How will the series of Chinese reforms impact Singapore’s office leasing market?

The sector’s recovery has always been hinged on the office demand from Chinese firms.

Demand from Chinese tech companies has been crucial to the recovery of the office property market in Singapore throughout 2021. As for 2022, Savills notes that the proposition that the CBD Grade A office market will finally experience recovery rested heavily on more Chinese tech companies beating a path here. 

“Then came the recent series of reforms by the Chinese authorities of the online, private tuition, real estate, commodity, and consumer sectors, undermining the rebound narrative. The fallout from these changes may be short term and should engender better social stability and reduce economic volatility in China. But how will these actions affect the Singapore office leasing market?,” asks Savills.

Here’s more from Savills:

On the one hand, it seems like much ado about nothing because Bytedance are expanding aggressively. However, in the field of Chinese social media and tech companies, they seem like an outlier. Leaving aside Bytedance, the outcome will probably be a hiatus in the expansion plans of Chinese companies in Singapore. If these moves do not spawn negative complications, then we may just have to sit through a few quarters for the new rules of engagement to take root and let the Chinese economy adjust before expansion restarts. 

But even if Chinese companies arrive here late or do not arrive in strength, the demand shortfall may still be partially offset by the expansion of new-to-market wealth management firms and Western tech companies. For the possibility that the latter can fulfil its role as replacement demand for the Chinese tech firms, that possibility arises from the observation that the prices of major US tech and social media companies have been rising sharply. Even for tech companies which are not listed, the number of late-stage deals done globally has not waned despite the pandemic and spiked in Q1/2021. The upshot of this is that such companies have amassed reserves for expansion. 

What remains is the question of whether demand from Western tech companies can fully take up the space left over from those rightsizing. After all, since the beginning of the pandemic, we have been observing rising vacancy rates in both the Central Area and Downtown Core. 

We believe that even if it cannot, it does not necessarily mean that CBD Grade A office headline rents and asset values will decline. Increasingly in both private and public equity markets, traditional fundamental measures are beginning to fade as influencers of valuation. In its place are metrics such as the ability of a company to capture market share, tempo rate, closing rate, customer retention rate etc, many of which are measures to boost exit valuations for investors. 

Thus, the zeitgeist of the past and current decade has realigned from the 1990s when the need for companies to create economic value add was paramount. This tech landscape, especially those in social media, alternative energy, disruptive technology and software application space, has now changed every sector of the economy. 

As the office sector plays host to many of the tech companies, explosive growth in the latter sector will spill over as derivative demand for space. That the brick and mortar, non-venture capital funded landlords can take on lower occupancies while maintaining rental growth and high asset valuations is made possible with the liquidity provided courtesy of global central banks. 

Thus, the scenario that vacancy levels may stay elevated while headline rents and values for CBD Grade A offices rise, is therefore a real possibility. For 2022, we therefore forecast a 0% to 2% increase in effective rents for CBD Grade A offices.