Grade-A office in 2Q2018 grows at fastest rate in 17 quarters

/ EdgeProp Singapore |

July 30, 2018 7:02 PM SGT

Rentals of office space in Central Region increased by 1.6% q-o-q in 2Q2018, marking its fourth consecutive quarter of growth. This was at a slower pace when compared with 1Q2018, which registered a 2.6% q-o-q increase.

The Singapore office market is becoming a two-tier market, with the focus on Grade-A office properties as companies focus on efficiency, notes CBRE. Office demand continues to be driven by co-working operators, and to a lesser extent, technology firms, adds CBRE.

Fierce competition in the e-commerce and ride-hailing sector has led to rapid expansion. Lazada renewed and expanded its space by 3.6 times in AXA Tower occupying around 109,000 sq ft in total. Indonesian giant Go-Jek plans to recruit ‘hundreds of staff’ in Singapore to support its roll-out in the city-state and the region. This necessitates further expansion of its office space, also in AXA Tower, says Christine Li, Cushman & Wakefield (C&W) senior director of consultancy.

Lazada renewed and expanded its space by 3.6 times in AXA Tower, while Indonesian giant Go-Jek plans to recruit ‘hundreds of staff’ in Singapore to support its roll-out in the city-state and the region, necessitating further expansion of its office space, also in AXA Tower (Credit: Corp Locations)

Multiple co-working spaces in one building

The co-working trend is expected to continue but with a twist: Instead of the current practice of landlords granting an exclusivity clause to serviced office and co-working operators, there could now be multiple operators in the same building. C&W’s Li points to Suntec City, which offers a wide range of serviced office and co-working options from Arcc Offices to Centennial, Regus, Servcorp, Ucommune and WeWork.

According to C&W, Grade A rental growth accelerated to 3.8% in 2Q2018, the fastest pace of growth in 17 quarters since 1Q2014. Office stock increased by 646,000 sq ft in 2Q0218, largely as a result of the completion of Frasers Tower. Despite the increase in stock, island-wide office vacancy rate came off from 12.5% to 12.2%.

Net absorption increased five-fold by 797,000 sq ft in 2Q2018 compared with the increase of 151,000 sq ft in the previous quarter. This has brought the total net demand island-wide for the 1H2018 to 947,000 sq ft, even higher than the 646,000 sq ft for the whole of 2017.

Suntec City offers a wide range of serviced office and co-working options from Arcc Offices to Centennial, Regus, Servcorp, Ucommune and WeWork (Credit: Samuel Isaac Chua/EdgeProp Singapore)

The fairly tight vacancy environment along with a tapering supply pipeline likely encouraged office landlords to continue to press for higher rents as they seek to benefit from the market upswing, says CBRE. “The medium- term rental outlook remains positive especially for the Grade A segment.”

Capital values up 1.9% q-o-q

Confidence in the office market has led investors to snap up office assets at aggressive prices. Capital values of office space in the Central Region rose 1.9% q-o-q in 2Q2018, according to URA price index. In 1Q2018, the corresponding growth was 1.3% q-o-q.

Two en bloc deals in 2Q2018 involved the sale of MYP Plaza for close to $3,000 psf and Twenty Anson for $2,503 psf of net lettable area. At The Octagon, two whole strata floors were sold for $30.3 million ($2,450 psf) in May 2018. This surpassed the previous high of $2,295 psf achieved in Nov 2016.

The 99-year leasehold Springleaf Tower saw a whole strata floor on the 22nd level change hands for $54.2 million ($2,602 psf) in June 2018 – new high, exceeding the $2,566 psf achieved in Aug 2017. A whole strata floor on the 20th level of Samsung Hubg was sold for $46.6 million ($3,550 psf) in April 2018, also above the previous high of $3,501 psf recorded in Dec 2017.

One of the en bloc deals in 2Q2018 involved the sale of Twenty Anson for $2,503 psf of net lettable area (Credit: Samuel Isaac Chua/EdgeProp Singapore)

“Investors’ optimism has been underpinned by the strong market fundamentals of steady demand and limited new supply which should support the continued growth in office rents into the medium term,” says JLL’s Tay.

Recent punitive additional buyer’s stamp duty (ABSD) measures on the residential sector may continue to fuel a shift in investor interest towards the commercial sector, points out C&W’s Li.

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