Office Property Market

THE KNOWLEDGE REPORT

SINGAPORE

Office Property Market

Singapore’s office property sector started the year on a mixed note with the sales market throbbing with life while the leasing market continued to lose its lustre.

The thriving sales market was evidenced from the quick take-up seen at new launches. All the 100 strata-titled office units at PS100 on Peck Seah Street were snapped up during their weekend launch in March 2012 at an average price of $3,000 per sq ft.

Meanwhile, sales of projects launched in 4Q 2011 continued to gather momentum. By the end of March 2012, about 78% of Robinson Square had been sold at prices ranging from $2,750 to $3,029 per sq ft and 85% of the 442 units released in Paya Lebar Square found buyers at an average price of $1,750 per sq ft.

These developments reportedly attracted a mix of investors and end-users from design agencies, shipping and logistics, investment, business consultancy and professional services firms. Transactions in the secondary market were also forthcoming. For example, in March 2012, Cortina Holdings inked a deal to buy seven units at The Adelphi at Coleman Street for $20 million to house its new headquarters when its existing lease at Ngee Ann City Tower B on Orchard Road expires in May 2013.

Beyond the low interest rate and high inflation environment that kept investors active in the office sales market, the introduction of the additional buyer’s stamp duty for certain residential property purchases last December, that had investors looking for alternative asset options, played a part in raising the interest level in strata-titled office units.

Supported by the robust sales activities, the average capital value of Grade A office space in the

Singapore’s office property sector started the year on a mixed note with the sales market throbbing with life while the leasing market continued to lose its lustre.

Prime

Rents Capital Prime

Values OFFICE

MARKET INDICATORS

Beyond the low interest rate and high inflation environment that kept investors active in the office sales market, the introduction of the additional buyer’s stamp duty for certain residential property purchases last December, that had investors looking for alternative asset options, played a part in raising the interest level in strata-titled office units.

… the average capital value of Grade A office space in the Raffles Place/New Downtown area held firm for the second consecutive quarter at $2,459 per sq ft in 1Q 2012. AVERAGE CAPITAL VALUES FOR GRADE A OFFICE SPACE IN

RAFFLES PLACE/NEW DOWNTOWN

Source: Colliers International Singapore Research

Raffles Place/New Downtown area held firm for the second consecutive quarter at $2,459 per sq ft in 1Q 2012.

In sharp contrast to the buzz in the sales market, activity in the leasing market was subdued as lingering debt issues in the Euro zone and slowing growth in the Chinese and Japanese economies dampened demand. Besides keeping most firms, especially the large space occupiers in the banking and finance industry, on the sidelines in 1Q 2012 due to a general lack of drivers for space expansion, the unresolved Euro debt crisis has caused some corporate restructuring and a hiring freeze.

However, such occurrences were contained and not yet as widespread as seen during the global financial crisis in 2009. As such, the amount of shadow space in Grade A office buildings that is currently available for subtenancy or assignment in the Raffles Place/ New Downtown micro-market stayed flat at 100,000 sq ft as of March 2012.

Coupled with ongoing lease renewals such as those by Sumitomo Mitsui Banking Corporation at Centennial Tower, Morgan Stanley at Capital Square and Bank of Tokyo-Mitsubishi at Republic Plaza, as well as healthy pre-commitment rates achieved at new completions, the overall islandwide occupancy rates of Grade A offices managed to hold relatively stable in the first three months of 2012 despite the continued injection of new supply by completions such as the 1.3 million sq ft Marina Bay Financial Centre Tower 3 that obtained its Temporary Occupation Permit in March 2012. In the Raffles Place/New Downtown micro-market, occupancy eased moderately by 0.8 percentage point to 87.2% as of March 2012 from 88.0% three months ago. With the

exception of the Orchard Road micro-market, the occupancy rates for Grade A office space in the remaining micro-markets hovered between 92.8% and 97.1% in 1Q 2012, which are close to the 92.2 to 96.9% recorded in the preceding quarter.

The average occupancy rate for Grade A office space in Orchard Road plunged by 7.4 percentage points to 84.4% as of March 2012. This can be attributed mainly to tenant movements out of the precinct. For example, Singapore Power vacated their premises at Triple One Somerset when they moved to Mapletree Business City, while Trafigura gave up space at Wheelock Place following their move to Ocean Financial Centre.

Nonetheless, the relatively stable occupancy rates achieved amid the competition for tenants in the contrasting supply and demand landscape came at the expense of the across-the-board rent corrections by up to 8.8% quarter-on-quarter (QoQ) in 1Q 2012.

In the Raffles Place/New Downtown micro-market, the average monthly gross rents for Grade A office space recorded a deeper fall of 5.3% QoQ in 1Q 2012 compared to the 4.3% QoQ correction in 4Q 2011. As a result, the average monthly gross rents for Grade A office space in the Raffles Place/New Downtown micro-market returned to the single-digit level of $9.76 per sq ft as of the end of March 2012. Over the next nine months, supply and demand of office space for lease is likely to continue on the opposing path. An uncertain economic outlook will continue to put businesses on guard and weigh down occupier demand. On the other hand, available space for lease is expected to grow on the back of an emerging two-tier space market. The first is the long pipeline of new office completions offered by various landlords. The second is an expected

… with ongoing lease renewals… as well as healthy pre-commitment rates achieved at new completions, the overall islandwide occupancy rates of Grade A offices managed to hold relatively stable in the first three months of 2012 despite the continued injection of new supply by completions…

OCCUPANCY RATES

AVERAGE OCCUPANCY RATES FOR GRADE A OFFICE SPACE BY MICRO-MARKETS

MICRO-MARKET AVERAGE OCCUPANCY RATE (%)

QUARTER-ON-QUARTER CHANGE (PERCENTAGE POINTS) 4Q 2011 1Q 2012 4Q 2011 1Q 2012

Raffles Place/New Downtown 88.0 87.2 -2.9 -0.8 Shenton Way/Tanjong Pagar 92.2 92.8 0.0 0.6

Marina/City Hall 95.8 95.8 -1.8 0.0

Beach Road 90.0 94.2 -2.2 4.2

Orchard Road 91.8 84.4 1.8 -7.4

City Fringe 96.9 97.1 -0.7 0.2

Suburban 93.9 94.3 1.4 0.4

Source: Colliers International Singapore Research

… the relatively stable occupancy rates achieved amid the competition for tenants in the contrasting supply and demand landscape came at the expense of the across-the-board rent corrections by up to 8.8 QoQ in 1Q 2012.

