New Reporter
12-04-24, 11:46
Are Singapore’s prime office buildings overpriced in offering 3 per cent yield?
Leslie Yee
Apr 8, 2024
LAST week, OCBC confirmed that it is exploring redeveloping its Chulia Street and Church Street property in the Central Business District (CBD).
Perhaps, OCBC is encouraged to consider redevelopment, which will involve the bank’s headquarters building, because of the positive picture for prime office towers here.
Since Covid-related movement restrictions were lifted, many knowledge workers here are back to working largely out of the physical office.
Unlike office towers in many other cities, rentals and capital values of Singapore’s office buildings have been resilient. For 2023, the Urban Redevelopment Authority’s office rental index climbed 13.1 per cent after expanding 11.7 per cent in 2022.
https://i.imgur.com/32KaQ4G.png
Research by JLL showed that monthly gross effective rent for CBD Grade A office space rose 1.3 per cent quarter on quarter to around S$11.42 per square foot in Q1 – the highest since Q4 2008.
According to Knight Frank Singapore, office rents in the Raffles Place/Marina Bay area rose in Q1, supported by renewals from businesses occupying quality spaces as well as demand from multinational corporations, and occupancy levels in the area remained tight at nearly 96 per cent.
At its earnings briefing early this year, Keppel Reit’s manager expressed optimism regarding its Singapore office portfolio in 2024, with expectations for continued positive rental reversions.
Nonetheless, looming headwinds make the longer term outlook challenging for Singapore’s office buildings.
Remote working
Take the widespread adoption of hybrid working arrangements, where workers split their time between working out of a physical office and remote working.
Many people across age groups value the flexibility of remote working. People can better care for the elderly or young kids, tend to their mental wellness, look after pets, run errands and so forth.
Continued technological progress coupled with rising tech-savviness of workers will translate into higher productivity among workers working remotely and quality of virtual interactions. As hybrid work arrangements become entrenched for many organisations, they will reassess and reconfigure office space needs.
Sure, workers want to work remotely at times and also have a permanent dedicated workstation at the office.
Still, the above aspiration may not be met. Expect organisations, which embrace hybrid working, to streamline space requirements and leverage technological as well as other tools to ensure their physical offices are well utilised. For example, the physical office should be bustling yet not overcrowded, with workers having ample quiet spaces to carry out tasks that need high concentration levels.
Ultimately, office space requirements will likely reduce when groups adopt hybrid working, compared with working solely out of the physical office.
Cost pressures
Moves to right-size office footprints when leases mature and reworking spatial needs to support business expansion in cities everywhere will take place amid a tougher operating environment.
In Singapore, retrenchments rose in 2023 from a year earlier. Business reorganisation or restructuring was cited as the top reason for retrenchments.
As businesses grapple with higher interest rates, inflationary pressures, geopolitical tensions, supply chain reconfigurations and the possibility of slowing global economic growth, expect extreme caution over headcount expansion and costs. In short, more cost-conscious office tenants may hesitate to sign leases for large office spaces at high rentals.
Indeed, some businesses and knowledge workers may even leave a high-cost location such as Singapore. A worker, who can choose where to be based, might prefer a cheaper neighbouring location to Singapore.
Looking further out, the rising power and use of artificial intelligence could displace the jobs of many knowledge workers who use physical offices. Massive job losses may hit people in professional services, middle management and administrative functions.
Couple the above with the challenge facing Singapore’s small open economy in the event some businesses, driven by political pressure, move knowledge worker jobs back to their home markets.
Occupancy at top-grade office buildings here will come under severe stress, if a model where businesses have large global or regional hubs gets dismantled over time.
Lofty valuations
CBD Grade A office buildings here are richly valued. The capitalisation rate used to value Keppel Reit’s one-third stake in One Raffles Quay, which is an office building in the CBD with about 76 years of remaining land lease, was 3.15 per cent as at end-December 2023.
Under the income capitalisation method, a property’s value is derived from dividing the assumed net property income by its capitalisation rate. There is an inverse relationship between a property’s value and the capitalisation rate used.
Typically, the capitalisation rate reflects an investor’s expected return from a property. A rate of close to 3 per cent for top-tier Singapore office buildings risks expanding to reflect higher interest rates and a tougher outlook for office towers.
After all, earning an annual net yield of just over 3 per cent from a Singapore office building does not stack up well versus the yield of lower risk Singapore-dollar instruments such as Treasury bills or borrowing costs.
Owners may need to be mindful of the risk of falling property valuations due to higher capitalisation rates leading to refinancing problems. Still, property groups here are betting on providing office spaces that are relevant.
Singapore Land Group : U06 0% is rejuvenating older office buildings into modern and sustainable workplaces. For instance, the group is carrying out extensive asset enhancement on its flagship Singapore Land Tower in Raffles Place, to be completed later this year.
Office tenants at the new Guoco Midtown in the Beach Road area, which is developed by GuocoLand : F17 0%, can access retail facilities, a network hub, thematic gardens and a swimming pool.
Various new office buildings here boast many biophilic elements and are designed to enhance the mental wellness of users. These buildings have green credentials, which tick the boxes of environmentally conscious tenants.
Businesses will choose high-quality office spaces in central locations to better attract and retain talent. Thus, the best CBD Grade A office buildings can be expected to outperform. However, if office buildings in general face strong headwinds over the long term, even stronger office property landlords will struggle.
https://www.businesstimes.com.sg/opinion-features/are-singapore-s-prime-office-buildings-overpriced-offering-3-cent-yield
Leslie Yee
Apr 8, 2024
LAST week, OCBC confirmed that it is exploring redeveloping its Chulia Street and Church Street property in the Central Business District (CBD).
