Tide has turned for office market, say analysts

Oct 3, 2017

Commercial rental recovery and shrinking pipeline spur bullishness among developers

Annabeth Leow

The bumper $1.622 billion bid for a Beach Road site last week has sparked renewed interest in a commercial property market already bubbling away after the $2.09 billion Asia Square Tower 2 sale.

The word "bullish" has been on the lips of industry watchers predicting an office rental recovery as the supply of new completions dwindles.

Mr Jeremy Lake, executive director of capital markets at CBRE, told The Straits Times: "It is quite clear that the tide has turned for the Singapore office market and the general bullishness reflects the positive outlook for rents in the next three or four years.

"Rents will rebound and the only question unanswered is how large the rebound will be."

Real estate consultancy JLL estimated recently that prime central business district office rents have climbed to $8.86 per sq ft (psf) a month in the third quarter, driven by growth in the Marina Bay area, but they are still tracking 16.1 per cent below their peak of $10.56 psf in early 2015.

JLL's head of capital markets Greg Hyland said: "Supply in large developments initiated now will not be ready for occupation until after 2020, supporting further rental growth through the end of this decade.

"Developers are responding to these dynamics and generally view Singapore favourably over other markets in Asia that are at late stages of their respective market cycle after experiencing strong performance over the last few years."

GuocoLand's offer for the Beach Road site works out to $1,706 psf per plot ratio, and it has set a record for land prices on a unit basis.

DBS Equity Research analysts noted that the tender "once again highlights (the) Singapore office sector as an attractive asset class to physical market investors, and their confidence in the potential recovery of Singapore office rents".

"The sale of the Beach Road land parcel points to the undervalued status of the listed Singapore office Reits," the DBS analysts added, "especially considering that the majority of the properties owned by the office Reits are located in more prime locations than the Beach Road site."

Mr Ian Loh, head of investment and capital markets at Knight Frank Singapore, said that fresh land parcels may draw bidders because "some of these listed companies are seeking better margins in the development itself, rather than just buying a new building".

"There will be more interest locally for projects," he added, noting that Singapore developers who ventured overseas may have found themselves confronted by cooling measures there.

Mr Lake said: "In some cases, local developers who were spending more time looking for opportunities overseas are now refocusing on the Singapore market."

But they cannot expect an entirely friendly welcome on the home front, said Mr Lake, as they face increasing competition from foreign developers.