Singapore’s office landlords, long dependent on banks, are broadening their tenant base to soak up empty space as the commercial property market inches toward recovery after a three-year slump in rents.
Rents in the best buildings may start to rise this year, according to brokers CBRE Group Inc. and Cushman & Wakefield Inc. Vacancies in the city-state fell to 5.1 percent in the first quarter, the lowest since September 2008, from the previous three months, CBRE said. Annual new supply will be 38 percent lower than in the past 20 years, CapitaCommercial Trust forecasts.
Property owners such as CapitaCommercial and Suntec Real Estate Investment Trust are using the cheapest rents in three years to lure commodity traders, law firms and software companies. The new tenants are moving in as financial-services firms scale back expansion plans in the wake of the European debt crisis.
“Singapore’s office market is getting a lot more diversified,” said Elysia Tse, senior vice president of strategy and research at Aviva Investors Asia Pte, which has $2.5 billion in property assets in the Asia-Pacific region. “We are at the turning point where we see supply stopping, demand slightly turning positive, vacancy declining and rents have stopped falling.”
Office inventory surged after the government in 2005 extended the traditional central business district with the development of Marina Bay, which sits on about 360 hectares (890 acres) of reclaimed land of which 80 hectares is allocated for the business district. The area is home to 10 office towers and gaming billionaire Sheldon Adelson’s landmark Marina Bay Sands hotel and casino.
Then came the collapse of Lehman Brothers Holdings Inc. in September 2008, a global recession and later the euro-zone crisis. Vacancy rates soared to a post-crisis high of 14.5 percent in the third quarter of 2010.
Prime-office lease rates declined to S$9.55 ($7.46) per square foot per month in the first quarter, the lowest since the same period in 2010, according to CBRE, which ranks Singapore’s overall office rents the 19th highest globally. Rents for prime space -- the most stable, high-income producing properties -- peaked at S$18.80 in August 2008, CBRE data show.
The office market is benefiting from Singapore’s emergence as Asia’s wealth-management center. The city of 5.3 million people has the fifth-largest proportion of millionaire households in the world, at 8.2 percent, according to a Boston Consulting Group report in May.
The island-nation also has become a commodities hub, with Asia’s biggest oil-trading market for companies such as BHP Billiton Ltd., Exxon Mobil Corp. and Chevron Corp., and the largest foreign-exchange center in the region after Tokyo.
“We are becoming more optimistic about the prospects and outlook for the office sector,” said Moray Armstrong, executive director of office services at CBRE in Singapore.
Companies are being attracted by some of the lowest occupancy costs in Asia. Rents, local taxes and service charges average $99.65 per square foot on an annual basis, according to a CBRE survey published June 21. That compares with $235.23 in Hong Kong, the world’s most expensive office market, and $161.16 in Tokyo.
U.K. law firm Clifford Chance, French oil-and-gas company Lynx Energy Trading, U.S. publisher McGraw Hill Financial Inc., German software maker Software AG and Zurich-based bakery Aryzta AG are among companies that have moved into Marina Bay Financial Centre’s Tower 3, completed in March of last year.
Clifford Chance, based in London, moved last year from One George Street as it expanded, said Justin Young, the firm’s Singapore and Bangkok general manager. The firm has taken 35 percent more office space than before and occupies 31,000 square feet (2,880 square meters) at Marina Bay, he said.
“The rents were very favorable because we signed the lease before the building was completed,” Young said in a telephone interview. “It made very good financial sense for us to move because we could lock in these rents for a long period of time.”
The downside of diversification is that the new tenants typically can’t afford the same rents as banks and brokers, which are willing to pay top dollar for large, contiguous spaces where they can consolidate their operations.
The average monthly rent for grade-A offices at Marina Bay fell 1.1 percent to S$10.18 per square foot in the final quarter of 2012 from the previous three months, Cushman said. The broker defines grade-A offices as those built in the past three years and located in sought-after areas.
