Strong demand from tenants and limited supply of prime CBD space helped boost office rental rates in Singapore during 2018 by the largest amount in four years, according to new figures issued by the city government.
Office rental rates increased 7.4 percent for the year, the highest jump since a 9.8 percent ramp-up registered in 2014. This full-year crescendo came despite a slow-down in the fourth quarter, when rental growth slowed to just 0.5 percent, down from 2.5 percent in the previous three months.
In contrast, average investment values for office properties rose 2.4 percent from October through the end of the year, up from 0.1 percent growth in the third quarter. according to the latest report by Singapore’s Urban Redevelopment Authority (URA).
The recovery was driven by “stronger demand for space from a broad range of sectors, as well as improved investment appetite for prime office assets,” said Duncan White, Colliers International’s head of office services.
Rents, now approximately 75 percent more expensive than in 2009, are still down 8.1 percent from their peak during the first quarter of 2015, but are 18.4 percent higher than in the second quarter of 2017.
Growth in rent was concentrated in premium and grade A assets in the city’s central business district, where the monthly cost for parking your staff rose approximately 15 percent last year, according to Colliers.
Growth of CBD prime office rents will likely slow down to eight percent in 2019, but “the limited availability of new office stock in the city centre over the next couple of years should remain supportive of Premium and Grade A rents in the CBD,” said Colliers’ White.
For the whole year, office investment values increased by 5.7 percent, a marked change from 2017’s 2.4 percent decline.
In the last three months of the year these costs of buying office space were driven up in part by “en bloc transactions during the quarter such as the sale of Robinson 77 and 78 Shenton Way,” according to Colliers.
Gaw Capital Partners is understood to have purchased Robinson 77 for S$710 million (S$2,300 per square foot) from CLSA Real Estate, according to a December account by Singapore’s Business Times.
Last November, Mingtiandi reported that PGIM Real Estate had entered into an agreement with Alpha Investment Partners to buy 78 Shenton Way from the private equity arm of Keppel Group for around S$680 million or around S$1,900 per square foot.
New supply Hits Absorption Rate
Rent increases during the last three months of 2018 were tempered by the addition of 59,000 square metres (635,000 square feet) of office space during the period — a 110 percent increase over the 28,000 square metres launched in the previous quarter.
Paya Lebar Quarter 1 and Paya Lebar Quarter 2, a pair of urban redevelopment projects by Lendlease in the city’s Central Region, were among the most important additions this year, according to Colliers.
Occupied office space, however, increased only by 39,000 square metres from October through December — 13 percent less than the 45,000 square metre uptick registered in the previous quarter, resulting in a 0.1 percent rise in vacancy rates to 12.1 percent.
Office vacancy rates across all locations and market segments now are almost 50 percent higher than in early 2016, but vacancy rates for CBD Premium and Grade A offices, where supply is constrained, clocked in at just 5.4 percent.
Prime Rents Expected to Rise Through ‘22
“The limited availability of new office stock in the city centre over the next couple of years should remain supportive of Premium and Grade A rents in the CBD,” said White.
Colliers expects vacancy rates for prime space to trend below six percent at least through 2022, driven by a reduced supply of grade A projects in the CBD from 2019 to 2021, when the total supply of new stock each year is expected to be equal to only two percent of total stock, according to Colliers.
There was a total of 732,000 square metres of office space in the project pipeline in the last quarter of 2018, according to the URA, representing 7.6 percent less than in the previous quarter.
Approximately 85 percent of this supply will come from projects hitting the market before 2023, with 30 percent coming in 2022 alone. Close to 86 percent of buildings in the pipeline are already under construction.