Analysts have said Grade B and C offices need to offer more attractive features like new facilities, or risk falling occupancy levels.

Already, there is a growing trend of tenants from the banking sector relocating to Grade A office space or planning to do so.

Banks are leading a flight to Grade A office space as the sector rebounds strongly from the financial crisis and prepares for further expansion.

Analysts said this trend stems from capitalising on low rentals of about S$7 to S$8 per square foot for Grade A offices. These levels are 60 per cent lower than the peaks two years ago.

Donald Han, managing director, Cushman & Wakefield, said: “The Grade A office buildings are doing very well right now in terms of the flight to quality phenomenon that’s happening because rents are at an all-time low, so obviously they are moving into Grade A office stock.

“And on top of that, the bulk of supply that we have in the next three years, about 7 million square feet from here on, are all Grade A office stock – about 80 per cent of them.”

About 2.5 million square feet of Grade A office space will be coming up annually over the next 3 years. And analysts said landlords of lower grade offices will have to revamp their properties to stay relevant.

Some measures could include upgrading older properties by sprucing up the facade of the buildings.

Tay Huey Ying, director of Research and Advisory, Colliers International, said “They can also look at redevelopment by amalgamating with their neighbouring plots so they can enjoy bigger floor plates and cater to financial institutions, for example.”

Occupancy rates are currently at about 96 per cent for Grade A offices, and 90 to 92 per cent for Grade B offices.

Analysts believe the financial sector will continue to lead in the occupancy of Grade A office space. But Grade B should not do too badly, as tenants from other sectors, such as shipping and insurance, are renewing or expanding their operations.

Analysts said the overall office market is expected to perform well, with rentals increasing as much as 12 per cent by the end of this year due to the strong economic outlook.

Source: Channel News Asia, 6 Aug 2010

H1 investment sales in region fall 58% to US$12.4b as global institutions sidelined

Pace of decline slows down but new supply looms over the next few years

(SINGAPORE) The pace of decline in prime office rents slowed in the first six weeks of the second quarter and the improvement has been most visible in the key Raffles Place sub-market, going by latest data from Cushman & Wakefield.

The property consultancy’s monthly average rental value for prime Raffles Place slid 6.6 per cent in the six weeks since the end of Q1 2009 to $9.44 per square foot as at May 15, a much smaller decline than the 28.8 per cent quarter-on-quarter drop registered in Q1 this year. This brings the total year- to-date decline to 33.5 per cent from $14.20 psf a month at end-2008.

The average Grade A Raffles Place rental eased 8.7 per cent in mid-Q2 2009, again a more moderate drop than the first quarter’s 27.7 per cent Q-on-Q slump.

The moderation in rental decline was also seen in the other micromarkets in Cushman’s prime office basket – namely, Shenton, City Hall and Orchard. Cushman’s overall prime office vacancy rate crept up 0.4 percentage point to 5.5 per cent as at May 15, milder than the 2.1-percentage point Q-on-Q hike to 5.1 per cent in Q1 2009.

‘The deceleration of rent declines is not surprising in light of the recent global stock market rally and signs of the oft-mentioned green shoots starting to emerge in major economies around the world,’ Cushman said in its report. This has caused a mood shift among landlords – from one of nervousness to a ‘more considered and cautious stance’. ‘The continued caution is understandable in light of competition from the oncoming stream of new office supply,’ Cushman added.

CB Richard Ellis executive director (office services) Moray Armstrong acknowledged that the pace of rent declines has ‘shown signs of easing in the past couple of months’ and expects this trend to continue. ‘There’s some semblance of confidence seeping back into the system,’ he said.

‘Relocation and leasing activity has been very limited for the past six to nine months. We’re looking out for a restoration of normal level of leasing activity, combined with the restoration of positive occupier demand. Those will be the signs that we’re emerging out of the office downcycle. We’re not there yet,’ Mr Armstrong added.

The office market may be weighed down by looming new supply – with 9.9 million sq ft net lettable area of offices slated for completion from 2009 to 2013. This year alone, the new supply is projected at about 2.56 million sq ft, 83 per cent above last year’s 1.4 million sq ft.

Demand-wise, the Singapore office market has already seen two consecutive quarters of negative take-up: 366,000 sq ft in Q4 2008 and nearly 323,000 sq ft in Q1 2009, based on official figures.

Cushman’s director of research Ang Choon Beng predicts around 40 per cent full-year contraction in prime office rents, with a bigger slide expected for Raffles Place.

‘While our forecast model predicts that prime office rents would continue to be weak through 2009, we believe the market has, in some instances, already priced in 70 per cent of the anticipated full-year decline. With the significant portion of the rent declines behind us, we think tenants can start to be more confident of entering into leases.’

