Business Times - 26 Mar 2009
Business park space offers long-term cost advantage
Cyclical rental fluctuations are much less volatile compared to those for offices
By CHRIS ARCHIBOLD AND TAHLIL KHAN
MUCH has been written about the global economic downturn in terms of the financial industry, the impact on non-financial industries and the knock-on effect on occupier demand across the globe. While this forms the backdrop to this article, we will be discussing Jones Lang LaSalle's (JLL) view on the likely impact on business park and high-tech occupancy rates and rental trends over both the short term (next one to two years) and the long term (next five to 10 years).
Over the past four years, Singapore has seen rapid growth on a number of fronts; the financial services sector and its supporting industries, professional services, multinational corporations and small and medium enterprises (SME). The most startling of this growth is in the financial services sector. This is a result of Singapore's efforts to reposition itself as a financial hub. The growth of the financial services sector has been in both front office and back office functions.
The share of office space usage of Grade A CBD Core buildings by financial services companies has risen from 37 per cent to 46 per cent between 2004 and 2008.
Similarly, the growth in the financial services back office function is evidenced by the recent acquisitions of significant chunks of business park space by Citi, Standard Chartered Bank, DBS Bank and HSBC over the last 24 months.
Post Sept 15, the economic environment has changed fundamentally across the globe and hence, we are unlikely to see growth in short-term occupier demand whether it be financial services industry or others.
Current market trends show that we are now in negative growth and many occupiers are surrendering space.
The current high-tech/business park supply pipeline shows 7.9 million sq ft of space over the next four years. The major developments include Mapletree Business City (1.3 million sq ft), Icon @ International Business Park (386,000 sq ft) and Ascendas-Frasers Centrepoint development at Plots 61-63 (645,000 sq ft) at Changi Business Park.
With significant new pure office supply coming on-stream islandwide between 2009 and 2012 (about 9.7 million sq ft), the office market is becoming increasingly competitive with landlords reducing rents to attract tenants. The anticipated effect on high-tech/business park space will be that there will be less spillover of occupier demand from a point of view of both availability of pure office space and reduced rental differentiation.
At the peak of the market in 3Q 2008, average Raffles Place Grade A rents stood at $18.40 per square foot a month whereas high-tech rents stood at $4.25 psf a month. This is a differential of $14.15 psf. Based on this, the financial driver behind much of the back office operation is compelling. As rents in the CBD decline, this differential will reduce.
The office market bottomed out in the second half of 2004 and saw a rental rise of 23 per cent in 2005, followed by a 63 per cent jump in 2006 and a further 67 per cent surge in 2007, peaking Q3 2008 at $18.40 psf a month. However, with the rapid acceleration of the financial crisis and a global recession currently being experienced, 4Q 2008 saw demand drop off and the overall y-o-y rental growth was reduced to 7 per cent given a Q4 2008 rental of $14.95 psf a month.
The high-tech sector also saw rent increases of 13 per cent, 11 per cent and 98 per cent in 2005, 2006 and 2007 respectively. The high-tech market correlated with the office market in 2008 as rents also fell in the last quarter of 2008 to an overall correction of 5 per cent. While 2007 saw a virtual doubling of high-tech rents, the increases from the bottom of the market till today has nowhere been as dramatic as the office market which has trebled.
We have a scenario today where there is still a significant gap between office and high-tech rents. To put that in perspective, average Raffles Place Grade A office rents are currently tracking $14.95 psf. while average high-tech rents are currently commanding $3.75 psf. That difference in rents is still compelling but with rents for both the office and high-tech market expected to ease in line with the economic slowdown and significant new supply coming on stream in both markets, especially within the CBD, we should expect the gap to narrow. This, as office rents fall at a faster clip compared with the high-tech sector.
Over the last three years, the landscape of the high-tech/business park space in Singapore has changed dramatically. This comes about with the significant developments in Changi Business Park, one-north in Buona Vista as well the establishment of Alexandra as a high-tech hub with a proposed new development known as Mapletree Business City. There have also been a number of high quality high-tech buildings developed in various locations across Singapore.
Our view is that the long-term outlook for high-tech/business park space remains a positive story even if it is challenging in the near term. The reason for this view is based on a number of factors. Once the economic downturn is over, Singapore is well-positioned to continue its growth as a financial services hub and this will include back office growth which is likely to be located in business park space.
Business park space is much less volatile in terms of cyclical rental fluctuations. This can be seen in the trough to peak rents for both segments: The most recent office market cycle saw rents rise from $4.80 to $18.40 psf a month whereas high-tech rents over the same period went from $1.60 to $4.25 psf a month.
Given that most back office functions are not directly revenue generating, they cannot contend with such a widely ranging impact on their cost base. A front office operation would generally have increased revenue that would counteract the impact of increased rent.
Another key point to note is that a number of the business parks are now reaching critical mass in terms of the number of employees working in the parks to support much needed local infrastructure, such as retail amenities. The lack of amenities had been a major criticism of business parks in previous years.
Finally, our house view is that there will always be a compelling cost advantage argument for business park space when viewed on a long-term basis, ie, 10-15 years or two to three property cycles.
Chris Archibold is regional director and head of markets, Singapore, Jones Lang LaSalle; and Tahlil Khan is associate director of markets, Singapore, Jones Lang LaSalle