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Commercial property outlook 2016

A year ago, the commercial market was a lot more optimistic and buoyant, on the back of tight supply, and rising rents, especially in the tight CBD area. Coupled with the outflow of capital from a residential property market seized up by 13 rounds of cooling measures, the commercial property market seemed like a bright spot in Singapore’s frigid real estate market.

In the space of a year, this optimism has become a lot more muted, with the tumbling of oil prices, a bearish Mainland Chinese economy and a weakening Eurozone. It’s time to take a good hard look at the commercial sector, and see what we can expect in the coming year.

Office Space

As an open economy that’s a regional financial hub for several companies in banking, financial services and commodities, the various crises have taken their toll on the office segment.

In 2015, high profile layoffs in companies such as Standard Chartered, Royal Bank of Scotland and Morgan Stanley made headlines. In the coming weeks and months, Barclays and Credit Suisse, amongst several others, are also expected to announce job redundancies.

With many financial institutions cutting back on overhead costs to stay buoyant, rents are taking a pummeling. Figure 1 shows the Urban Redevelopment Authority’s (URA) Office Rental Index, for both the Central and Fringe Areas. Between Q2 and Q4 of 2015, rents in the Central area fell 9.1 percent, while those in the Fringe fell 8.3 percent over the course of 2015.

With overall pessimism leading to lowered demand for office space, rent prices are likely to continue falling over the course of 2016. However, the sub-segment most likely to be affected by the economic turmoil is likely to be office spaces in the city fringe.

Figure 2 shows the different vacancy rates across the key office areas of the island, including the prime Downtown Core and Orchard Areas, as well as the Rest of Central and Fringe areas. From Q4 2014, the vacancy rate in Fringe areas have remained consistently high, around 13 percent, suggesting that more than one in 10 of completed stock is unoccupied or untenanted.

In contrast, vacancy rates for the Downtown Core and Orchard Areas have been on a decline over the course of 2015. Real estate consultancy CBRE suggests that this is a “flight to quality,” with corporate tenants taking advantage of lowered rents to move their operations into more prime areas. This is in contrast to past years, where tight supply and high rents in the prime areas led banks to move their back room operations into regional centers and business parks.

Supply in the fringe-CBD saw a boost in the second half of 2015 with the earlier than expected completion of South Beach. It is likely to increase in 2016 with Guoco Tower, part of the integrated Tanjong Pagar Center, and Duo at Beach Road, completing construction and entering the supply pool. These developments will likely continue to apply pressure on office rents outside the city fringes.


The industrial property sector is facing strong headwinds, buffeted on almost all sides. The global economic uncertainty translated to declines in manufacturing output in Singapore, with the Purchasing Managers Index (PMI) dipping to a 49.0 in January 2016. In fact, for most of 2015, the PMI stayed mostly below the 50.0 mark, suggesting an overall lack of confidence.

With output on the decline, demand for industrial property space is falling as manufacturers scaling back operations. This is exacerbated by an oversupply of industrial property space. Between 2013 to the end of 2015, JTC Corporation and URA, sold 61 sites, totaling over 583,000 sq metres of land, for both B1 (light industrial) and B2 (heavy industrial) purposes. This fi gure does not include some of the smaller industrial buildings that were collectively sold over the past two years.

URA predicts that by the end of 2016, a total of 2.2M sq metres of factory space is likely to be completed. Because this is currently beyond what the market can absorb, URA has also tapered down the supply, with a much lowered 789,000 sq metres of factory space to be completed in 2017, and then another 623,000 sq metres in 2018.

The combination of weak sentiment and oversupply has led to a vacancy rate of just over 10 percent and 6 percent for privately owned industrial property and government leased industrial property respectively (refer to Figure 3). From the charts, it is quite clear that the vacancy rate for both segments are on an upward trajectory.

Weak manufacturing sentiment and a slowing global economy will reduce demand for industrial space, suggesting that the vast upcoming supply will find it difficult to be absorbed. We might see vacancy rates increase to around 12 percent or even higher, for factory space by the end of 2016.

This has also negatively aff ected the sale prices and rentals of industrial property. Over the course of 2015, both the sale price index and rental price index of industrial properties have seen quarterly declines, ending the year at 105 and 100.6 respectively (refer to Figure 4).

These prices are likely going to tumble even further as 2016 progresses, and will be a buyers’ and tenants’ market. Investors who fl ocked to this segment, and who do not have adequate holding power, or are dependent on rents to repay their loans, are likely going to have to slash rental or sale prices.

Picture Source: A worm’s eye view of CBD buildings.
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