Singapore office: Recovery interrupted

– With recent rising macroeconomic uncertainties, there are rising concerns that Singapore office rentals could take a big fall like the experience of 2008 and 2009. This is because office rentals are very economically sensitive (e.g. banks as big tenants).

– However, while there could be weakness in office rentals, we don’t think it will be a repeat of the crash in 2008 and 2009, due to current office rental levels and the supply situation.

– Singapore office rentals only had a partial recovery, thus office rentals are still significantly lower than late 2007/early 2008. Thus, rental affordability is less of an issue compared to then.

– In addition, post 2011, office supply will remain lower than average than during the large supply days in 2009-2011.

– Lastly, for office landlords, there are generally in good financial health, therefore large discounts are unnecessary to attract landlords.. Also, in 2012, landlords will be generally renewing rentals signed three years ago. Hence,  they will still see higher office rental rates versus the previous rates (signed in 2009).

Recent macroeconomic headwinds arising from the U.S. and EU have raised concerns that Singapore office rental market could again be heading for tough times like thatexperienced during the global financial crisis in 2008 and 2009. During that previous crisis, Singapore grade A office rentals fell from a high of S$xx per square feet per month in late 2007 (psf pm) to S$xx psf pm in late 2009, translating to a jaw dropping 60%peak-to- trough decline. Singapore prime office rentals are notoriously volatile as they are very economically sensitive given that financial institutions count as one of their biggest clientele groups.

However, while Singapore office rentals could indeed soften from current levels due to the macroeconomic headwinds, we do not expect to see the same magnitude of declines as that seen in 2008 and 2009. This is because current office rentals are relatively more affordable and office supply tighter than in 2008 and 2009. In addition, office landlords are in better position to weather the cyclic downturn.

After bottoming out in late 2009 and early 2010, Singapore grade A office rentals have managed to mount a robust recovery, rising by around 35% from its trough of S$xx psf pm to S$xx psf pm in 3Q 2011 currently. Despite this robust recovery, grade A office rentals however are still some 40% below its late 2007 peak of S$xx psf pm. Thus, office rentals are currently still relatively more affordable and less onerous when compared to2008.

In addition, the supply of new offices is expected to tighten post 2011. Over the last few years, we have seen the addition of a number of new prime office buildings to Singapore office stock such as Marina Bay Financial Centre (MBFC), Ocean Financial Centre, OUE Centre and Asia Square. This has in turn resulted in a large supply of new office space entering the market from 2009 to 2011, which fortunately coincided with the post global financial crisis recovery and was generally well absorbed. Going forward, post 2011, the supply of new office space is expected to decline as most of the large new office  developments are being completed or reaching its ending stages. This tighter supply should help to provide some support to Singapore office rentals. ‘

Finally,  most of the large Singapore office landlords are generally in good financial health and their net gearing levels are lower than the levels in 2008. Thus, while  office landlords may be willing to lower their asking rentals given the potential tougher economic times ahead, we do not expect many office landlords to be desperate enough to accept huge cuts in their asking office rentals in order to fill up their office buildings.