Expect 2014 to be the year of galloping office rents: Savills

CBD Grade A office rents to jump 5–10%.

According to Savills, with limited supply, 2014 could well be the year of galloping rents. Savills noted that CBD Grade A office rents are expected to jump 5–10%.

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Moving into 2014, Singapore's economic outlook remains positive and will benefit from the improving external economic conditions in the US, Europe and China. The future supply pipeline of CBD Grade A office space remains relatively limited in 2014, with only about 1.2 million sq ft from CapitaGreen on Market Street and South Beach Tower on Beach Road being scheduled for completion by year’s end.

Therefore, there are very few landlords holding new supply of CBD Grade A office space, while older stock in Raffles Place, Shenton Way, Tanjong Pagar and City Hall are enjoying low vacancy rates. This economic outlook remains positive and will benefit from the improving external economic conditions in the US, Europe and China.

The future supply pipeline of CBD Grade A office space remains relatively limited in 2014, with only about 1.2 million sq ft from CapitaGreen on Market Street and South Beach Tower on Beach Road being scheduled for completion by year’s end. Therefore, there are very few landlords holding new supply of CBD Grade A office space, while older stock in Raffles Place, Shenton Way, Tanjong Pagar and City Hall are enjoying low vacancy rates.

This has encouraged landlords to hold up rents. On the demand side, the hiring outlook remains uncertain over the next half-year and companies will continue to be conservative in their expansion plans according to the latest surveys.

Therefore, we expect the office leasing market to be dominated by small lettings, with tenants holding the negotiating power, as there are plenty of options from pockets of space in various buildings. Savills expects the recovery phase to continue over the coming quarters, with moderate rental growth in the CBD market.

The strata office market will remain healthy as there are end users and more seasoned investors who still prefer this sector, and by and large do not seem to be affected by the total debt servicing ratio framework. In view of the more positive outlook for the office rental market, we may also see a few more office investment deals.

However, the pricing gap between buyers and sellers has widened and yields have compressed, and as such, transaction activity in 2014 will be most likely be limited due to the tightly held stocks and the lack of available investment opportunities. The growth in capital values is therefore expected to be modest.