Slow rent growth in 2020 seen for Singapore CBD Grade A offices
The expected growth will make it the fourth straight year of rental growth.
Grade A office rents in Singapore’s central business district (CBD) will likely increase in 2020, said Colliers International in its latest Quarterly Office Market report.
The expected growth will make it the fourth straight year of rental growth, but such increase will substantially slow down as the more cautious market and weak economic outlook will hold back landlords’ ability to go on hiking up rents.
“2019 was a year of two halves: H1 2019 saw a steady 5.4% year-on-year (YOY) rental growth on the back of strong net absorption led by flexible workspace and technology sectors; while H2 2019 witnessed lower net demand from a weaker economic growth, rising vacancy and slowing rental momentum as tenants showed increasing resistance to further rent rise,” said Tricia Song, head of research for Singapore at Colliers International.
“Some of the concerns around market uncertainties in 2019 will carry into the new year and we expect tenants will remain prudent in their real estate decisions.”
Colliers Research noted that in Q4 2019, Grade B office space rents had started to dip, decreasing by 0.7% quarter-on-quarter (QOQ) to S$8.47 per square foot per month (psf pm), with CBD Grade A office rental growth reaching S$10.09 psf pm.
Among the micro-markets tracked by the company, Beach Road/Bugis had the highest rental growth in 2019 at (+10.2% YOY), as the landlords priced in the precinct’s upcoming rejuvenation project, including the redevelopment of the Shaw Tower in 2023 and the planned completion in 2022 of Guoco Midtown.
In general, the muted rental movements in Q4 show reservation from the market, with landlords becoming more realistic for rent rates as occupiers face growing cost pressure and occupiers becoming increasingly conservative about their space requirements because of the subdued economic growth.
CBD Grade A vacancy reached 3.4% in 2019 compared to 5.4% in 2018, as Colliers Research sees the limited supply of office space keeping vacancy rates down until the supply hike in 2022.
Office investment sales in the country was pegged at S$1.1 billion in Q4 2019, down 63% QOQ partly because of the high base effect coming from a strong Q3 2019.
Transaction volumes in 2019, meanwhile, grew 62% YOY to S$7.6 billion on the back of heightened investors’ interests.
With major transactions achieving optimistic valuations in 2019, the average imputed capital value for CBD Grade A office properties increased 3.9% YOY to S$2,518 psf for the full year.
In general, 2019 had a 10 to 15 bps cap rate compression to range from 3.15% to 3.50% on average.
Due to external uncertainties and weak economic growth, demand and rental growth momentum have decreased significantly in the second half of 2019. There was also an increase in resistance to rent hikes under the current decade-high rental levels.
Despite these, the projected modest pick up in economic activity in 2020 might give some lift to business sentiment and increase rents by 1%.
New Grade A supply is predicted to stay limited, with an average of 820,000 sq ft annually 2020-2021. This will keep vacancy tight and well below the decade average of 6.2%.
“In 2020, we expect the demand for office space to continue to be led by the technology and flexible workspace sectors, albeit at a slower rate,” said Song.
“To this end, an interesting development that could support tech sector growth would be the arrival of virtual banking, with the Monetary Authority of Singapore (MAS) set to announce the results of the applications for up to five digital banking licences by mid-2020.”
Source: CommercialGuru, 14 January 2020