… activity in the leasing market was subdued as lingering debt issues in the Euro zone and slowing growth in the Chinese and Japanese economies dampened demand.

… available space for lease is expected to grow on the back of an emerging two-tier space market.

increase in shadow space available for sublease or assignment by tenants if the economy stays in the doldrums. The accumulation of these factors would continue to drag down rents. On a brighter note, although the overall business outlook for 2012 remains grim, recovery seems closer with the seemingly bottoming-out of the US economy.

Moreover, there are pockets of industries such as those in the mining and gas, private banking, equity investment and information & communications services sectors which have remained optimistic and maintained their expansionary mode in spite of the economic uncertainty. They have been seen to contribute to office space take-up in recent times. For example, Rio Tinto has recently completed its lease of about 46,000 sq ft of space at Marina Bay Financial Centre Tower 3 to house their new regional headquarters. The mining company will be moving out of its current 27,000 sq ft premises at Centennial Tower in the Marina Centre/City Hall micro-market. In the banking industries where some players have chosen to freeze or reduce headcounts in their investment and consumer banking business as part of their cost cutting measures, niche private foreign banks such as Julius Baer and Union Bancaire Privee have stepped up hiring to expand their wealth management business in Singapore given the economic power shift towards Asia. Banco

Santander has also opened a new branch in Singapore to try to capture a slice of the Asian trade flows.

On the equity investment front, firms which have recently set up offices in Singapore to tap into its fast growing reputation as an important market for the asset management industry include Eaton Vance Corp - one of the oldest investment management firms in the US - and General Atlantic LLC (GA) - one of the world’s largest equity firms.

Singapore is well-positioned to continue to attract these expanding sectors. The island nation’s stable legal and regulatory framework is appreciated by the western business community for providing some level of certainty in current times of economic fluctuations. Credit rating agencies such as Standard & Poor’s (S&P) and Moody’s have, in their latest reports, ascertained that Singapore has a stable outlook owing to its strong fiscal performance, effective policymaking and structural reforms, and is likely to hold on to its AAA ratings.

Additionally, Singapore was found to be the most competitive city in Asia with high scores in financial maturity and physical capital, according to a recent Economist Intelligence Unit (EIU) report. Singapore has also maintained its third place ranking behind Hong Kong and Ireland on the Globalisation Index 2011, jointly published by Ernst & Young and the Economist Intelligence Unit (EIU).

OFFICE RENTS

AVERAGE MONTHLY GROSS RENTS OF OFFICE SPACE

AVERAGE MONTHLY GROSS RENTS

(PER SQ FT/MONTH) QUARTER-ON-QUARTER CHANGE (%) 4Q 2011 1Q 2012 4Q 2011 1Q 2012 Grade A

Raffles Place/New Downtown $10.31 $9.76 -4.3 -5.3 Shenton Way/Tanjong Pagar $8.44 $7.94 0 -5.9

Marina/City Hall $9.48 $9.26 -2.3 -2.3 Orchard Road $9.04 $8.71 0 -3.7 Beach Road $7.40 $7.07 -0.8 -4.5 City Fringe $7.92 $7.71 0.6 -2.7 Suburban $5.29 $5.00 0 -5.5 Grade B

Raffles Place/New Downtown $8.13 $7.71 0.5 -5.2 Shenton Way/Tanjong Pagar $7.38 $6.88 0.4 -6.8

Orchard Road $7.50 $7.00 0 -6.7

Beach Road $5.71 $5.21 0 -8.8

Source: Colliers International Singapore Research

Though these players may be smaller space users and are not able to fully fill the roles previously played by the financial institutions, these new demand drivers could help cushion the fall in occupier demand and mitigate rental erosion.

Hence, though office rents could continue to slide this year due to growing office supply and slowing take-up amid global economic uncertainties, the fall is expected to be capped at 15% as opposed to the previous downturn when office rents crashed 20% to 50% in 2009 alone.

On the back of continued investor interest in light of the low interest rate and high inflation environment, office capital values, on the other hand, could hold relatively stable though they may face with downsides that is limited to 5% for the whole of 2012 if the rocky global environment prolongs.

… though office rents could continue to slide this year due to growing office supply and slowing take-up amid global economic uncertainties, the fall is expected to be capped at 15%...

On the back of continued investor interest in light of the low interest rate and high inflation environment, office capital values… could hold relatively stable though they may face with downsides that is limited to 5% for the whole of 2012 if the rocky global environment prolongs.

SINGAPORE:

Colliers International 1 Raffles Place

#45-00 One Raffles Place Singapore, 048616

TEL +65 6223 2323

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RESEARCHER:

Chia Siew Chuin Director

EMAIL [email protected]

This report and other research materials may be found on our website at www.colliers.com. Questions related to information herein should be directed to the Research Department at the number indicated above. This document has been prepared by Colliers International for general information only. Colliers International makes no guarantees, representations or warranties of any kind, express or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This publication is the copyrighted property of Colliers International and/or its licensor(s).© 2012. All rights reserved.

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