Still, some of the recent transactions in Marina Bay have set rents of more than S$12 per square foot, said Toby Dodd, managing director for Singapore at Cushman. The broker expects average rents to climb 5.8 percent to S$10.77 per square foot by June as vacancies shrink.
“Second-quarter estimates are showing a clear growth in rents since the start of the year, driven by a 35 percent increase in occupancy on a quarter-on-quarter basis,” Dodd said.
Not everyone sees an imminent recovery. Prime rents will decline this year, weighed down by global economic uncertainty, said Chia Siew Chuin, a director at Colliers International. Domestic growth -- Singapore’s economy is expected to expand 1 percent to 3 percent this year -- and the city’s status as a financial hub may keep the decline to less than 5 percent.
“The challenging global economic environment coupled with supply pressures could see Singapore’s office rents continue to soften in 2013,” Chia said.
Companies positioned to take advantage of a recovery include CapitaCommercial, Asia’s biggest office-property trust outside of Japan. Its portfolio occupancy was stable at 95.3 percent in the first quarter, analysts Eli Lee and Sarah Ong at OCBC Investment Research said in a note to clients on June 4. Plans to renovate its office complexes at Six Battery Road and Raffles City Tower will provide further growth.
At the trust’s key buildings, rents are below current market rates, leaving them well positioned for increases, they wrote, maintaining a buy rating on the shares with a price target of S$1.80. The stock, which gained 60 percent last year, has declined 16 percent to S$1.42 this year.
Singapore’s new supply for the next three years will be about 800,000 square feet annually, down from 1.3 million square feet over the past two decades, Lynette Leong, chief executive officer of CapitaCommercial, said in January.
Frasers Commercial’s China Square Central near the central business district is expected to increase occupancy and rental income, said the OCBC analysts, who have a buy rating on the trust. Frasers Commercial, a Singapore and Australian office landlord, rose 78 percent last year. The shares added 0.4 percent this year to S$1.325.
The trust focuses on grade-B offices, with mainly mid-sized to small companies as tenants, which tend to be more stable, Wang Mei Ling, investor relations manager at Frasers Commercial said in a phone interview.
“You don’t see large pullbacks or large expansions by them,” Wang said. “We expect grade-B rents to remain fairly stable.”
Grade-B office rents have declined by 2 percent over past year, while those for grade A have dropped about 10 percent in the period, she said. Frasers Commercial’s two office buildings, comprising 444,000 square feet in the central business district, will post average rent increases of as much as 10 percent, Wang said.
Suntec, which owns a third of two towers in the Marina Bay Financial Centre, had a 7.6 percent increase in revenue, driven by higher rents and occupancy at its offices, OCBC analysts Lee and Kevin Tan said in a separate note to clients on April 26.
The company signed 185,000 square feet of leases in the first quarter, with only 10.3 percent due to expire in 2013, OCBC said. The brokerage maintained its buy rating on the stock. OCBC forecast the stock to rise to S$2.16. The stock rose 1.4 percent to S$1.485 at the close in Singapore trading.
“Our office portfolio has been close to 100 percent occupied every quarter for the last two years,” Yeo See Kiat, chief executive officer of Suntec, said in a phone interview, adding he expects 2013 to be better than 2012.
A shortage of new supply as demand from companies increases will support rents, said CBRE’s Armstrong.
GuocoLand Ltd. is building a skyscraper at the edge of the city’s financial district that will become the tallest tower in Singapore when completed in 2016. It will have 850,000 square feet of office space, representing 60 percent of the tower.
MGPA Asia Fund III, owned by MGPA, the private-equity property investment advisory firm being acquired by BlackRock Inc., is building Asia Square Tower 2, comprising 782,280 square feet of office space, in Marina Bay, while CapitaLand Ltd.’s CapitaGreen will be completed at the end of next year in Raffles Place, the city’s established business district.
Grade-A supply for the CBD “is looking a little bit thin,” Armstrong said. Asia Square Tower 2 is already 20 percent pre-let, he said, indicating strong demand before completion.