Sentiment for the office sector remains positive as capital values and rents continue to rise amidst a backdrop of limited supply and higher occupancy rates, according to DTZ. Based on data from URA REALIS, 151 strata-titled offices changed hands in Q2 2014. For the first half of this year, a total of 257 strata-titled offices were transacted. This was 51.6% lower than the 531 units transacted in the same period last year.
Lee Lay Keng, DTZ’s Regional Head (SEA), Research commented: “Notwithstanding, the continued interest in strata-titled office units and enbloc office deals, amidst expectations of further rental increases, helped lift average capital values of office space in Q2. Based on a range basket of existing buildings tracked by DTZ Research, capital values of office space within the Raffles Place and Shenton Way/Robinson Road/Cecil Street areas inched up 0.5% and 0.2% quarter-on-quarter (q-o-q) respectively in Q2.”
Average office rents also rose in Q2, and by a faster pace compared to the growth in capital values, as islandwide occupancy rate increased 0.4 percentage-point q-o-q to 95.0%. This was in spite of a lower net absorption figure of 290,000 sq ft, compared to 322,000 sq ft in Q1 2014, as only orchard gateway was completed in this quarter. This brought the cumulative net absorption for H1 2014 to 612,000 sq ft, still higher than the 545,000 sq ft reported in H1 2013.
Demand in Q2 stemmed mainly from tenants consolidating their operations from various locations or expanding within their existing buildings. These demand sources remained diversified across industries such as social media, pharmaceuticals and technology, as well as secondary financial institutions. For instance, Aon will be re-grouping its operations to SGX Centre in H2, while Jardine Lloyd Thompson will consolidate its operations at CapitaGreen after its completion at the end of the year. Social media firm LinkedIn is moving out of AXA Tower (30,000 sq ft) to take on a larger space at Marina Bay Financial Centre Tower 2 (50,000 sq ft) while Twitter, currently operating out of a serviced office in Samsung Hub, is reportedly looking for a larger and permanent office space. Within the CBD, occupancy rates and rents increased the most in Marina Bay in Q2. The occupancy rate of Marina Bay rose 3.3 percentage-points q-o-q to 91.4%, while average gross rents increased 6.5% q-o-q to $12.25 per sq ft per month. With no new supply in the CBD until the completion of CapitaGreen at the end of this year, leasing interest for Asia Square Tower 2 remains strong. For instance, Vodafone recently signed a lease for 30,000 sq ft at Asia Square Tower 2.
Elsewhere in the CBD, the occupancy rate at Shenton Way/Robinson Rd/Cecil Street declined the most from 97.9% to 94.7%, with average gross rents stagnant q-o-q at $8.00 per sq ft per month. The fall in occupancy was due largely to the significant space vacated by the Singapore Exchange (SGX) from their flagship building. The average occupancy rate in the area, however, is expected to strengthen in H2 as Aon will absorb part of SGX’s vacated space when they relocate. Insurance broker, Willis, will also take up 20,000 sq ft in the same building.
Going forward, an estimated 2.7 million sq ft of office space will be completed between H2 and 2015. This works out to an annual average supply of 1.8 million sq ft, which is in line with the past three-year (2011-2013) annual average demand of about 1.7 million sq ft. Activity in the office market is therefore expected to remain healthy in the near term. In addition, office space at developments due to be completed in H2 has been filling up, with some pre-commitments announced. For instance, CapitaGreen is now 21% pre-committed, while a fund management group and City Serviced Offices were also understood to have signed on for space at South Beach Tower.
Beyond 2015, however, the pipeline supply of office space will reach a new peak of about 3.9 million sq ft in 2016, with about 60% located in the CBD. Major iconic and premium office buildings expected to be completed in 2016 include Marina One, Guoco Tower and Duo Tower. This could exert some downward pressure on office rents going forward until this additional space can be absorbed.
Cheng Siow Ying, Executive Director of Business Space commented: “Notwithstanding, the large supply in 2016 presents an opportunity for occupiers to review and formulate their long-term accommodation strategies. Occupiers exploring relocation and consolidation options could enjoy first-mover advantage should they decide to take up space in the upcoming developments.”
Source: DTZ
