Lower supply, faster recovery ahead for Singapore's office sector: analyst

Office S-REITs are expected to pick up as they adjust to tenants’ flexible work needs.

Even as Singapore’s economy is slated to pick up gradually in H2, the office sector is set to face low levels of incoming net office supply in the coming months, according to DBS Group Research analyst Rachel Tan.

Over 2020-2022, only c.71,000 sqft of new net supply in the downtown core will be completed, far less than the supply in previous crises (range of 818,000-2.84m sqft), noted Tan.

Compounding the limited supply will be the projected construction delay and record low vacancies (<5% in downtown core), which will mitigate a steeper fall in office fundamentals and set the stage for a faster recovery into 2021 and beyond when the economy recovers, Tan stated.

“Whilst the office sector has been the least impacted by COVID-19 directly thus far, we are cautious on the potential economic impact it might have on office demand as we move into the phased reopening post Circuit Breaker. The stock market has been exuberant with the end of Circuit Breaker on 1 June, but the critical factor for the office sector is how quickly the economy can recover,” she added.

She also cited the past three economic crises (Asian Financial Crisis, SARS and Global Financial Crisis), where office demand in the downtown core is observed to track closely to GDP, both bottoming out in tandem. In trade sectors, office demand remained most positively correlated to GDP from the finance and insurance sector, despite increasing demand in the past few years from the information and technology trade sector, and real estate business and services trade sector.

Since Q2 is expected to be the rock-bottom period during the COVID-19 recession, net office demand may have started to decline in the same quarter. However, office demand will likely recover post-Q2.

“Despite facing a steep economic recession in 2020, we believe that Singapore’s economy is near an inflection point with the steepest GDP contraction expected in Q2. Based on historical trends over the past three recessions, we note that this period will also coincide with the bottom in both office demand and office S-REIT share prices,” Tan said.

Further, it is still too early to factor in potential structural demand shifts as firms continue to adopt work-from-home (WFH) practices. “Whilst flexible working policies will be core, we do not see a 180-degree pivot towards WFH but a balance will be sought.”

Office S-REITs, Tan added, may likely adjust by offering flexible workspace to meet their tenants’ evolving needs and integrating with sustainability practices. A near-term supporting factor is demand for more space for safe distancing requirements and Business Continuity Plan (BCP) needs.