It has been suggested before, as early as two years ago, that the new downtown at Marina Bay will eventually be the new Raffles Place. Now it seems the market is actually doing the talk.
Almost everyone who does business in the region knows Raffles Place. It is Singapore’s premier office district.
Over the decades, the mantle of being Singapore’s most-sought-after business address has shifted before – from Raffles Place to Shenton Way and then back to Raffles Place. And for a while, Raffles Place expanded to include parts of China Square.
But now, judging from office rental trends, the market is ready to bestow that title to a new aspirant, way ahead of expectations. For a market that is supposed to be replete with abundant space, it is strange to see Prime Grade A rentals rebounding so strongly.
One property consultant reported that the average gross monthly rental value for Grade A CBD office space appreciated 8.7 per cent quarter-on-quarter in Q3 this year following a 7.6 per cent escalation in the first half.
The definition of Prime Grade A space is a little tricky. It is not the building with the highest specifications nor is it one with the best location. It is a combination of both. Besides, the market is always changing and a property market researcher needs to know when to drop some buildings even as he or she adds new ones to the basket.
The best definition I can give is that it is the most-sought-after business space. This covers not only quality and centrality of location but market perception as well. This means only the market can determine what is Prime Grade A space, not the agent nor the researcher.
Compared to Prime Grade A space, rentals in other districts have not shown a lot of improvement. Overall, they have been flattish. You can understand why.
Official figures show that we can expect on average about 3 million sq ft of new space to be completed each year for the next three years to the end of 2012. For the first half of this year, office demand in terms of net take-up of about 700,000 sq ft has not even come close to matching the supply figures.
You would expect this divergence of performance in the residential market, where there is wide variation in quality and personal tastes but not in the office market. Here, most of the offerings are close alternatives. It is just that travel times may be a bit longer.
Moreover, the Singapore office market is a mature one. In a mature market, the difference in quality between new and old space may not be minimal but it is definitely not significant.
So, what is responsible for the hike in Prime Grade A rentals? Is there a shortage of such space or has demand expanded very strongly? Yes, demand from banks and financial institutions has expanded strongly but as the official figures show, it does not come close to matching supply.
This leaves a shortage of such space as the only other reason. In the eyes of the market or in this case, multinational companies or regional tenants, the supply of such space has remained stagnant or has actually shrunk.
The most recognisable feature of Singapore today is not just the Merlion or the Esplanade. It now includes the Marina Bay Sands. Soon, you cannot say you have been to Singapore if you have not visited Marina Bay. As such, multinational tenants who are worth what they say they are must be at Marina Bay and they have shown that they are willing to pay a hefty premium for this must-have space.
Almost all of us will agree that the new office buildings in the Marina Bay area are truly world-class. This means, in the eyes of the market, some previously Prime Grade A space has lost its coveted status. At the same time, some quality new space simply does not have it because it is not in the right location.
The market has spoken. Let us listen and not dismiss it as a temporary anomaly that will sort itself out later.
By Colin Tan, head of research and Consultancy, Chesterton Suntec International.