Singapore may have only 80k-85k new jobs for 2012

• Recalibrating assumptions for a more muted 2012. As the drastic turn of events in the West has clouded employment prospects, we now expect a drop in job creation in 2012, which is likely to hurt office rents in a period of rising supply, though we are currently not anticipating a repeat of 2009.

With prospective tenants spoilt for choice, landlords with new office inventories and significant pre-leases should fare better. We retain our preference for office developers over office REITs, but with lower target prices on lower rent assumptions (-5% to 10%) and higher cap rates (+25bp). 

• Less-sanguine job outlook. Economic conditions have taken a turn for the worse. Our economics team was initially expecting 110k-115k new jobs a year but with prospects now dimmer, it now expects a lower 80k-85k for 2012 on GDP growth of some 5%. While recent surveys still suggest healthy job growth in 3Q11, checks with headhunters show that hiring plans for most business units in the financial service sector, except private-wealth and fund management, have been put on hold.

• Expect a softer patch for rents, though not a repeat of 2009. In an environment of slowing job growth, near-term weakness in office rents appears unavoidable. While the recovery in this cycle comes from a low base, we believe prime rents could retrace by 5-10% in 2012 to S$9-10psf, or back to the levels of end-2010. We continue to believe there will not be a repeat of the 2009 crisis.

If our employment estimates are right, we believe supply can still be absorbed. Using a conservative 130sf-per-employee ratio, we estimate that a mere 13k new jobs would be needed per year to absorb supply. Financial services alone generate a steady-state 10k new jobs a year. We believe these numbers are still achievable.

Falling office space-to-total employment ratios and average prime rental costs to financial service GDP coupled with rents still at discounts to Hong Kong’s and previous peaks also suggest that office rents remain undemanding on a mid-term basis.

• New over the old. In the next 12-18 months, prospective tenants will be spoilt for choice in the Grade-A market, and are likely to gravitate towards newer buildings with higher spot rates than older buildings, in our view. We believe the demand disparity between new and older buildings will widen further.

We note that big financial institutions like Citigroup and BOA-ML are due to move from Millenia Tower and Republic Plaza respectively to Asia Square and OUE Bayfront, paying what we believe to be commensurate rents as their current rents. Around 52% of new office space in the CBD for 2H11-2012 has been pre-leased.