Iras has just released the official figures for performance of commercial office market in Singapore ending in 2nd quarter 2018. Here’s an overview:
The overall picture is a positive one for office landlords in Singapore with slight drop in vacancy rate as well as continued pickup in both the price index (for buying and selling) as well as rental index. For this article we are more concerned and will take a closer look at the latter, where average rents have increased by 1.6% over the preceding quarter.
We are also more concerned with rents in CBD of Singapore. As evident from the trend line, the office rental market in Singapore’s Central region has passed the doldrums over the last 4 quarters since the lowest point in 2Q 2017. We do see some slight plateauing in the lastest quarter but clearly we are far from the last rental peak of 190 index back in 2015. As URA does not capture the rents of coworking operators, we suspect this plateauing effect we are starting to see from the 2nd half of 2017 could well be due to burgeoning of flexible office space operatings especially in CBD area, where entire floors are rented from building owners at a “discount” from market. With supply taken out from office rental market in bulk, as URA also reported an increase of 74,000 sqm (nett) of occupied office rental space which is a big jump from just 14,000 sqm (nett) in the previous quarter, we would expect the overall supply to continue to fall in the meantime aas well as vacancy rate to continue its slight drop over the next few quarters. See trendline below.
What this means is that tenants who are renewing and coming into the office rental market would expect to pay slightly more on rental reversions with the landlord or to move to a whole new office.
Another factor that will continue to exert upward pressure on rent is the need for REITs building owners to price in higher rental reversions going forward with a rising interest rate. Tenants whose business model are strong and sustainable would do well to lock down longer leases in the current market, but this is not without risk. Coworking space might provide the ideal solution for businesses to scale up or down but with a minimun pax of seats secured on longer leases for a core team of staff.
Office tenants looking to rent can take reference from the psf rentals achieved in 2Q 2018:
Note that URA defines Category 1 office space as those in buildings located in core business areas in Downtown Core and Orchard Planning Area, and which are relatively modern or recently refurbished, command relatively higher rentals and have large floor plate size or gross floor area. This would largely capture all Grade A and Premium office space in the CBD/Orchard. Further URA then lump all other commercial spaces outside of Cat 1 and across the entire island of Singapore as Cat 2.
Office tenants could use the indicative benchmark of approximately 2-3 times the unit psf rent to assess coworking or serviced office operators who needs a much higher margin to provide for office services and renovation and repairs.
This report would not be complete without a look one critiecal factor that could derail the current uptrend in rentals – supply in the pipeline.
With the main bulk (around 200,000 sqm out of total 725,000 sqm under construction or with planning approval granted as at 2Q 2018) of new office rental space to hit the market by 2020, there is a possibility of a softening in rent. Still we expect there could be delays in construction, and the likelihood that many existing office landlords would have stretched rent reversions beyond this point to secure longer leases, that scenario may or may take place. This is especially true in a global economic recovery led by the US in the past one year which may see bustling economic activities and new investments spurring more and more coworking spaces and serviced offices in the coming years. In short, the demand might prove too strong and mop up any new supply quickly, especially for newly-fitted offices.
If you are a small but growing setup with the need to be located close to your customers in Singapore’s CBD, why not consider having the best of both worlds in office rental – with the exclusive branding of your “almost wholly-owned” office unit, yet retain the flexibility of scaling up and adding workstations as and when needed.