Commercial Property Research – Office Property 4th Quarter 2021

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Commercial Property Research - Office Property 4th Quarter 2021

Overview

In Q4 2021, Singapore’s economy continued to grow strongly amid improving global and trade outlook. Based on advance GDP estimates, the Singapore economy grew strongly by 5.9% YOY and 2.6% QOQ in Q4 2021. Based on these estimates, the economy has grown by 7.2% for the full year, according to the Ministry of Trade and Industry (MTI). The economy is projected to grow by 3% to 5% in 2022.

The office property market ended the year on a strong note with several big-ticket deals inked during the quarter. Market observations suggest that demand for office space is expected to remain buoyant with a number of businesses looking to expand against a backdrop of the global economic recovery and limited availability of prime office space.

Rentals are expected to grow at a faster pace in 2022, which could further pique the interest of investors in Singapore's prime office assets and drive capital value. The economic expansion along with Singapore’s commitment towards the reopening of its economy and its borders, will boost the office market’s investment and occupier demand in 2022.

Sales Transactions and Prices

  • According to the URA office price index, the prices of office space contracted by 1.8% QOQ in Q4 2021, continuing the downward trend from the 2.4% contraction in Q3 2021 – the slip in prices was largely attributed to the Central Area office prices which contracted by 2.7% QOQ. For the whole year, office prices have contracted by 5.8%.
  • Based on caveats lodged, the total value of transactions in Q4 2021 surged to $2.03 billion, up sharply from $241.9 million in Q3 2021. This took 2021 sales to $4.79 billion, which does not capture deals for which caveats were not lodged. The total value of deals transacted in 2021 has surpassed the last peak in 2012, where values hit $3.7 billion.
  • In Q4 2021, there were 98 sales transactions, reflecting a 30.6% QOQ increase from the 75 deals done in Q3 2021. For the whole year, there were 346 office sales – the highest since 2014.
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  • The highlight of Q4’s office transactions was the divestment of the 23-storey Grade A office building on One George Street by OGS LLP – a limited liability partnership, of which CapitaLand Commercial Trust (CCT) owned 50 per cent of – to SG OGS, a private firm, in mid-November for $1.28 billion. Just a month later, the building was then acquired from SG OGS by a joint venture between JPMorgan Global Alternatives and Nuveen Real Estate for $1.29 billion. A caveat has yet to be lodged for the second deal, and should it be included – it brings the total value of office investment deals in Q4 to more than $3.3 billion.
  • Based on caveats, the next biggest office deal of Q4 was the sale of 112 Robinson, a 14-storey freehold commercial building on 112 Robinson Road for $269.7 million. The purchase price works out to $2,925 per square foot based on a net lettable area (NLA) of 92,205 sq ft. The buyer is Alpha Eins (SG) Pte Ltd, an entity of Munich-based family office AM Alpha. The 112 Robinson deal is believed to be the family office’s first direct real estate acquisition in Singapore.
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Rentals and Leasing Trends

  • Despite activities in the year-end being typically slower, due to the seasonal lull, the leasing market in Q4 2021 fared relatively well compared to the same period in the last couple of years.
  • The URA office rental index showed that rents inched up by 0.9% in Q4 2021, reversing from the 3.5% decline in Q3 2021. For the whole of 2021, office rentals have grown by 1.9%
  • According to Realis data, the number of office rental transactions rose by 6.2% QOQ to 1,385 contracts in Q4 2021. On a YOY basis, the number of rental contracts was up by 7.9%.
  • Total rental value contracted slightly by 0.7% QOQ to $27.0 million in Q4 2021. However, on a YOY basis, overall leasing value grew by 26.6% from $21.3 million in Q4 2020.
  • 2021 was the year of “flight-to-quality” where a number of occupiers seized the chance to relocate to a better location or space with better specifications. Many occupiers also conducted space-rationalisation reviews in view of more workers telecommuting.• Rentals have recovered strongly on the back of the economic recovery and Singapore’s steady roll out of the vaccination programme – both of which has helped to boost the confidence among businesses and office occupiers. Delays in office supply completions due to construction disruptions has kept office supply fairly tight and rentals firm.
  • For 2022, demand for office space will likely be primarily led by tech and finance institutions as well as corporates that are increasing headcounts for business expansion, as the global economy return to normalcy. As of January 2022, 50% of the workforce are allowed to return to their workplace, bring more buzz to the office districts.
  • Some leasing trends that may gain traction in 2022 include co-working, offices that allow flexible space configurations as well as offices with green features and high-quality air filtration systems.

Office Vacancies

  • Latest URA data showed that the island-wide vacancy rate of office space has decreased slightly. Vacancies dipped to 12.8% as of Q4 2021 from 12.9% in the previous quarter.
  • Vacant Private Sector Office Space island-wide declined to 952,000 sqm (nett) as at Q4 2021, down from 967,000 sqm in Q3 2021. The bulk of vacant space in Q4 was located in the Downtown Core at 533,000 sq m.
  • According to the URA, the amount of occupied office space fell by 10,000 sqm (nett) in Q4 2021, following the decrease of 5,000 sqm (nett) in Q3 2021. Meanwhile, the stock of office space decreased by 23,000 sqm (nett) in Q4 2021.
  • In terms of supply in the pipeline, there was a total of 786,000 sqm gross floor area (GFA) of supply as at end of Q4 2021, compared with the 755,000 sqm GFA of space in Q3 2021.
  • In 2022, the limited incoming office supply – estimated at 78,000 sqm - should help to support occupancies in the near-term. At the same time, there may be an uptick in leasing demand from occupiers that have been displaced from buildings that are slated for redevelopment, such as AXA Tower and Fuji Xerox Towers.
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Market Outlook

Looking ahead, office prices and rentals are expected to continue to recover in 2022, in light of limited Grade A new office supply and the positive economic outlook.

While the prospects in the office property market are generally looking up, there are some downside risks including the impending interest rate hikes and rising inflation, potential emergence of new virus variants, supply chain disruptions as well as China’s economic slowdown.

Growth in the office market may also be uneven, with investors and occupiers being more selective; prime office assets that have higher specifications and located in choice locations may be more sought after, compared to Grade B office spaces or buildings outside the downtown core.