Singapore Office REITs: What Is The Future Of The Workplace?

The outlook seems brighter for Singapore office REITs. Barring any surge in COVID-19 community cases, Singapore seems on track to relax existing restrictions under the Phase 2 (Heightened Alert) period. This could mean that after June 13, work from home may no longer be the default and more employees may gradually head back to the office.

This is positive news for the six Singapore REITs that have significant exposure to office properties in Singapore.

Source: The Business Times

Of these six REITs, Keppel REIT, whose top tenants include companies in banking and financial services, government agencies, technology and media, has the highest exposure to office assets.

Not far behind are Mapletree Commercial Trust (MCT) and CapitaLand Integrated Commercial Trust (CICT). Both manage a mix of office and retail properties, including Mapletree Business City and Asia Square Tower 2. 

Will employees head back to their offices permanently post-pandemic? Or will remote work take over? That’s a debate that’s still playing out, and will hold the key to whether office REITs can bounce back over the longer term. 

Overview of Grade A offices in Singapore

The office sector spans a wide variety of properties but most office REITs such as Keppel REIT, CICT and Suntec REIT manage Grade A commercial assets situated in the Central Business District (CBD).

In Singapore, Grade A offices are typically leased by multinational corporations in the financial and technology sectors. For instance, Facebook takes up four levels in Marina One and DBS is the anchor tenant at Tower 3 of the Marina Bay Financial Centre (MBFC).

Grade A office outlook 

The Grade A market registered a positive net absorption in the first quarter of 2021. This means that the space vacated during the period was less than the new office take-ups that happened. 

This is an encouraging development after three consecutive quarters of negative net absorption in 2020. One catalyst was the redevelopment of buildings such as AXA Tower and Fuji Xerox Towers, which contributed to demand as displaced tenants relocated to other office buildings. Another demand driver came from technology firms and financial services industries including asset management companies.

On the supply side, there are limited developments in the pipeline over the next two years. The main CBD development coming online in 2021 is just CapitaSpring. Overall, the total new supply from 2021 to 2023 will likely be lower than the historical three-year supply from 2018 to 2020.  

Going forward, we could see increased demand for Grade A office space, supported by the gradual recovery of Singapore’s economy and growth in the tech and investment sectors.

Given Singapore’s politically neutral position, more Chinese technology firms may join Tencent and ByteDance in expanding in Singapore. With the launch of the Variable Capital Companies framework in 2020, Singapore’s strong positioning as a hub for investment funds could also draw more investment managers and hedge funds to set up shop here.

At the same time, office rents should hold steady or improve given the tight supply pipeline.

Office REITs remained resilient in Q12021 

The current default work from home arrangement naturally means emptier buildings and offices within the CBD now. But office REITs were showing signs of recovery before the Phase 2 (Heightened Alert) measures kicked in.

For instance, the main office REITs with exposure to Grade A offices had a higher occupancy rate than the Singapore core CBD occupancy rate of 93.9%. Keppel REIT’s office occupancy was 96.5% as at 31 March 2021. Meanwhile, CICT had an occupancy rate of 95.1%, and the average office occupancy for Suntec REIT stood at 97.8% as at 31 December 2020.

Source: CBRE, 1Q2021. Image from Keppel REIT’s AGM presentation

Average core CBD Grade A office rents also remained stable at $10.40 per square foot per month (psf pm). That said, office rent reversions reported by the REITs were mixed in the first quarter. Rent reversion is a metric that shows whether new leases signed in the quarter have higher or lower rental rates than before. For example, Keppel REIT reported a positive rental reversion of 10.7%. This means that its new leases signed in Q1 were 10.7% higher than previous leases on average. 

Suntec REIT reported a relatively flat reversion of 0.9% due to the timing of lease renewals. According to a CSG CIMB report, CICT saw some negative reversions due to tenant downsizing.

Will banks lead the way in embracing hybrid work models?

Although more of the office crowd started heading back to work in early January 2021 after workplace arrangements were relaxed, it seems financial institutions may be moving to a hybrid work model permanently.

DBS is joining the likes of Standard Chartered, Citigroup and Mizuho in cutting back office space in Singapore. According to industry sources, DBS plans to surrender about two and half floors in MBFC Tower 3. Meanwhile Standard Chartered is considering plans to give up some of its 21 floors at MBFC Tower 1 when its lease expires.

The COVID-19 pandemic has shown banks that they can still operate effectively with a work from home model. As more banks offer their staff flexible work arrangements – DBS employees can work remotely two days a week for instance – they no longer require that much office space in the CBD.

Overall, financial firms may cut at least 500,000 square feet of office space in Singapore’s CBD over the next two years, according to a forecast by Cushman & Wakefield. 

Tech may fill the gaps

The downsizing by financial institutions doesn’t necessarily spell the end for Grade A offices in Singapore. While banks may be looking to cut office space, tech companies are looking to set up headquarters in Singapore. Amazon is taking up the three floors in Asia Square Tower 1 that Citigroup is giving up. ByteDance is also leasing three floors in the CBD. 

Given Singapore’s political stability and positioning as an Asian wealth hub, we can expect more companies to choose us as the site for their regional headquarters, especially as the economy recovers. So even as some tenants exit the CBD, the loss should be balanced by incoming tenants from newer industries like tech. 

Will workers return to the office?

Over the longer term, the outlook for office REITs depends very much on whether employees will return to their office desks. Although working from home provides flexibility, it cannot replace the collaborative atmosphere and social interactions a physical office space fosters. 

And while it may be liberating to “go to work” in pajamas, employees and employers are starting to realise that permanent remote work could mean a blurring of work-life boundaries and missed opportunities for mentorship and office camaraderie. 

As we’ve seen with banks, more companies may start to offer flexibility in terms of when and where people work, but still expect employees to work from the office to benefit from the collaborative elements of communal work spaces.

The office is here to stay

At the moment, the COVID-19 situation is still in flux. Companies are taking a longer time to finalise their decisions around remote working, hybrid work, or a back to office model. While office occupancy may face some volatility if companies downsize their space requirements in a remote or hybrid work model, we think the threat posed by these trends are overstated.

With relatively small home sizes in Singapore, there will always be employees who view offices as the most optimal working environment. These can be parents who need to get away from their children’s crying or employees living in high-density households.

This will bode well for office REITs, especially those that can improve their properties and meet the post-pandemic requirements of safety and flexibility. 

For exposure to the return-to-office trend, consider a diversified REIT portfolio like Syfe REIT+. It holds 20 of the largest REITs in Singapore, including office REITs like Keppel REIT, CICT, MCT and Suntec REIT. 

With no minimum investment amount, Syfe REIT+ is an ideal way to start investing in Singapore office REITs. You can make a lump sum investment, or choose to make regular investments over time since there are no brokerage fees charged. This is unlike buying REITs through a local broker, which will set you back $10 to $25 per transaction.