Climbing office rents could turn off tenants: CBRE

Singapore had the fourth strongest premier rental growth across Asia at over 4.1%.

Amidst a recovering office market, high rents in Singapore which have recorded rapid growth in 2018 may deter some tenants, CBRE said.

The Urban Redevelopment Authority (URA) previously revealed that Singapore office space prices have grown by 1.9% in Q2, higher compared to the 1.3% increase in Q1. Rentals of office space inched up by 1.6%, softer compared to the 2.6% increase in Q1.

According to its Asia Pacific Q2 MarketView, Singapore had the fourth strongest Grade A rental growth across Asia in Q2 at over 4.1%, following Sydney and Guangzhou which recorded growth at around the same level (4.4-4.5%). Prime office yield is at 3.35% with +35 bps YoY change.

Singapore was also considered one of the active markets that helped drive a 22% QoQ increase in net absorption to 16.8 million sqft in Q2. It joined tier 1 cities in China, Hong Kong, India, and Japan.

However, CBRE noted that the US Federal Reserve increased its policy rate by 25 bps in June. “The signalling of two additional rate hikes by the end of the year came as a surprise,” said CBRE Asia Pacific head of research Henry Chin.

The change in the number of US rate hikes scheduled for the second half of the year prompted Hong Kong and Singapore to increase short-term interest rates. “The interbank lending for these two markets rose significantly compared to Q1 2018, increasing the cost of funding for investors,” Chin added.

By the end of June 2018, Singapore’s policy rate is at 1.63%, whilst the change within the quarter is at +18 bps. Still, this is significantly lower than Hong Kong (+81 bps) and Indonesia (+100 bps).

Moreover, in CBRE’s office rental cycle, Singapore is understood to be in the middle point between the “growth accelerating” and “growth slowing” phases along with cities like Bangalore, Guangzhou, and Ho Chi Minh City. However, it continued to be in the “growth accelerating” space in terms of capital value.

With this in light, office leasing demand is expected to remain solid and will continue to be driven by relocations for expansions and upgrading, CBRE said.

Singapore is expected to follow the pattern in Asia wherein demand will be led by financial and technology companies along with the co-working sector, with local and global operators understood to be planning further expansion.

Net absorption in Singapore remained solid and was supported by healthy pre-commitments to the newly completed Frasers Tower, with an estimated supply contribution of 663,000 sqft, Chin added.