Hong Kong beats Singapore again -- as the most expensive place to do business

The gap between Singapore and Hong Kong in terms of office rents has widened further – from 45 percent as of end December 2008 to 67 percent in 2H 2009.

Singapore remained locked out of the global Top 20 most expensive office locations list taking the 24th position – up two notches from its 26th position in the previous survey in 1H 2009.

Colliers International’s latest global office real estate review – which tracked office performance from June 2009 to December 2009 across 154 cities worldwide – revealed that Singapore’s competitiveness, in terms of office occupancy costs, continues to improve, as the gap between its office rents and the world’s key financial centers’ widened further.

Hong Kong retained its topmost position as the most expensive office location, while London West End and Tokyo ranked second and third, respectively.

Singapore remains one of the laggards – worldwide and regional – in the office property market recovery path. Many cities have either posted gains or recorded milder rental declines in office rent in 2H 2010, both in US Dollar and in local currencies.

Ms Tay Huey Ying, Director of Research and Advisory at Colliers International, says, “This phenomenon, however, is to Singapore’s advantage. The resultant growth in the gap in office occupancy costs against other key financial centers improves our competitiveness and makes Singapore the choice location for business set-ups.

For instance, comparing with our closest competitor, the gap between Singapore and Hong Kong has widened further – from 45 percent as of end December 2008, to 60 percent in 1H 2009, to 67 percent in 2H 2009. Hence, on top of its many accolades in building a conducive business operating environment, Singapore’s cheaper office rents vis-à-vis other key financial centers is certainly icing on the cake for any firm choosing to locate their regional office here.”

While Singapore’s office rents have continued to trend south, the pace of decline has, nonetheless, slowed down significantly to 6.5 percent in 2H 2009, compared to 42.3 percent in 1H 2009, in local currency terms.

Ms Tay explains, “The marked moderation in Singapore’s office rental decline was underpinned by a pick up in office leasing activity in 4Q 2009, which was fuelled by relocation deals – motivated by flight to quality amid attractive rents at more than 50 percent discount to 2008 peak. New leases prompted by businesses planning for the upturn and renewals also contributed to the increase in leasing activity.”

The global report concluded that despite signs of growth in the global economy, office markets in most regions – particularly North America and Europe – continued to experience weak tenant demand and sluggish leasing activity in 2H 2009. Asia Pacific and Latin America, however, were just beginning to show some signs of growth.

Meanwhile, all regions continued to report high office vacancy rates and falling rents. However, relative to 1H 2009, the changes in both the vacancy and rental rates were modest. Nonetheless, in contrast to the worldwide sluggish leasing conditions, office investment activity in 2H 2009 increased across all regions – suggesting that investors worldwide are confident of the market fundamentals firming in the near future.

On the investment sales front, after a two-and-a-half-year period of decline, global sales in 2H 2009 totaled US$41.8 billion, a 42.3 percent increase from 1H 2009. This suggests the bottom may have been reached and global property sales are now set to go higher.

An analysis of global sales activity for the full year shows that Asia Pacific is leading the recovery in property investment. Three out of the top five cities were from the Asia Pacific region – with Tokyo taking the second spot at US$11.2 billion, Seoul taking the 4th spot at US$4.4 billion and Shanghai fifth at US$3.5 billion.

Outlook

The global outlook for 2010 is for a further weakening in fundamentals, but by year-end, most regions are expected to show signs of growth, albeit tentative.

The leasing markets in Asia Pacific are forecast to move further along into recovery in 2010. The prevailing supply cycle in some markets will put a damper on any material rental growth over the near term; however, in anticipation of the catch-up of occupational demand in tandem with overall economic growth, rents in the region should start to post limited growth in the latter half of 2010.

Ms Tay concludes, “Singapore’s office market is expected to ride on the economic recovery in 2010 and build on the momentum in 4Q 2009, during which demand for office space expanded by 301,000 sq ft.

In fact, with occupancy rates firming since 4Q 2009, rents of Grade A office space in the CBD has bottomed out in 1Q 2010, rising by 0.5 percent quarter-on-quarter to end the quarter at S$6.38 per sq ft per month.

While there remains more than six million sq ft of space in the pipeline in the CBD, it is noted that at least one third of the potential supply has already been pre-committed by tenants. In particular, Phase One of the 1.6 million sq ft Marina Bay Financial Centre is 100 percent leased ahead of its completion in 2010. This has injected confidence into the market that the huge on-coming supply might not be beyond the market’s appetite after all.

The flight-to-quality process, as well as expansion by businesses, can be expected to continue in 2010. Barring any unforeseen external shocks, the Singapore office market is expected to see a modest recovery with up to 5 percent increase in rents in 2010.”