Singapore’s landlords are bracing themselves for the biggest financial crisis of the century, with office leasing demand and property investment already disappearing as a result of the COVID-19 pandemic.
In a report released yesterday, Cushman & Wakefield said that office rents – which had hit an all-time high in the last quarter of 2019 – are set to fall by at least 10 percent this year, as companies halt expansion plans to concentrate on handling the fallout of the health crisis.
The downturn in demand, along with the broader economic anxiety wrought by the virus crisis, also expected to hit capital markets activity in the Southeast Asian financial hub, with a report from CBRE showing that investment volumes fell by more than a third during the first three months of the year.
Bracing for a Bigger Hit Than 2008
In its report on the office market, Cushman & Wakefield said that grade A leasing demand has already weakened this past quarter, with rents in the central business district falling by 0.5 percent from the end of the year to an average of S$10.61 ($7.42) per square foot per month by the end of March, while rents in Marina Bay and Raffles Place dropped 1 percent.
“Comparing the first quarter of 2020 and Q4 2019, firms are increasingly taking a wait-and-see approach, channelling resources to activate business continuity plans instead,” said Cushman & Wakefield’s head of research in Singapore and Southeast Asia, Christine Li, adding that remote working was also reducing the immediate demand for new space.
Despite a nearly S$60 billion stimulus package brought in by the Singapore government, Cushman & Wakefield said that it was likely the economic impact of the pandemic would be worse than the financial crisis of 2008, and encouraged landlords to brace themselves for a larger fall in rental values should the situation continue to deteriorate.
The combined impact of global and local recessions, which it says are likely to occur, are set to pull down rents not only this year, but also into 2021, the firm predicts.
“Companies are seeking cash flow protection measures and this includes rental concessions,” said Cushman & Wakefield’s regional head of tenant representation in Singapore, Mark Lampard.
With the Singapore government closing all workplaces except for essential services until 4 May, Lampard expects occupiers to delay their decision-making on new leases until the end of June.
Should multinationals cut back their expansion plans in the city due to lockdowns in the US and Europe, office leasing demand will take a further hit, according to Lampard.
Falling Investment Volumes as Dealmaking Stalls
The same forces which have snuffed out leasing demand are already having an impact on real estate capital markets in Southeast Asia’s wealthiest city, according to CBRE.
The US property services giant reported yesterday that property investment volumes in Singapore fell by 36.1 percent to total just S$2.47 billion during the first three months of the year, marking the second consecutive quarter of decline.
“We’ve observed deals in the pipeline fall through, with bids below expectations as the buyer-seller price gap widens,” said CBRE’s head of capital markets in Singapore, Michael Tay, who noted that the market “seems to have come to a stalemate with little activity”.
Tay indicated that with retail and hospitality assets currently in the eye of the storm, investors would be circling those sector for distressed opportunities, and looking to pick up properties at a discount.
After a bumper crop of large transactions in Singapore in 2019 – such as Allianz and Gaw Capital’s S$1.6 billion acquisition of the Duo Towers last July – smaller deals may become more common in 2020, according to CBRE’s head of research for Southeast Asia, Desmond Sim.
The analyst predicts that real estate investment in Singapore this year fall 20 to 30 percent below last year’s record S$18.23 billion haul, although he still predicts that buyers will be on the lookout for bargains. “Investment will still be supported by ample liquidity looking for safety and value, government land sales, and unless any prominent asset comes onto the market, bite-sized deals,” Sim said.