Cushman’s figures show that in the Shenton micromarket (which includes Shenton Way, Robinson Rd and Anson Rd), the average monthly rental value slipped 6.5 per cent in the first six weeks of Q2 2009, slower than the 18.7 per cent Q-on-Q contraction in Q1. The City Hall location – which includes the Marina Centre area – saw an average 9.4 per cent rent reduction in the first six weeks of Q2 from the end-Q1 level, against a 27.2 per cent Q-on-Q drop in Q1. Similarly, for the Orchard area, the 9 per cent mid-Q2 drop was smaller than the 15.5 per cent slump in Q1.

Cushman’s director of commercial and industrial agency Kelvin Chiang says that along with an uptick in tenant inquiries and demand in the first six weeks of this quarter, there wasn’t much sublease (shadow) space being added to the market. Neither does he foresee any significant supply of additional ‘shadow space’ – which refers to excess space that companies try to sublet – in the months ahead.

DTZ executive director (occupier services) Angela Tan says that while there has been no let-up in the amount of shadow space in the market, there is healthy interest in such space as it offers ‘good value proposition for short-term use since the space usually comes fully fitted out and reduces the initial set-up cost for the new occupier’.

Source: Business Times, 21 May 2009

Price gap between sellers and buyers also narrows in past few months

THERE has been a pick-up lately in activity and prices in the strata office market, says Cushman & Wakefield Singapore managing director Donald Han.

For instance, a 2,443 sq ft unit on the 38th floor of Suntec Tower 2 sold for $1,780 psf last month – above the recent low of $1,300 psf set in March for the entire 32nd floor of Suntec Tower 1, even after factoring in a 5-10 per cent discount for an entire-floor transaction, according to Mr Han.

At International Plaza in Anson Road, which is another popular location for strata office investors, a 17th level unit changed hands for $1,146 psf in March and a 16th level unit went for $1,100 psf in April – higher than transactions of around $1,000 psf in December last year on the same floors. The gap between sellers’ and buyers’ prices has also narrowed in the past few months.

‘Late last year, after the Lehman fallout, the gap between sellers’ asking prices and bids from buyers was as much as 30 to 40 per cent,’ Mr Han said. ‘This has narrowed to around 5 to 15 per cent today, which is why transactions are happening. Generally, vendors have become more realistic in their pricing.’

The latest transacted price at International Plaza of $1,100 psf is about 26 per cent lower than the level in May last year. ‘The smart money is now looking at compelling price discounts from the peak rather than waiting to buy at the market-bottom,’ Mr Han said. ‘Once you see prices about 30-40 per cent off the peak, it provides compelling reasons to look seriously. Some of those who have bought at Suntec recently may be looking to locate their businesses in these premises, instead of renting.’ Credo Real Estate managing director Karamjit Singh agrees that buying interest in strata offices has picked up, but notes that there are still few transactions.

‘The market is going through a phase in which buyers’ perception is slowly changing,’ he said. ‘Previously they were staying away or offering prices that worked in a huge buffer (against potential price falls). Today, buyers are more confident that the downside is limited, or prepared to stomach further downside as the good properties may not necessarily surface at the absolute bottom of the market.’

Some market watchers say there is liquidity in the marketplace for smaller strata transactions involving investments of under $20 million. ‘One contributing factor is wealth creation from the more positive stock market,’ said Cushman’s Mr Han.

Source: Business Times, 7 May 2009

Three buildings in CBD may change hands as buyers shop again

(SINGAPORE) After a nine-month lull, investment sales activity for office buildings could pick up soon.

BT understands a deal is on the cards for Parakou Building at the corner of Robinson Road and McCallum Street. Due diligence by a potential buyer is also said to be going on for the 13-storey Anson House, while VTB Building (formerly known as Moscow Narodny Bank Building) at Robinson Road has also been generating interest.

The 16-storey freehold Parakou Building, which is about three years old, is expected to change hands at about $82 million or $1,300 per square foot (psf) of existing net lettable area, while a price of about $85 million or $1,100 psf-plus is being bandied about for Anson House. Prices of both properties are about 35 per cent lower than what the owners paid for them in 2007 during the property upcycle.

VTB Building, a 16-storey freehold office block that is more than 30 years old, is said to have drawn offers of around $60 million, which works out to around $900 psf.

‘There’s a sweet spot for office blocks priced at $1,100 to $1,300 psf or with a lump sum investment of between $70 million and $100 million,’ says Knight Frank executive director (investment sales) Foo Suan Peng.

While prices for Parakou Building and Anson House are about 35 per cent below what their owners paid, bigger price discounts are expected for larger office towers costing several hundred million dollars or more because there is less equity around and because of tight bank financing, say property consultants.

