Office: lower rents, lower pipeline supply
Office rents have recovered from the lows of 2009, but are still some 35-40% below previous peak levels. On a though-the-cycle basis, Grade A rents of S$10-11psf are probably at historical average levels. Discounts to Hong Kong rents have also remained wide since 2009. In addition, we believe one key difference between now and then is the lower pipeline supply levels, with a large portion of the CBD stock coming in the next 6-12 months already pre-committed. Supply completions are expected to be uneven as more supply will come through in 2014-2015 vs. 2012-2013. Similar to past cycles, we believe the demand disparity between new and old will widen, with newer buildings commanding higher spot rates vs. older buildings.

We lower our office assumptions once more, following our downgrade in Aug. Declining jobs and GDP growth have historically led to weaknesses in office rents through the cycle, and we expect this to trend to hold going into 2012. Retrenchments in the financial sector are gaining pace, something that will adversely affect office take-up. We now expect Grade A rents to retrace 18-22% from current levels, from 5-10% previously, down to S$8.50-9psf.

Our base case though remains that the bottom of 2009, when Grade A office space traded at S$6.50-7.50psf, will not be retested unless net employment falls below 2009 levels. A lower supply pipeline in this cycle helps mitigate a drastic fall in occupancy. We raise our cap rates by another 50ps to 5.25%-5.5%, a shade below the worst of the GFC, and implying Grade A capital values of S$1,750-1,900psf.