Perhaps, OCBC is encouraged to consider redevelopment, which will involve the bank’s headquarters building, because of the positive picture for prime office towers here.
Since Covid-related movement restrictions were lifted, many knowledge workers here are back to working largely out of the physical office.
Unlike office towers in many other cities, rentals and capital values of Singapore’s office buildings have been resilient. For 2023, the Urban Redevelopment Authority’s office rental index climbed 13.1 per cent after expanding 11.7 per cent in 2022.
https://i.imgur.com/32KaQ4G.png
Research by JLL showed that monthly gross effective rent for CBD Grade A office space rose 1.3 per cent quarter on quarter to around S$11.42 per square foot in Q1 – the highest since Q4 2008.
According to Knight Frank Singapore, office rents in the Raffles Place/Marina Bay area rose in Q1, supported by renewals from businesses occupying quality spaces as well as demand from multinational corporations, and occupancy levels in the area remained tight at nearly 96 per cent.
At its earnings briefing early this year, Keppel Reit’s manager expressed optimism regarding its Singapore office portfolio in 2024, with expectations for continued positive rental reversions.
Nonetheless, looming headwinds make the longer term outlook challenging for Singapore’s office buildings.
Remote working
Take the widespread adoption of hybrid working arrangements, where workers split their time between working out of a physical office and remote working.
Many people across age groups value the flexibility of remote working. People can better care for the elderly or young kids, tend to their mental wellness, look after pets, run errands and so forth.
Continued technological progress coupled with rising tech-savviness of workers will translate into higher productivity among workers working remotely and quality of virtual interactions. As hybrid work arrangements become entrenched for many organisations, they will reassess and reconfigure office space needs.
Sure, workers want to work remotely at times and also have a permanent dedicated workstation at the office.
Still, the above aspiration may not be met. Expect organisations, which embrace hybrid working, to streamline space requirements and leverage technological as well as other tools to ensure their physical offices are well utilised. For example, the physical office should be bustling yet not overcrowded, with workers having ample quiet spaces to carry out tasks that need high concentration levels.
Ultimately, office space requirements will likely reduce when groups adopt hybrid working, compared with working solely out of the physical office.
Cost pressures
Moves to right-size office footprints when leases mature and reworking spatial needs to support business expansion in cities everywhere will take place amid a tougher operating environment.
In Singapore, retrenchments rose in 2023 from a year earlier. Business reorganisation or restructuring was cited as the top reason for retrenchments.
As businesses grapple with higher interest rates, inflationary pressures, geopolitical tensions, supply chain reconfigurations and the possibility of slowing global economic growth, expect extreme caution over headcount expansion and costs. In short, more cost-conscious office tenants may hesitate to sign leases for large office spaces at high rentals.
Indeed, some businesses and knowledge workers may even leave a high-cost location such as Singapore. A worker, who can choose where to be based, might prefer a cheaper neighbouring location to Singapore.
Looking further out, the rising power and use of artificial intelligence could displace the jobs of many knowledge workers who use physical offices. Massive job losses may hit people in professional services, middle management and administrative functions.
Couple the above with the challenge facing Singapore’s small open economy in the event some businesses, driven by political pressure, move knowledge worker jobs back to their home markets.
Occupancy at top-grade office buildings here will come under severe stress, if a model where businesses have large global or regional hubs gets dismantled over time.
Lofty valuations
CBD Grade A office buildings here are richly valued. The capitalisation rate used to value Keppel Reit’s one-third stake in One Raffles Quay, which is an office building in the CBD with about 76 years of remaining land lease, was 3.15 per cent as at end-December 2023.
Under the income capitalisation method, a property’s value is derived from dividing the assumed net property income by its capitalisation rate. There is an inverse relationship between a property’s value and the capitalisation rate used.
Typically, the capitalisation rate reflects an investor’s expected return from a property. A rate of close to 3 per cent for top-tier Singapore office buildings risks expanding to reflect higher interest rates and a tougher outlook for office towers.
After all, earning an annual net yield of just over 3 per cent from a Singapore office building does not stack up well versus the yield of lower risk Singapore-dollar instruments such as Treasury bills or borrowing costs.
Owners may need to be mindful of the risk of falling property valuations due to higher capitalisation rates leading to refinancing problems. Still, property groups here are betting on providing office spaces that are relevant.
Singapore Land Group : U06 0% is rejuvenating older office buildings into modern and sustainable workplaces. For instance, the group is carrying out extensive asset enhancement on its flagship Singapore Land Tower in Raffles Place, to be completed later this year.
Office tenants at the new Guoco Midtown in the Beach Road area, which is developed by GuocoLand : F17 0%, can access retail facilities, a network hub, thematic gardens and a swimming pool.
Various new office buildings here boast many biophilic elements and are designed to enhance the mental wellness of users. These buildings have green credentials, which tick the boxes of environmentally conscious tenants.
Businesses will choose high-quality office spaces in central locations to better attract and retain talent. Thus, the best CBD Grade A office buildings can be expected to outperform. However, if office buildings in general face strong headwinds over the long term, even stronger office property landlords will struggle.
https://www.businesstimes.com.sg/opinion-features/are-singapore-s-prime-office-buildings-overpriced-offering-3-cent-yield