Potential buyers keen on Singapore office blocks are said to be assuming at most 50 per cent bank financing for proposed acquisitions these days. Such investors are not institutional players like big-name property funds that dominated office investment sales deals a few years ago, but rather the likes of family concerns with ‘old money’, investors involved in businesses that are doing well such as renewable energy, as well as a few private equity funds, according to Mr Foo.

And these parties are largely from Singapore and the region (mainly Hong Kong and Indonesia), he added. ‘Some of them may have wanted an office building as their flagship business premises or as investment but were priced out in the past two years. These are long-term investors, not short-term traders or speculators,’ Mr Foo says.

Credo Real Estate managing director Karamjit Singh says ‘there won’t be too many office transactions likely to take place in the next six months because sellers that are in a position to hold, will hold’.

‘Many owners are sitting on high costs; current values of their buildings will be below cost. If banks aren’t chasing them and they are not in a distressed position, these owners are unwilling to take a haircut and are likely to wait it out rather than divest now,’ Mr Singh added.

However, the hit on the foreign owners of these buildings from selling properties today below their purchase price may be mitigated by foreign currency movements. For instance, for Parakou Building’s owner, UK fund manager New Star Asset Management Group (which was recently acquired by Henderson Group), its expected 35 per cent loss (in Singapore dollar terms) should be significantly offset by a 27 per cent appreciation in the Singapore dollar relative to the pound over its holding period for this investment, a property market watcher observed.

Similarly, the fund managed by Australia’s Macquarie Bank that bought Anson House in 2007 for $129.5 million should find its loss from selling the asset for about $85 million being cushioned by the depreciation of the Australian dollar against the Singapore dollar.

Anson House is on a site with a remaining lease of about 87 years.

Source: Business Times, 7 May 2009

Singapore, Hong Kong see steepest fall; leasing activity remains subdued
(SINGAPORE) Office rents across Asia sank in the first quarter of this year – with Singapore and Hong Kong suffering the sharpest declines – a report by CB Richard Ellis (CBRE) shows.

Overall office rents in Asia fell 7.9 per cent quarter-on-quarter in Q1, after a 7.3 per cent decline in Q4 2008, according to the CBRE Asia Office Rental Index. Rents have now declined 18.5 per cent from their peak in Q2 2008.

Asia’s major financial centres – Singapore and Hong Kong – continued to see the biggest falls. Rents in Singapore dropped 18.6 per cent, while those in Hong Kong declined 14 per cent. On an annualised basis, corrections in Singapore and Hong Kong have now exceeded 34 per cent, CBRE said.

‘The Asian office property market deteriorated further during the first quarter of 2009 as companies continued to down-size and cut back on costs,’ it said.

Leasing activity remained subdued across the region, with transactions dominated by renewals, although a few deals involving companies relocating to cheaper premises were concluded.

Across many markets, landlords were forced to offer more concessions to retain and attract tenants, CBRE noted: ‘In some major Asian office markets, they are displaying a new willingness to negotiate lease restructuring with tenants they desire to retain.’

In Singapore and Hong Kong, the rise in vacancies was ‘less than what might have been expected and availability remains tight’, CBRE said. But the amount of shadow space due to sub-letting activity continued to rise.

A number of hedge funds in Hong Kong were considering sub-leasing and surrender options during the quarter, while landlords remained under significant pressure to reduce rents still further.

Likewise, Knight Frank said yesterday in a report on Singapore that there are signs that tenants are seeking to cut their occupation costs and, in some cases, are trying to sub-let space.

‘Landlords have needed to offer reduced rents and incentives to retain existing tenants,’ Knight Frank said. ‘There is substantial new supply expected in 2009, which may further dampen rental prospects.’

Leasing activity in the Hong Kong office market has likewise slowed, with corporate occupiers continuing to down-size amid the financial crisis.

‘A number of occupiers appear to be attempting to surrender office space by seeking replacement tenants, while some companies have moved from Central Hong Kong to Kowloon East to save occupation costs,’ Knight Frank said in its report.

Source: Business Times, 5 May 2009

URA has received 4 applications to convert space in CBD

THE property market may be subdued, but developers are not sitting still. A check with the Urban Redevelopment Authority shows some are still putting up proposals to convert office space or embark on residential and commercial projects.

URA told BT it has received four applications to convert office space in the central area to other uses since it lifted the ban on doing so in October last year. ‘These applications are now being evaluated and are pending final approval,’ said a URA spokesman.

In a bid to ease the office space supply crunch that built up during the boom years, URA called a halt to such conversions in May 2007. It later removed the ban as the supply of office space coming on stream started to increase, while the economy began to slow. URA did not identify the buildings involved in the applications, but some property owners have revealed plans to convert office space.

CapitaMall Trust, for instance, said last week that it was ‘in talks with the authorities to optimise the integration plan for The Atrium@Orchard and Plaza Singapura’ and that work could start by end-2010 subject to market conditions and official approvals.

