Singapore office market poised for steady long-term growth

October 16, 2018 / By  

Office assets in Singapore’s CBD have remained firmly on the radar of investors, who continue to pick up assets at record pricing and compressed yields in 2018.

For instance, Twenty Anson and 55 Market Street were transacted at net property yields of 2.7% and 1.7%, respectively. MYP Plaza is also believed to have changed hands at a sub-2% yield. In the strata-titled market, record pricings were set in at least three developments — The Octagon, Springleaf Tower and Samsung Hub.

Investors’ optimism is mainly driven by the sector’s promising prospects for steady and sustainable growth on the back of an expected low pipeline supply both in the medium and long term.

Medium-term dynamics

Based on known projects, an estimated 3.3 million sq ft of new supply averaging 0.8 million sq ft per annum can be expected over the next four years (2019-2022) in the CBD. This is slightly below the historical ten-year annual average net absorption of 0.9 million sq ft.

Figure 1: Upcoming future supply in the CBD
*Note: Frasers Tower was completed in 2Q18
Source: JLL Research, 3Q18

Given Singapore’s ageing CBD, withdrawal of assets for redevelopment/refurbishment can be expected. Tenants in Chevron House have been served notice and the building will be undergoing refurbishment in 2019. Written permission for the redevelopment of Keppel Towers on Hoe Chiang Road was renewed in 2Q18, suggesting a possibility of its near-term withdrawal from stock. There are also several other owners known to be mulling over the redevelopment of their ageing assets. If these redevelopments materialise, the balance could tip further in favour of demand.

Understandably, the forecast of a slower annual GDP growth of 2-3% and the lack of major demand drivers have led some to argue that future demand could come in lower than the historical average of 0.9 million sq ft per annum. However, the materialisation of redevelopment activities would surely help rebalance supply with demand in the medium term.

Long-term dynamics

Beyond 2022, the rate of increase in Grade A office supply in Singapore’s densely built CBD will hinge on the Government’s land sales programme for Marina Bay — the only greenfield district in the CBD.

In this regard, we expect the government to take a slow-release approach in order to achieve its planning objective of growing commercial nodes outside the CBD, which would bring work closer to home, alleviate congestion and relieve pressure on supporting infrastructure in the CBD.

Coupled with ongoing redevelopment of ageing assets, CBD Grade A office stock can be expected to hold relatively stable in the longer term.

Economic growth, on the other hand, will continue to generate demand for office space. JLL’s forecasting model predicts annual net absorption of Grade A office space in the CBD to average between 0.6 and 0.7 million sq ft in the next ten years. The model takes into consideration exogenous factors such as US and Singapore GDP growth, which are found to be closely correlated to historical net absorption.

In conclusion, barring unforeseen adverse external shocks, the combination of stable CBD Grade A stock and steady demand should pave the way for rents and capital values to chart a path of steady and sustainable growth.

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