CCT) acquisition edged up 1.0% QoQ from S$8.70 the corner in Q3. At the same time, of Tower 2 (excluding the per sq ft in Q2/2017 to S$8.78 per the number of leasing contracts hotel component) from BlackRock sq ft in Q3/2017. Grade AAA offi ce continued to increase for three Asia Property Fund III, which is also rents recorded the biggest quarterly consecutive quarters starting from 1 Based on data downloaded on 27 October 2017 growth of 2.1%, followed by those of Grade AA and Grade A offi ces, which GRAPH 1 increased marginally by 1.0% and Net demand, net supply and vacancy rate of CBD Grade A 0.6% respectively. offi ces, 2010–Q3/2017 On a location basis, rents were Net demand (LHS) Net supply (LHS) Vacancy rate (RHS) unchanged in the City Hall and 4,000 40% Orchard Road submarkets, while

3,500 35% those in other areas rose slightly from

30% last quarter, with the Beach Road/ 3,000 Middle Road and Marina Bay micro- 25% 2,500 markets topping ranks at 2.7% QoQ 20% and 2.5% QoQ increase respectively. 2,000 15% 1,500 Underpinned by low interest rates sq ft ('000)sq ft 10% and ample liquidity, activity in the 1,000 5% offi ce sales market remained healthy 500 0% in Q3/2017. Capital values of CBD Grade A offi ces stayed fi rm and 0 -5% hovered around S$2,723 per sq ft in -500 -10% the quarter under review.  2010 2011 2012 2013 2014 2015 2016 Q1-Q3 2017 Source: Savills Research & Consultancy

savills.com.sg/research 02 Briefi ng | Singapore offi ce sector November 2017

GRAPH 2 TABLE 1 Price and rental indices of CBD Grade A offi ces, Micro-market Grade A offi ce rents Q1/2010–Q3/2017 and vacancy rates, Q3/2017

Price index Rental index Monthly rent Vacancy rate Location 250 (S$ per sq ft) (%)

Marina Bay 10.32 3.9 200 Raffl es Place 8.90 3.6

150 8.04 4.5

100 Tanjong Pagar 7.78 8.9 Q1/2003 = 100

City Hall 9.08 4.3 50

Orchard Road 9.15 4.1 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Beach Road/Middle Road 7.32 23.7 2010 2011 2012 2013 2014 2015 2016 2017

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

OUTLOOK The prospects for the market

Going by URA’s latest statistics, nine months of this year. This is a explanation to this seemingly bizarre after nine consecutive quarters’ signifi cant difference from the 279,900 rental-vacancy relationship and the decline, the median rent of sq ft for the similar period in 2016 and paradoxical behaviour for demand Category 121offi ce space just a faction of the 10-year average where the set of island-wide demand recovered in Q3/2017. It rose by of 917,100 sq ft for the Q1-Q3 period. does not appear to contain the subset 2.9% QoQ despite vacancy levels The situation is further complicated of CBD Grade A demand. rising even more sharply from when Savills estimates for the net 14.2% in Q2/2017 to 17.7% in take-up for just Grade A CBD offi ces Year-to-date, the high net take- Q3/2017. This unusual situation is for the fi rst nine months of 2017 was up for Grade A CBD offi ce space amplifi ed further when the island- 984,700 sq ft, much higher than the has been due to three kinds of wide net demand for offi ce space island-wide demand of 53,800 sq ft. tenant movements. One is by those was just 53,800 sq ft for the fi rst expanding within their existing Grade