URA has also granted approval for close to 10 commercial and private residential projects, according to its Q1 2009 real estate statistics released yesterday.

UIC Investments (Properties) received provisional permission in January to develop office and retail space with gross floor areas (GFAs) of 114,500 sq ft and 48,000 sq ft respectively at the UIC Building in Shenton Way. Some 593 residential units could also take shape at the site.

The South Beach consortium – comprising City Developments, a Dubai World unit and Elad Group – has been given the go-ahead to develop 560 hotel rooms across a GFA of 474,100 sq ft at its Beach Road project. The site may include office space with a GFA of more than 632,100 sq ft, and retail space with a GFA of 158,000 sq ft. The project is tipped to receive a temporary occupation permit in 2014.

BT understands there will also be a residential component in the South Beach project, although this did not appear in the URA statistics. The data only shows development approvals for uncompleted private residential projects if they have at least 200 non-landed property units.

YTL Corp, which bought the Westwood Apartments in Orchard Boulevard in 2007, has obtained provisional permission to develop shop space with a GFA of 1,500 sq ft and 39 hotel rooms across 78,200 sq ft at the site. BT understands the residential component similarly did not show up in the URA statistics, because there are less than 200 non-landed units.

In February, UOL Group subsidiary Hotel Plaza got URA’s nod to re-use the GFA in The Plaza’s podium block to create 273 hotel rooms.

Source: Business Times, 25 April 2009

Vacancies hit 10% in Q1; broader property market sees prices fall across sectors; rentals also slide, URA data shows

This segment took a hit for the second consecutive quarter, government data showed. The broader property market also saw prices and rentals slipping.

‘Many of the corporates we talk to are well advanced in implementing their restructuring programmes. From this, we deduce we may be going through the period of sharpest contraction in office demand now. Contraction may ease in the second-half,’ he said.

The weak demand in the office sector also rubbed off on business park space, which saw negative take-up of about 215,000 sq ft in Q1, against positive take-up of some 10,700 sq ft in Q4 2008. Vacancy rate for the sector increased from 6.2 per cent in Q4 2008 to 9.7 per cent in Q1 2009.

In the private residential segment, URA’s overall islandwide price index slipped 14.1 per cent in Q1 over the preceding quarter, slightly steeper than the flash estimate decline of 13.8 per cent. The Q1 drop was also the biggest quarterly drop to date. The index has now eased 21.2 per cent since peaking in Q2 last year.

Colliers International director Tay Huey Ying says: ‘Mass market homes could see more gradual price corrections averaging about 8 to 12 per cent over the next three quarters (from Q1 2009 levels) as more sellers in the secondary market as well as developers with unsold units from earlier launches can be expected to adjust the pricing of their properties to near-current levels.’

She predicts bigger average price declines of 10-15 per cent for the mid-tier and high-end/luxury segments over the same period.

URA’s private residential rental indices show that the sharpest contraction in Q1 was for non-landed homes in the Core Central Region, which shrank 10.3 per cent quarter on quarter. The overall private residential rental index slipped 8.5 per cent in Q1, bigger than the 5.3 per cent drop in Q4. ‘The decline in rents could be attributed to supply outstripping demand as more expats left the country and to more new projects being completed,’ CBRE executive director Li Hiaw Ho said.

Developers sold a total 2,596 private homes in Q1, about six times the 419 units in Q4 2008.

The latest Q1 number was 64 units lower than the 2,660-unit figure collated from monthly developer sales stats (for January to March 2009). The decline reflects lapsing of options on units sold earlier in the quarter, URA’s spokeswoman said.

Market watchers also observed a slight easing in residential supply.

Some 27,423 private homes are expected to be completed between Q2 2009 and 2011, lower than the 31,004 units projected for completion between 2009 and 2011 in URA’s Q4 2008 data.
The smaller pipeline supply partly reflects the completion of 2,230 units in Q1 2009.

Developers may also have postponed redevelopment of some of the sites they had bought through en bloc sales and delayed construction, said URA’s spokeswoman.

URA’s shop rental index eased 3.3 per cent quarter on quarter in Q1, after dipping 0.6 per cent in Q4. The all industrial rental index slid 5.6 per cent in Q1, also worse than the 3.7 per cent fall in Q4.

Summing up prospects for Singapore’s property markets, Knight Frank managing director Tan Tiong Cheng said: ‘For the private residential sector, there’s evidence of a pick-up in activity – not just in the primary market but also subsales and resales. For office and industrial, there are going to be more rental declines because of the economic slowdown. Retail will be difficult. New malls opening this year may drum up business, but it will be at the expense of existing malls, given that tourism numbers are weak.’

Source: Business Times, 25 April 2009