Singapore office rentals to drop 8% in 2012 - 2013

OFFICE

We have turned cautious on the office sector on an anticipated 8% p.a. pullback in office rentals in 2012-13 driven by slowing office demand and rising supply. This is based on a GDP growth of 2-3% in 2012-13, as highlighted in our office rental sensitivity table, and would mean that office rentals would pull back to S$7.50-8.00 psf in two years. This rental is still 15-20% above the trough prime office rental of S$6.70 in 1Q10. Although we see global headwinds with the weak recovery in the US and the sovereign debt issues in Europe, our view remains that a double-dip scenario  remains unlikely.

Demand slowdown from weakening hiring pace and cost-cutting at banks. With slowing global growth, banks and financial institutions have announced staff cutbacks in developed countries such as the US and the EU, with an estimated 50,000 jobs affected worldwide. However, banks in Singapore were aggressively hiring in 9M11, but we anticipate the pace will slow with the more uncertain economic environment. Citibank Singapore had increased headcount by 15% to 10,000 in Aug 11, up from 8,700 in Nov 10 while DBS had also increased its headcount by 1,400 to reach  17,000 staff in 1H11.

This is reflected in the moderation of the business expectations survey conducted by the Singapore Department of Statistics, with 33% of financial institutions looking to hire additional workers, down 11ppt from a year ago.

Leasing market shifting towards smaller tenants. With the relocations of large banks such as Citigroup, DBS and Standard Chartered to the Marina Bay area, new demand for space is now more dependent on smaller tenants. Though office landlords are reconfiguring space to meet requirements in the 5,000-50,000 sf range, new demand may be insufficient to fill new completions.

Rising supply may mean vacancies ahead. The supply of office space is more visible, with an average of 2.1m sf of space to be completed p.a. over the next three years. This includes the redevelopment of Market Street Car Park into a Grade-A office tower, and also over 1m sf of space to be built in the suburban commercial hubs of Jurong East and Paya Lebar. In addition, an estimated 2.5m sf of office space will also be developed by 2016 from the six parcels of land in Marina Bay and Ophir-Rochor arising from the Malaysia-Singapore land-swap arrangement.

We anticipate that demand will moderate from the average 2m sf of space p.a. in 2010-11 to 1.3m sf of space p.a. in 2012-13 due to slower economic growth. This may cause occupancies to dip moderately from 87.5% in 2Q11 towards 85-87% in 2012-14 due to an average 2.1m of space being completed p.a. over the next three years.