21 Refers to offi ce space in buildings located The offi ce sector has become A CBD building and also by those in core business areas in Downtown Core and extremely complex. However, it is still expanding by moving to other Grade Orchard Planning Area which are relatively modern or recently refurbished, command relatively high possible to identify a trend between A buildings (new builds or otherwise). rentals and have large fl oor plate size and gross the supply and demand to provide an The second is by an infl ow of tenants fl oor area. moving from non-Grade A CBD or non-CBD buildings to Grade A CBD TABLE 3 premises. Thus, over a measured Net take-up and net supply of offi ce space by period in time, although the set CBD location, Q1/2017–Q3/2017 Grade A offi ce space is closed, the tenants can move in (and out) of New supply ('000 sq ft) Net take-up ('000 sq ft) the various sets of offi ce by type Location and location. We see evidence of Q1 Q2 Q3 Total Q1 Q2 Q3 Total such infi ltration to Grade A CBD Downtown Core offi ce space when tenants have -43 990 1,001 1,948 86 323 140 549 Planning Area consolidated their operations into a Orchard -11 0 32 22 -43 0 -32 -75 single address and in the process Planning Area moved parts of their offi ces from Rest of Central -65 -22 -11 -97 0 -258 11 -248 Area ungraded buildings to UIC Building and . Similarly for Duo Fringe Area -54 -161 -65 -280 -108 -108 -75 -291 Tower, we have a pharmaceutical Outside Central 506 11 22 538 0 54 65 118 company that consolidated from three Region locations, two of which are not in Island-wide 334 818 980 2,131 -65 11 108 54 our Grade A basket. Partial evidence of this second action by tenants is Source: URA

savills.com.sg/research 03 Briefi ng | Singapore offi ce sector November 2017

OUTLOOK The prospects for the market

shown when we refer to the net is the “fl ight-to-new-builds” effect that GRAPH 3 take up from URA’s statistics we have monitored for the past few Vacancy rate of offi ce space by that showed a negative take up quarters. of 613,500 sq ft for the Rest of location, Q1/2017–Q3/2017 Central Area, Fringe Area and Aside from the spatial shift in demand Downtown Core Planning Area Orchard Planning Area Orchard Planning Area in the fi rst towards the core new CBD offi ces, on Rest of Central Area Fringe Area Outside Central Region Island-wide nine months of 2017. the supply side, landlords are starting 20% to behave differently from past cycles. Tenants could not all have leaked Landlords of Grade A CBD offi ces 18%

out to Outside Central Region now have much stronger holding 16% because the net demand here was power than they had prior to the just 118,400 sq ft for nine months Global Financial Crisis and they can 14% of this year. Offset, this negative hold out longer for higher rents for the net take-up of 613,500 sq ft, still remaining unlet space. The entrance 12%

results in a net defi cit take up of of companies in the disruptive 10% 495,100 sq ft. business space who have a war chest of cash to burn is adding another 8% This means that demand was slice of demand over and above 6% either extinguished and/or moved fundamental space drivers. This adds Q1/2017 Q2/2017 Q3/2017

to the Downtown Core. That much greater complexity to the offi ce Source: URA demand completely vanished is a market because a signifi cant amount distinct possibility as there was a of demand is now and moving 2018, they will remain elevated. net withdrawal of 376,700 sq ft for forward driven by cash burn business However, rents are expected to the Rest of Central Area and Fringe models rather than by demand from continue rising next year because Area where tenants displaced traditional for profi t companies' spatial not only is there a limited stock of in general didn’t come back to requirements. These, together with new buildings, they are mostly held the market to seek replacement co-working space operators are by strong landlords. Multinational premises, as seen in negative take throwing a spanner into the models companies that need to be in up outside the Downtown Core. developed to predict offi ce space Singapore for various reasons will demand and rents. Therefore, the new Grade A continue to gravitate towards the new offi ce buildings in the CBD are All said, if we limit our analysis only Grade A CBD offi ce buildings. For all vacuuming tenants out of buildings to CBD Grade A offi ces, although these reasons, we are projecting a located outside the Downtown vacancies may trend up until Q4/2017 10% YoY increase in rents for CBD Core area. In simple parlance, this and thereafter improve throughout Grade A offi ces for 2018.

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Christopher J Marriott Marcus Loo Alan Cheong Simon Smith CEO, Southeast Asia Executive Director, Commercial Senior Director, Singapore Senior Director, Asia Pacifi c +65 6415 3888 +65 6415 3893 +65 6415 3641 +852 2842 4573 [email protected] [email protected] [email protected] [email protected]

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