Singapore office rents to rise 8% in 2011

Lowering office assumptions on slower growth outlook but not a repeat of 2008/09. Singapore GDP growth forecast has been cut to 6.2% in 2011 and 5.5% in 2012. We believe recent global events set a case for an extended period of slower growth rather than a repeat of the 2008/09 global financial crisis conditions. Against this backdrop of a more muted office employment prospects, we expect office demand to remain positive though slower than previously projected.

Historically, demand would turn negative only when economic growth remains in the negative territory for 2-3 consecutive quarters. As such, we expect rental rates to remain relatively flat this year and to range between 0% to –5% for next year. In the current low interest rate environment, capital value outlook should remain relatively flat over this period.

Longer supply visibility. Under the slower growth environment, we are revising our office demand projection to 2msf this year and project another 1.2-1.5msf (2msf previously) to be taken up in 2012. This means that islandwide vacancy level wcould rise by another 1%pt from the present level of 12%, still below the 2003’s high point of 18%. Meanwhile, visibility of new office supply has been extended beyond 2016 with the potential stock from the M+S land parcels. As such, office tenants are likely to have more choices and this will moderate rental pressure going forward.

Reassessing office
Momentum decelerating into Q2. Office rents continued to strengthen in Q2 by a mere 1.4% qoq, the slowest increase since the past 4 quarters despite a higher demand in Q2. This brings the rental increase in 1H11 to 7%. According to CBRE, prime Grade A office space achieved average rents of $10.60psf/mth, +2.9% qoq. Meanwhile, capital values continued to improve by 2% in Q2, with 1H11 values up 8.7%.

Moderating our expectations for 8% rental and 10% value appreciation in 2011. We are moderating our projection for an average 8% yoy rise in office rents and a 10% hike in capital values in 2011, slightly lower than the 10% growth expected earlier, on the back of a slower take up for the rest of the year.

For 2012, we estimate rents and capital values to range between 0% to –5% yoy compared to a 5% uptick previously. While rents have risen 20% from the low in 2009, it is still 14% below the 2008 peak.

Adjusting our demand assumptions
In terms of activity, a higher take up of 667,368sf of space was seen in Q2 vs 538,200sf in Q1, bringing the 1H absorption to 1.2msf. In our base case scenario, we expect demand to moderate but still remain positive going into the 2H and next year. Hence, we revise our current take up assumption of 2.5msf to 2msf for this year and 1.2-1.5msf for next year. Hence, we expect occupancy rate to dip slightly to c86-87% compared to 88% currently.

Given Singapore’s relatively open economy, possibility of downside risks exists. Anecdotal evidence showed that office take up would turn negative only when GDP growth remains in the negative territory for 2 or more consecutive quarters.