Office prices in 4Q2023 fell by 5.9% due to asset repricing, including River Valley Green Residences
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In its latest quarterly report, released on Jan 25, URA revealed that the office property market in Singapore ended 2023 on a subdued note. The commercial office prices for the last quarter of the year saw a decline of 5.9% q-o-q, reversing the small growth of 0.8% q-o-q in the third quarter. This resulted in an overall net decrease of 4.2% in office prices for the year. This trend was not unexpected, as JLL had already noticed a weakening in occupier demand as early as the second quarter of the year.
According to Tay Huey Ying, head of research and consultancy at JLL Singapore, the downcast global and domestic economic outlook at the start of the year, coupled with the prolonged higher interest rates, had made occupiers more cautious. Many corporations had put their expansion and relocation plans on hold in a bid to manage costs. As a result, the steep 5.9% q-o-q fall in the URA office property price index in 4Q2023, following three consecutive quarters of lacklustre growth, was largely attributed to the immense pressure to reprice assets arising from the negative yield spread over borrowing costs in the prolonged elevated interest rate environment.
On a similar note, Tricia Song, CBRE’s head of research for Singapore and Southeast Asia, highlighted that office rents in the Central Region had only increased by 0.3% in 4Q2023, which was the lowest quarterly growth for the year. This was a stark contrast to the 4.9% q-o-q increase in the previous quarter. However, for the whole of 2023, office rents still managed to register a growth of 13.1%, which was higher than the 11.7% increase recorded in 2022. Song explained that, due to the higher capital expenditure and interest rates, some occupiers had chosen to renew their existing leases at higher reversionary rents rather than relocate. Limited supply has also contributed to the tight availability of office space.
Song observed that there was a high demand for selected premium office space with quality specifications in the Core CBD. This had led to an increase in rental prices. However, she also noted that the availability of shadow spaces in prime areas such as Marina Bay and Raffles Place had proved to be an attractive option for occupiers seeking high-quality, fitted-out office spaces. Furthermore, some shadow spaces were also taken off the market as tech occupiers decided to retain their office premises, further contributing to the shortage. As a result, based on URA data, the market saw a positive net absorption of 0.1 million sq ft in 4Q2023, adding to the 0.25 million sq ft absorption in the third quarter. This brought the island-wide vacancy rate down slightly to 9.9% from 10% in the previous quarter.
CBRE Research also noted a moderation in the rental growth for Core CBD Grade A offices. In 4Q2023, rents in this category only grew by 1.7% y-o-y, as compared to the 8.3% increase in 2022. CBRE Research attributed this to the higher than historical average completion pipeline in 2024 and the potential influx of secondary spaces, which could lead to a temporary increase in the availability of office space. Nevertheless, the research team believes that the market will pick up after the first half of 2024 due to a reduction in interest rates and inflationary pressures. They are forecasting a moderate growth of 2% – 3% in Core CBD (Grade A) rents for 2024, as flight-to-quality and flight-to-green trends are expected to continue.
Meanwhile, investors who have been waiting on the sidelines are starting to re-enter the market as the Fed rate hike cycle ends. The successful sale of VisionCrest Commercial in Orchard to a consortium comprising TE Capital Partners, LaSalle Investment and Metro Holdings in November 2023 is seen as an impetus for more office deals, which could support the upside in asset prices in 2H2024.