Flight to quality activity taking hold in Singapore
Office vacancy in Asia Pacific continued a slow decline in Q1 2012, however, this trend is likely to end in Q2, given slowing occupier demand and new supply coming online across the region, according to the latest Asia Pacific Office MarketView report published by CBRE, the world’s leading commercial real estate services firm.
The minor dip in overall office vacancy in Asia Pacific resulted from diverging performance in markets across the region. Nearly half the countries in Asia Pacific recorded a drop in vacancy, slightly offsetting those regions that experienced an increase in vacancy. In Asia, overall vacancy in Hong Kong, Shanghai and Beijing continued to decline, while Tokyo, Singapore, Kuala Lumpur and New Delhi all saw vacancy rise.
Island-wide vacancy in Singapore increased to 7.3 per cent in Q1 2012. This is a 57 basis points increase from Q4 2011 and 162 basis points increase from a year ago. Vacant stock island-wide totalled 3.8 million sf. In Core CBD, the vacancy rate grew to 9.30 per cent from 8.80 per cent in Q4 2011. Going forward, vacancy rates are expected to rise further across all grades and micro markets and we expect vacancy to peak in 2013.
Grade A rents in Singapore continued to decline in Q1 2012, falling by 3.6 per cent quarter-on-quarter to $10.60 psf/month. The key demand indicator, quarterly net absorption, recorded a positive 587,000 sf in Q1 2012, boosted by the high 70 per cent pre-commitment level at Marina Bay Financial Centre (MBFC) Tower 3, which came on line in March. Our projects for the remainder of the year, however, suggest weakening demand and declining net absorption levels. The office stock reached 52.8 million sf in Q1 2012 on account of the 1.3 million sf MBFC Tower 3 completion.
Moray Armstrong, Executive Director, Office Services, said “Whilst the banking sector is not in the market, overall occupier demand is holding up fairly well. We are seeing strong leasing interest from the energy/commodities, professional and legal sectors. Whilst rents are expected to trend slightly downwards we do not foresee a significant rental correction as compared to previous cycles. Occupiers can, however, expect to benefit from more generous rent-free periods and other incentives. Our medium to long-term outlook is that Singapore is ideally placed to capitalize on the shift of economic power to Asia. The lower office cost base that will emerge from this cycle is likely to further improve Singapore’s competitive edge”.
MBFC Tower 3 is by far the largest office development in 2012 and represents the last significant new office building in the last three years. With the exception of the development in Pickering Street, which is already pre-let to AGC, there is no other new office supply expected this year. That said, a sizable secondary stock will be released to the market in the next 18 months resulting from the relocations of major occupiers such as Citibank, DBS, Cisco and Credit Suisse to new facilities. To date landlords have managed their exposure to secondary space well and such space has provided opportunity to cater for growth of existing occupiers in these buildings.
Similar trends have been observed across the Asia Pacific. Demand for office space weakened further in Q1 2012, as corporates continued to seek opportunities to reduce real estate costs via consolidation and/or relocation. This trend is spurring the release of secondary space in a number of key markets, which will continue to exert pressure on vacancy. Demand for large floor plates also fell during the quarter, with most leasing deals completed over the period for smaller spaces. In terms of industry sector, financial institutions—particularly major international banks—remained generally inactive. Professional services including IT and consumption-related sectors accounted for the bulk of office leasing demand.
New supply anticipated to come online in 2012 will also put pressure on the overall vacancy rate. In Q1 2012, new office stock of 8.3 million sq. ft. was completed across Asia Pacific, 33 per cent above the 10-year quarterly average. Completions are expected to exceed 45 million sq. ft. in 2012, a 30 per cent rise year-on-year. It should be noted that the development pipeline for 2012-2013 as a proportion of current stock varies significantly per market, ranging from as high as 44 per cent in New Delhi to virtually zero in Wellington and Bangkok. Tokyo, Seoul, Mumbai, Kuala Lumpur and Ho Chi Minh City will witness an increase in completions over 2012.
With rents moderating amidst weaker demand and an abundance of new supply in select markets, two distinct trends are emerging: some occupiers are focusing on cost reduction/rationalization and moving to decentralized locations, while others are focusing on upgrading to higher quality/better located buildings in prime CBD areas.
“A combination of weakening demand and limited availability of development finance is slowing the pace of construction activity. Nevertheless, considerable new supply will still hit the market in 2012, which means newer and often better quality products for those occupiers looking to secure alternative space this year, “ said Dr. Nick Axford, Executive Director and Head of CBRE Research, Asia Pacific.
Disclaimer:
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world's largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
